Why I Live Below my Means

[Culture]

We certainly practiced LBYM when we were younger and raising a family (so the kids could practice LABY I can probably count on the fingers of one hand the real vacations we had -- every other trip was to see family or take care of something or other. Now that we're retired, the last thing I want to do is to keep LBYM. We want to take advantage now of everything we sacrificed for. Not that we're big spenders, we never developed that personality. But, if we have the money to spend on a vacation, on a hobby, or whatever, we spend it. As LOL said, that's better than to have it go poof. Besides, if we really believe our spreadsheets, and if we stay within our SWR, then we should be fine.

I would argue that if you are past the accumulation stage, and spending at a reasonable SWR, the idea of LBYM is not applicable. The point of accumulation is to allow spending AT your means in retirement.

My friend is clearly in the accumulation stage.

 

[ziggy29]

I would argue that if you are past the accumulation stage, and spending at a reasonable SWR, the idea of LBYM is no applicable. The point of accumulation is to allow spending AT your means in retirement.

I would think so. For example, you don't need to save for retirement when you are IN retirement. But that also means that you have to make sure your budgets at a "reasonable SWR" is realistic because there won't be any slack in the cash flow if not.

 

[TromboneAl]

I thought the idea was to maximize the enjoyment of your resources. Wouldn't this suggest the smooth and constant expenditure of resources?

In theory, yes. The problem is that the return on our investments is not smooth and constant, so we might have to LBYM more now just in case there are future downturns.

Also, in balancing current and future expenses while still working, you have to decide whether retiring a year earlier might be better than, say, buying a boat now.

 

[Culture]

Culture, if your friend lost $350K, and had a 60/40 stock/fixed allocation, then he probably has about $850K left. If he had all stocks, perhaps he has $350K left. But I guess for him, that wouldn't last long.

Based on his personality, I suspect he was close to 100% equities. However, I have never ask about this.

 

[Lusitan]

Ive come to the conclusion do whatever makes you happy. If its LBYM or LAYM do it.

Or Live Above Your Means and wait for the govt to bail you out.

 

[Hamlet]

I've notice a lot of financial advise books tend to spend a lot of time on the "Latte factor", the small expenditures that add up to a lot over time, but often don't address the big expenditures as much.

I just read The Two Income Trap by Elizabeth Warren, and was struck hard by her point that most people are having problems because their fixed costs are too high, not because they are wasting their money on frivolous stuff. She points out that the frivolous people are actually in better shape than the people with high fixed costs, because when they have a job loss they can stop spending the frivolous money fairly easily, while the person who stretched to buy a house is in real trouble.

That was a revelation to me. I've always avoided high fixed costs reflexively, but I have a friend who stretched to buy a rental duplex, and he is always broke because it sucks money from him. He doesn't have the income to deal comfortably with his fixed costs.

It is just a little counter-intuitive to realize that the person who spends all their money on travel, eating-out, and gambling is better off after a job loss than the person who used all that money to pay a mortgage on a nicer house.

When I was younger, I did not think about spending $5 either, I admit! But if I had saved it and invested it, I probably wouldn't be working at age 60 as I am right now.

 

[W2R]

you don't need to save for retirement when you are IN retirement.

But, but, but...?

Personally, I DO plan to save while in retirement. For example, if I want "expensive item X", I will save from my monthly living allowance (that I will give to myself) until I have enough to buy it. That way, I am sure that my portfolio will remain intact and I will also be sure that I am not going hog wild.

As another example, if the market is tanking as it has in the past year, I plan to spend less than my dividends so that I can re-invest the excess and maybe do some damage control on my portfolio.

 

[W2R]

I've notice a lot of financial advise books tend to spend a lot of time on the "Latte factor", the small expenditures that add up to a lot over time, but often don't address the big expenditures as much.

I just read The Two Income Trap by Elizabeth Warren, and was struck hard by her point that most people are having problems because their fixed costs are too high, not because they are wasting their money on frivolous stuff. She points out that the frivolous people are actually in better shape than the people with high fixed costs, because when they have a job loss they can stop spending the frivolous money fairly easily, while the person who stretched to buy a house is in real trouble.

That was a revelation to me. I've always avoided high fixed costs reflexively, but I have a friend who stretched to buy a rental duplex, and he is always broke because it sucks money from him. He doesn't have the income to deal comfortably with his fixed costs.

