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...
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.
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.