How do you quantify LBYM?

[Apex1]

LBYM is one of the most important concepts in order to achieve FIRE. However, I am interested in what everyone's thoughts were if they had to quantify it in order for someone new to this concept objectively determine if one is truly LBYM.

Is it a measure of annual expenses compared to his/her yearly after-tax earnings or Net Worth (or some combination thereof)?

Thanks in advance.

P.S. My question is specific to an individual who has not reached FIRE

 

[Gatordoc50]

I've always taken it to mean spending less than you make. The larger the gap, the more you are LBYM. I would guess that someone who spends less than what their net worth would provide as an income stream would also be LBYM.

 

[martyb]

DW & I have a combined working income of $90k, and we save $30k+ of it for retirement. We've maintained that savings ratio for several years, at a minimum, into our TSP/401ks. Anytime I get a chance, I toss more into the Roths. We are getting very close to FI, and I will retire soon. Wife chooses to work a little while longer, probably till age 55 (3 yrs). I suspect once I stop working, she may change her mind!

 

[Major Tom]

IMO if, after meeting all your financial obligations, you have money left over, you are LBYM.

Whether that amount of money is enough for you to attain ER is another discussion.

 

[Meadbh]

If income > expenses, then LBYM is present.

 

[Animorph]

I've always taken it to mean spending less than you make. The larger the gap, the more you are LBYM. I would guess that someone who spends less than what their net worth would provide as an income stream would also be LBYM.

I think this is probably the common meaning. However, without retirement savings you would still find yourself in trouble most likely.

To me you would ideally be setting a lifestyle you could maintain through a normal retirement. That's living at your means. If you want to retire early or leave an estate, then you would have to LBYM to save extra. But that's probably just the ER version of LBYM.

 

[Major Tom]

For some reason, the acronym LBYM is starting to bug me. A whole cult seems to have built up around these 4 letters.

It's just common sense. Save as much as you can and pay attention to how you invest it if you want to RE as soon as possible. No need to quantify how LBYM you are. The more you save, the more LBYM you are. How's that?

I think I had better not post anymore this evening. Have just cracked open the Merlot and don't want to reveal the curmudgeonly side of my nature in this fine and friendly forum

 

[dessert]

To me LBYM means keeping your expenses below your income. You are saving money as a first priority and then spending what is left for your lifestyle. It means every time you get a promotion or a raise that most of it goes into savings and not to increase your lifestyle.
It means you can afford a Lexus but you drive a Chevy. It means you can eat out every night but you choose to cook and eat in. It means you could afford to live in the gated community but you choose not to because it makes more sense to save those high mortgage costs and add to your 401K.
It means not trying to keep up with your co-workers or kinfolk when they buy new cars, new boats, fancy bicycles, vacation condos etc.etc.etc.
It means you have control of your finances and are not in debt to maintain your lifestyle (other than your affordable mortgage or car loan).
That is the way I did it. Works for me and it would for others as well.
Its just as simple as that.

 

[Apex1]

IMO if, after meeting all your financial obligations, you have money left over, you are LBYM.

Whether that amount of money is enough for you to attain ER is another discussion.

I was just wondering for myself. Is there any alotment for "madmoney"? As long as income > expenses....then its still LBYM?

Its just that.... I hear the term LBYM used in many discussions to insinuate/interchangeably with being frugal. When I first started reading the boards, I used to think LBYM was a pretty decent goal to achieve FIRE. But more I read/think about it, for many of us, LBYM may be "too easy" and being truly frugal is really the ultimate gold standard to achieve FIRE.

 

[Major Tom]

I was just wondering for myself. Is there any alotment for "madmoney"? As long as income > expenses....then its ok?

You can allot as much or as little madmoney as you want. It depends what your goals are. This is an early retirement forum, incidentally.

What are your goals? To quote The Tubes -

What do you want from life? (The Tubes) - YouTube

 

[Original Wally]

***My good friend (37 years old) bought a new BMW but lives at home still. He makes around 100K with little expe **

Personally, if it were my kid, he would be outta here. Period.