It is just a little counter-intuitive to realize that the person who spends all their money on travel, eating-out, and gambling is better off after a job loss than the person who used all that money to pay a mortgage on a nicer house.

That can be true. But then the one who buys a slightly nicer house may not feel the need to travel, eat out, and gamble so much.

To get serious for a minute - - what has helped me the most in reducing my expenses to the level that I wanted to spend, is to reduce the recurring expenses. For example, if my food for lunch costs about $3 at the grocery store, vs $5 at work, that is a savings of $10/week. I don't always take my lunch, but in a year, I have probably saved enough to pay for my Wii.

But each to his/her own! We each have a different path towards the same goal.

 

[ziggy29]

I just read The Two Income Trap by Elizabeth Warren, and was struck hard by her point that most people are having problems because their fixed costs are too high, not because they are wasting their money on frivolous stuff. She points out that the frivolous people are actually in better shape than the people with high fixed costs, because when they have a job loss they can stop spending the frivolous money fairly easily, while the person who stretched to buy a house is in real trouble.

This is true. Not that it justifies a spendy lifestyle, but someone who spends too much without debt is in better shape than someone who may spend less on current items from month to month but carry a lot of debt. It's easier, as you mention, to cut excessive spending than it is to get rid of debt if your income drops substantially.

This is why we have our small, paid-off house and haven't fallen prey to the "upwardly mobile" siren song. Upwardly mobile means debt and higher property tax, insurance and utility bills in an environment where I want to be capable of living as cheaply as possible. I've spent the last 3+ years trying to configure our financial position to survive economic conditions like the one we're seeing now -- crank up the cash reserves, have no debt, be able to live reasonably well on less than $30K a year if need be.

As for the latte factor, I think personal finance coaches often focus on that because many people don't think about how the little things add up to be as much as a big thing they'd consciously think twice before buying. No one needs to be told that a once-a-month $150 splurge can be a budget buster -- most people clearly feel a single $150 purchase -- but many of the same people wouldn't think twice about a $5 a day Starbucks habit, even though at the end of the month it's all the same financially.

 

[NW-Bound]

The real reason we have been living below our means: We are afraid our means might shrink, due to job loss when we were still working full-time, and now due to portfolio shrinkage.

As it turns out, in our career we have been fortunate that we have never suffered an involuntary job loss. I have seen megacorps shutting down entire plants where everyone gets affected, the talented hard workers along with the dead-wood slackers. So, our fortune has to do with luck too.

We'd rather save to build up a portfolio, so that we can have options. Some people don't seem to get the same idea, but it's their life. I'd say "Let them spend".

What happens if all Americans become LBYM'ers? Look at the Chinese, whose savings rate of 50% makes the Japanese look like spendthrifts. If the Chinese loosen up their purse, internal consumption growth is plenty to help their production. I think they are getting there, and try to invest accordingly.

 

[FIREd]

I personally don't care if people want to live above their means as long as they can deal with the consequences without impacting me. But they rarely can. I am finding that those people who most vocally criticized my LBYM lifestyle a few years ago, are the same people who are now clamoring for a piece of my money.

 

[Grep]

I live below my means because I am constitutionally incapable of anything else.

As my security and income has grown, I have increased my spending and relaxed quite a bit. Even so, I find spending money on certain categories of more frivolous purchases and experiences to be, at times, physically painful or nauseating. This can be a problem during dating, for example, but mostly I wish I could get over it so that I myself do not have to experience that discomfort.

 

[LOL!]

So I guess the consensus is to figure out how much you want save for retirement (10%, 20%, ...) include that in your Living At Your Means budget. No need for this below or above hoopla.

 

[Sarah in SC]

Hamlet, that is a great book! I really enjoyed it, and it comes close to home for me. My sister and BIL have a nice, not lavish home, 3 kids in private school and two modest larger cars. They are right at the edge of their income with expenses. With two of them working, they can keep it all up, but there is no room for "extras"--no time, money or bandwidth. I think it would be a hard way to live.

All our "extra" money is spent totally frivolously, and we could cut it out if need be. Very different story.

I found the premise in the book interesting regarding the big upswing in house prices being due to the sudden move to 2 incomes in this country from the primary breadwinner model in decades past.

