What does it mean to "live below your means"?

I was recently telling a friend of mine that the reason my wife and I were able to make such significant strides in our financial growth - paying off a lot of debt and significantly growing our cash account balances - was because we recognized (and corrected) our bad spending habits after we started using YNAB and now we live below our means.

The more I think about that phrase the more I wonder what that really means. I assume at a high-level that means you consistently spend less than you bring in, but I'm curious if anyone has any kind of guideposts or rules of thumb they follow that have been successful for them.

One I believe I've read/heard about is the 80/20 rule (or is it 70/30?), where-as any given month you should spend more than 80% of what you bring in and stash 20 for the future.

Or am I conflating that with the Pareto principle? LoL...

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  • 1) Save adequately for retirement

    2) Out of your remaining income, being able to cover all your monthly spending and also save regularly to cover all your non-monthly expenses

    3) After 1 and 2, still having money leftover.

    If you need a breakdown, the 50 / 30 / 20 rule use in All Your Worth is a decent guide. It's a good idea to distinguish between fixed obligations and discretionary spending that you can 'turn off" if the need arises. The book also uses a specific calculation for determining the denominator, as well as what pay deductions may be included in need/want/savings numerators. I actually just calculate the Needs and Savings and assume the remainder goes to Wants.

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    • nolesrule  I was hoping you would chime in 😀.

      In regards to #1, I am currently contributing the max to my 401k that my company will match at my full-time job and I'm even making monthly contributions to another investment/retirement account with some of the money I make from my side-hustle.

      Is that approaching the realm of "adequate" or do you have any other suggestions regarding saving for retirement?

      Does YNAB have any education (blog posts, workshops, etc.) around saving for retirement?

      Also, that book you mentioned, All Your Worth. Are you referring to the one co-authored by Elizabeth Warren (the senator)?  I just did a quick Amazon search and that's what I saw.

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 2 yrs ago
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      This Is JKB Yes, that's the book. When you have a good grasp of using YNAB, some of it can seem redundant, but I think the breakdowns that it provides and the reasoning behind them are good personal finance tools.

       

      This Is JKB said:
      I am currently contributing the max to my 401k that my company will match at my full-time job

       That doesn't really tell us much. Company matching can vary  from none to whatever you put into the 401k. The max for funding a 401k in 2018 is $18,500 as employee contributions (with a side hustle you can also open a solo 401k, but that's another topic) and $5,500 in an IRA. In this day where pensions are no longer the norm, you should probably be saving at a minimum 15% toward retirement, preferably in tax-advantaged accounts. So if you're saving 6% to get an employer match of 3%, then no, you're probably not saving enough.

      If you count non-retirement saving for the future, then I think that you have to look at your specific situation. For example in the Need/Want/Save breakdown, if you have a car payment, it falls under Need, but if instead you are saving that same amount of money to buy a car in cash, it's calculated as Saving.

      Last time I calculated our Need/Wants/Savings using the formula, it came out as about 25% Need / 31% Want / 46% Saving.

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    • nolesrule said:
      That doesn't really tell us much.

       Ha, you're absolutely right. I didn't realize I did not include the actual amount (even though I was intending to);  my employer matches 100% of my contribution up to 5% of my salary, and it's a low 6-figure salary.

      My long-term plan is to replace my job with my side hustle but I want to have certain "risks" covered and a solid financial system in place first.

      I'll be sure to check out that book, that Need/Want/Save formula has me very curious.

      Thanks for your input (again, 😀)!

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      • nolesrule
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      • nolesrule
      • 2 yrs ago
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      This Is JKB Generally speaking, at low 6 figures you should be capable of maxing your 401k and an IRA (though you may have to do a Backdoor Roth which requires an empty traditional IRA). Also with your side hustle you can open a Solo 401k and make your own employer contributions to it. There are some rules involved with a Solo 401k. I go back and forth between employee and contract work so I have some experience with a Solo 401k.

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    • Patzer
    • Retired at age 60. Thank you, YNAB!
    • Patzer
    • 2 yrs ago
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    Probably the most famous quote on living below your means is from Charles Dickens:

    “‘My other piece of advice, Copperfield,’ said Mr. Micawber, ‘you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
    David Copperfield (1850)

    To understand the numbers, you have to know that there were 12 pence in a shilling and 20 shillings in a pound at the time Dickens wrote this.  The actual economic value of pence, shillings, and pounds isn't relevant; the idea is that spending less than your income produces a good result, spending more than your income produces a bad result.

    nolesrule gives a more detailed and conservative definition of living below your means, but the thought is the same.  Spend less than your income, invest the rest, grow your net worth.  Investing is a complex topic; but the most basic fact is that you can't earn money from investments if you have no money to invest, and you get money to invest by spending less than your income.

    Do that for long enough, and at retirement time you find that your assets can produce income to support you.  At that point, living below your means would be spending less than your total investment income, and re-investing the income you don't need to spend.  Or that's how I look at it. 

    It seems all the easily found commentary on retirement investing assumes drawing down the principal over your remaining life.  That gets into complicated analyses of how much money can you spend and not outlive your assets; that issue is much simpler if you simply don't need to touch the principal.  That can be possible if you do a good job of LBYM while working, invest well, and don't feel a need to spend everything.

    Guideposts?  When my employer froze the pension in 1996, I did a back of the envelope estimate of how much of an asset base I would need to retire, despaired of every being able to save that much, saved as much as I possibly could, and hoped for the best.  Eventually, the asset base got to where my employer changed working conditions in a way I found annoying, and I said "goodbye" at age 60.  I had considerable good fortune in that only one of my major financial worries actually came to pass; but I also prepared well. 

    Like 2
    • Patzer Gotcha!

      I hear people talk about investment assets, living off the interest, and things of the like but my severely limited knowledge of that area always leaves me in a state of "awe". I guess because when I look at our personal numbers it's very difficult for me to fathom how any kind of significant interest could be generated from it, haha. The contributions I'm making to the investment account I have with my side hustle is happening purely off the suggestion of my financial advisor (whom I fully trust), I don't fully understand everything that's happening with that, to be honest.

      I suppose that's where LBYM over a long stretch of time (years and years) starts to separate the "kids from the adults" (haha). 

      Thanks for your input!

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      • nolesrule
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      • nolesrule
      • 2 yrs ago
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      Patzer I don't know that I'd call it more conservative. I think it's more accurate. Most people completely forget about non-monthly expenses and it comes back to bite them with the expenses come due. Or they  end up drowning in financing one more thing with monthly payments because they can't afford an outright purchase for an unavoidable expense.

      My basic personal finance advice boils down to the following:
      Maintain an adequate emergency fund, live below your means, invest for the future.

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      • Patzer
      • Retired at age 60. Thank you, YNAB!
      • Patzer
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      nolesrule Your definition is more detailed, in that you explicitly say to cover non-monthly expenses.  It is more conservative, in that it considers saving for retirement an expense to be covered before you can say you're living below your means.

      I can see it either way:  a) If you're not saving anything for retirement, you're living above your means, or b) retirement savings becomes possible when you're living below your means.  People who are going to be successful at this won't get hung up on the distinction.

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