 

[Major Tom]

Also, Apex1, there's a thread called "Hi, I am...." in which you can introduce yourself -

Hi, I am... - Early Retirement & Financial Independence Community

 

[NW-Bound]

I believe that the OP understands that LBYM means "expenses < income".

However, he likes to quantify it. Well, there has not been a committee to define an "LBYM factor", but it is clear that the lower the expenses are with respect to income, the more LBYM a person is.

For example, around here, a poster may declare that he saves 30% of income, and another may say that she saves 40%. We can say that the second poster is "more LBYM" than the first.

So, I propose that the LBYM factor to be defined as the ratio of savings rate over expenses. A person who saves nothing has an LBYM factor of 0. A worker who saves 1/2 of his net income has an LBYM factor of 1. A worker who lives under a bridge and dumpster-dives for food may have an LBYM factor approaching infinity.

This simple LBYM factor can be useful in this manner. Suppose we ignore taxes, inflation, investment gains/losses, we can have an easy rough order of magnitude (ROM) estimate of how long a person's working life should be.

If the LBYM factor is 1, then it means this person's income for 1 year pays for 2 years of living, as he spends only 1/2. So, the LBYM factor of 1 means "work 1 year, retire 1 year". In this case, he spends 1/2 of income.

If the LBYM factor is 2, then it means that this person saves 2 years of expenses for each year that he works. Then, if he works for 10 years, he will have saved enough to cruise for 2 x 10 = 20 years. In this case, he can spend only 1/3 of income.

When taxes, inflation, investment returns, mortgage pay down, etc... are taken into account, of course it is not so simple. Still, a person with a higher LBYM factor can still feel virtuous over someone with a lower number. It's similar to the BMI number, which does not take into account other health factors, body shape, or fat content.

 

[Meadbh]

My good friend (37 years old) bought a new BMW but lives at home still. He makes around 100K with little expe

I hope he is paying fair market rent to Mom and Dad.


Edit to add: my 5000th post! Do I get a new handle now?

 

[dessert]

I was just wondering for myself. Is there any alotment for "madmoney"? As long as income > expenses....then its still LBYM?

Apex1, yes there is an allotment for "mad money" and you can still LBYM. My previous post didn't mention this mad money but I'll give you an example:
All through my career my DW and I always drove nice new cars and I even bought 12 boats (all cash) during that time. I was still LBYM so it didn't matter that I spent that mad money on fishing and reliable transportation. I thought that was important to have reliable transportation for our safety. I also needed to fuel my passion for fishing and did so.
I will also say that you should be saving but not to the extent that it makes your life miserable. You still need to enjoy yourself along the journey.

 

[Tigger]

(this from memory, possibly incorrect, the ERE site is down at the moment)

To me LBYM means spending less than your income.

To ERE-ers, spending less than 25% of your income means you can retire after 5 years (that's VERY LBYM!).

To measure how far your LBYM has brought you, it's interesting to express your portfolio in years of expenses. If you reach 25 years of expenses, then you could probably live off your investments for 30 years (assuming a 4% SWR is still a good rule of thumb), with 33 years you should be good indefinitely, I think.
Net worth is something else, it has no relationship with SWR.
If I remember well in 2011 Jacob from ERE had over 40 years of expenses invested.

 

[ERhoosier]

LBYM to me means spending sig under your REAL expenses, not just paycheck to paycheck. To truly LBYM, longer term purchases need to be budgeted. Too many seem to ignore HI (prem's & deductibles), periodic auto purchase/upkeep, house upkeep/maint/repair, etc, etc. Most who LBYM tend to include savings as in important budget item (at least prior to ER).

 

[Apex1]

I believe that the OP understands that LBYM means "expenses < income".

However, he likes to quantify it. Well, there has not been a committee to define an "LBYM factor", but it is clear that the lower the expenses are with respect to income, the more LBYM a person is.

For example, around here, a poster may declare that he saves 30% of income, and another may say that she saves 40%. We can say that the second poster is "more LBYM" than the first.

So, I propose that the LBYM factor to be defined as the ratio of savings rate over expenses. A person who saves nothing has an LBYM factor of 0. A worker who saves 1/2 of his net income has an LBYM factor of 1. A worker who lives under a bridge and dumpster-dives for food may have an LBYM factor approaching infinity.