 

[Grep]

By the way, I've never really known one of those classic "big spender" types. Perhaps I unconsciously avoid them.

The people in my life that have money troubles didn't buy the McMansion and the SUV, they have kept a much lower profile. They graduated with substantial college loans, had lower paying jobs, and continued to slowly but surely get over their heads until their credit card balances were crushing them, or they lost a job and didn't find another soon enough, etc.

I've been surprised and at times shocked at the financial naivete that is out there. "But it's just another $150 a month on my card" leaves me stupefied. "Yes, it's another $150 a month, essentially for life!" is my response, but these are hopeless cases that are in denial and who are unwilling to take the uncomfortable steps that will end their debt.

On the other hand, I've been gratified that some friends in financial straits have been self-aware, motivated people who come to an epiphany and turn their financial lives around. That is wonderful to watch.

 

[ziggy29]

I found the premise in the book interesting regarding the big upswing in house prices being due to the sudden move to 2 incomes in this country from the primary breadwinner model in decades past.

That brings up an interesting chicken-and-egg question. It seems like the tendency for wage increases to beat inflation started reversing around the time two-income households became more prevalent.

So, if there is ANY cause and effect relationship (knowing that correlation != causation), did more women start working because it became economically necessary due to inflation and lower household income growth? Or did the increase in the supply of labor result in depressing the upward pressure on wages and increase inflationary pressures?

They may not even be related, though, because this period of time also coincided with the beginnings of serious economic globalization which created its own set of economic pressures...

 

[FUEGO]

I think the idea proposed by The Two Income Trap by Elizabeth Warren is a little incredulous. Obviously the spendthrift household that blows all their money on discretionary items will weather a financial crisis better than a family who has fixed expenditures that cannot be easily reduced. But there is a third option that wasn't really focused on in that book. The family that keeps their fixed expenditures low, and saves a significant portion of the second income earner's salary for a rainy day. With this third style of personal financial management, not only do you have the spendthrift's advantage of not having all your income spoken for each month, you also have the added advantage of an ever increasing account balance to help you weather any financial storm. I really wish Ms. Warren would have focused on this in her book as the best solution that is easily implementable on an individual level.

Let's face it, when both adult members of a household are working and bringing in good incomes, that is as good as that family's income stream will ever be from working. There are so many "known unknowns" that can cause that income stream to go from salaries to one (temporarily or permanently), that you might as well plan for it, or at least a significant probability of it. To name a few: death, disability, childbirth, child rearing, homeschooling, elder care, going back to college, job loss, etc.

Ms. Warren really didn't place much expectation of responsibility to consider these "known unknowns" on the level of individuals households.

To be fair, some households have very low incomes and simply can't save much, if any, of a second income because they depend on it to live a bare minimum lifestyle. These are probably few and far between, though they undoubtedly exist in great numbers (in the aggregate) across the US. (So go ahead and bring up all the poor 2 income earning families you know that are completely unable to save anything ever to refute my point! )

 

[CoolChange]

I am a LBYM type very similar to what Grep has described.

I suspect that I am a bit younger than Grep; but, I am not sure. And, I hope that I also continue to relax a bit as I age. But, here is a current example situation to give some insight on my particular personality quirk in this regard:

My car is 12 years old, high mileage, and (I suspect) getting close to the point where upkeep will be more expensive than buying a newer car. However, just the thought of shopping for a car and spending that kind of money (never mind that I have the means) is making me physically ill to my stomach. (The thought of repair bills for the current car also makes me ill.)

While this personality quirk has definitely helped me accumulate more savings that most of my colleagues, it definitely leads to problems as well. Grep mentioned dating which has also been an issue for me; and, not having a reliable car could conceivably impact me financially if I were to miss a client meeting, etc.

Just another perspective.

 

[bank5]

To me that depends on how much enjoyment you derive out of spending $10 for lunch and how easily you can afford it (and, to some degree, how often you do it.) If you can well afford going out to lunch every day and it adds a lot of enjoyment to your life, go for it.

But maybe it doesn't add much to your quality of life, and maybe you'd rather save that $200 a month or there are other discretionary things and/or activities you'd rather spend it on when your discretionary budget is limited. In that case it makese sense to "brown bag" it, at least most of the time.

The bottom line is that we all have different "means," goals and priorities with respect to enjoyment of life in the here and now. And to some degree, suggestions of how people should handle their discretionary income is very much projecting.

Yeah, I agree. When I said the thing about going out to lunch, I should have been more specific. I didn't mean going out everyday but meant once in a while if you can easily afford it. If you're saving thousands a month, but don't want to out for lunch twice a month only because you want to save an extra $10 -- that IMO is pretty extreme.

I think I'm borderline extreme LBYM but am wondering what other people would consider extreme. I wish I wasn't so extreme because I think too much about money.

 

[W2R]

I think I'm borderline extreme LBYM but am wondering what other people would consider extreme. I wish I wasn't so extreme because I think too much about money.

I would think that any LBYM led by realistic financial goals, rational planning, and enough introspection to implement some honest prioritization is not extreme. Look within yourself to discover what you really want and don't want out of life, and what your priorities are.

I would also think that LBYM led by spiritual goals is not extreme if it is not causing harm to you (physically, emotionally, mentally, or spiritually) or others.

Any LBYM that is extreme would not fall inside these parameters.

The fact that you say you think too much about money, means to me that you are not following your own priorities and need to think more about what is important to you. Not to someone else - - but to you.

 

[ziggy29]

I would also think that LBYM led by spiritual goals is not extreme if it is not causing harm to you (physically, emotionally, mentally, or spiritually) or others.

Agreed. If it makes you feel physically ill or stressed out to spend money you can easily afford to spend, if it gnaws deeply on your conscience to do so, or if it leads to behavior that damages relationships, then it might be "excessive" -- and possibly to the point where counseling might be in order. But if being a major cheapskate doesn't cause any of these unhealthy results, then be as cheap as you want to be.

 

[bank5]

But that is according to your priorities, not necessarily anyone else's.

Personally, I felt like my humungous 1975 wedding was a huge waste of money. I agreed to it because it was my mother's dream, not mine. I still could care less whether I had it or not because I felt that marriage is in the soul and heart, and has nothing to do with 350 guests that you don't even know. But my priorities are not yours.

Also, I pack a lunch for work every day because I don't want to spend $5 on lunch; your priorities would say this is extreme, but mine don't. I bring healthier food from home than I would otherwise buy, and save a little bit. Since I live alone, I also have a habit of never having more than one light on in the house. Some people might think that was unconscionably cheap.

Someone else's priorities might say that I should not have spent the money to buy my Wii last summer, but it has been such fun and makes me feel privileged, too. Again, my priorities but not theirs.

Good points.

Just to clarify -- for the lunch example that I gave, I meant never going out to lunch when someone can easily afford it and wants to, but doesn't because it would be an extra $20/$30 dollars a month. I'm not saying that's the wrong thing to do, it's just being an extreme LBYM IMO.

 

[W2R]

Good points.

Just to clarify -- for the lunch example that I gave, I meant never going out to lunch when someone can easily afford it and wants to, but doesn't because it would be an extra $20/$30 dollars a month. I'm not saying that's the wrong thing to do, it's just being an extreme LBYM IMO.

Who's to say the person can easily afford it and wants to? These are decisions and priorities that the person himself or herself needs to make. See my post #45, above. Maybe (as in my case) that money would give more happiness when spent on something else (like my Wii, for me). If the person knows himself and knows these are his own priorities, then I don't think that would be overly extreme.

Just to not give the wrong impression - - it's not like I never eat out! I do. I just bring my lunch to work most of the time.

 

[ziggy29]

Just to clarify -- for the lunch example that I gave, I meant never going out to lunch when someone can easily afford it and wants to, but doesn't because it would be an extra $20/$30 dollars a month. I'm not saying that's the wrong thing to do, it's just being an extreme LBYM IMO.

It may be extreme relative to what most people will do, but if they derive enjoyment from seeing their savings balances grow as much as possible and it's not leading to destructive or toxic behavior or impacting one's health or relationships, more power to them.

It's not always a "sickness" or an "obsession." Sometimes frugality can be a hobby for people.

 

[W2R]

It's not always a "sickness" or an "obsession." Sometimes frugality can be a hobby for people.

That's it!! That's it!! People are always asking me what my hobbies are, and I draw a blank. FINALLY I have identified a hobby of mine.

Frugality, tightwadism, LBYM - - or, Applied Spiritual/Mathematical Principles of Personal Finance, I suppose. Thanks.