This simple LBYM factor can be useful in this manner. Suppose we ignore taxes, inflation, investment gains/losses, we can have an easy rough order of magnitude (ROM) estimate of how long a person's working life should be.

If the LBYM factor is 1, then it means this person's income for 1 year pays for 2 years of living, as he spends only 1/2. So, the LBYM factor of 1 means "work 1 year, retire 1 year". In this case, he spends 1/2 of income.

If the LBYM factor is 2, then it means that this person saves 2 years of expenses for each year that he works. Then, if he works for 10 years, he will have saved enough to cruise for 2 x 10 = 20 years. In this case, he can spend only 1/3 of income.

When taxes, inflation, investment returns, mortgage pay down, etc... are taken into account, of course it is not so simple. Still, a person with a higher LBYM factor can still feel virtuous over someone with a lower number. It's similar to the BMI number, which does not take into account other health factors, body shape, or fat content.

+1.

Also, I think "LBYM factor" should be comparitive within income brackets since it should be easier for higher income earners to save (ie. above basic living costs).

Similar to having different BMI targets for men and women.

 

[KingB]

Before I joined this forum, I thought LBYM means Living Beyond Your Means. Honestly.

 

[Major Tom]

Apex1 -

On reflection, I think some of my previous comments in this thread were a bit hasty and judgmental. I see now that your intent is genuine, so hope you can accept my apologies if I spoke out of turn.

Welcome to the forum, and I hope you find the encouragement and information you are seeking.

 

[scrabbler1]

To me LBYM means keeping your expenses below your income. You are saving money as a first priority and then spending what is left for your lifestyle. It means every time you get a promotion or a raise that most of it goes into savings and not to increase your lifestyle.

It means you can afford a Lexus but you drive a Chevy. It means you can eat out every night but you choose to cook and eat in. It means you could afford to live in the gated community but you choose not to because it makes more sense to save those high mortgage costs and add to your 401K.

It means not trying to keep up with your co-workers or kinfolk when they buy new cars, new boats, fancy bicycles, vacation condos etc.etc.etc.

It means you have control of your finances and are not in debt to maintain your lifestyle (other than your affordable mortgage [-]or car loan[/-]).

That is the way I did it. Works for me and it would for others as well.
Its just as simple as that.

Except for the part about the car loan, I agree with you. To me, LBYM means being able to save up and pay cash for anything except a house and staying out of debt except for a mortgage, and an affordable one of course. It also means being able to pay off your student loans before taking on any other "big" debt.

 

[old woman]

I consider LBYM to be after your cost of living you have money left. The problem is nobody knows what their cost of living actually is. I for example think I can live nicely on 36K with money for everything like medical bills but who know what next year could actually cost or next year's income. I currently save about 30K plus profit sharing so about 40K so more than 50% of my wages and I don't take my investment gains 77K last year. So for last year income was about 175K and I spent about 36K maybe less I don't really budget. One nice thing if you LBYM long enough you don't need to budget if you value savings you will just do the right thing balancing income and expenses.

But this year I might quit my job, get 15K of dental work done, have a minor surgery or other things that will mean I spend more than I earn from working. Then go on SS and spend more than that to maintain a good live but spend some investment and rental income to make it up. I would still be living below my means because I wasn't going into debt more each year or having to ask for charity.

Young people think they are LBYM if they bring in a little more than they spend but the first emergency they have to use credit or depend on charity from parents.

It is not living below your means if you only save for spending later like Christmas and vacations because you aren't building wealth.

 

[obgyn65]

Annual income - annual spending > 0.

I do not think it is related to NW.

Is it a measure of annual expenses compared to his/her yearly after-tax earnings or Net Worth (or some combination thereof)?

 

[Meadbh]

Annual income - annual spending > 0.

I do not think it is related to NW.

Exactly.

Apex1, have you ever read The Wealthy Barber? If not, you should. Or at least watch David Chilton's interview with Strombo (link on the website).

The Wealthy Barber Returns

 

[donheff]

DW and I saved around 30% of gross income in the last 15 years of work. I never put a number on what constituted LBYM. I evaluated it in terms of being comfortable ERing at 56.