“Living below your means” gets a bad reputation. People hear these words and assume you need to eat grits, make honey sandwiches, and recycle toilet paper.
But that’s not the case at all. Living below your means simply means creating cash flow through your household.
It also means that you do not subscribe to the notion of lifestyle inflation. Do not worry; I will cover these terms throughout the article. Let’s begin.
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How does living below your means (LBYM) look in reality? You already know (and feel) what living below your means would look like in your life.
The problem is you don’t know what the benefit of living this way would give you. Living below your means allows you to increase your savings rate.
On a daily basis, LBYM gives you a sense of freedom you never dreamed possible. It allows you to create a budget and have extra money to save and invest at the end of the month.
Put simply, LBYM is looking at your income and creating a life a couple of steps below what you earn. For example, if you make $5,000/month, LBYM would mean you live off of $3,000/month.
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What prevents you from LBYM? The most challenging part of living below your means is forgoing the consumer culture that companies created for us. They turned us all into spenders that do not think about the long-term consequences of our actions.
It’s not normal for a 25-year-old to buy a sizable single-family household or a downtown apartment. We used to believe in moving from a studio apartment to renting a single family and finally purchasing a starter home.
Today, tv shows like House Hunters (one of my favorites) tell us that we need to buy a massive single-family home as soon as possible.
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Housing is the number one reason we cannot live below our means. Your home (and all associated expenses) should be less than 30% of your income.
So when people buy homes where the mortgage is 50-60% (before utilities and maintenance), they have zero chance of getting ahead long term.
What is your savings rate? Your savings rate is how much money actually makes it into your high-yield savings, retirement accounts, and investment portfolios.
If you earn $5,000/month and save $1,000/month, your savings rate is 20%. Of course, you want this number to be as high as possible.
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I don’t calculate my savings rate, but I keep tabs on my accounts every month. My goal is to increase my net worth (minus real estate) every month.
Some months are challenging because the stock market decreases, but I still buy more shares throughout the month. By LBYM, you have a much higher chance of saving and investing for your future.
Why is saving and investing important? But what is the benefit of saving and investing your money? It’s hard to LBYM if you do not understand the reason you must save.
Saving money helps to protect you from emergencies, routine maintenance, and general spending occurrences. When you don’t have savings, your first reaction is to use credit cards.
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Credit cards are bad if you don’t know (101, 102, 103, 104). So by LBYM and saving some money every month, you will have the cash flow for children’s random events, car maintenance, insurance deductibles, unexpected dental emergencies, etc.
Investing money helps you beat inflation, grow wealth, and pass on an inheritance to future generations.
By investing money, you ensure that your money makes money. You can also invest in real estate, businesses, and yourself (by upskilling and taking courses).
LBYM prevents lifestyle inflation. If you can wake up every day, make your bed, and go to work, chances are you will climb some kind of corporate ladder.
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As you grow at your job or get a higher-paying job, you may begin to spend more money—we call this lifestyle inflation.
For example, let’s say you earn $5,000/month and spend $4,000/month. You then get a pay raise to $6,000/month—what do you do with the extra cash flow?
How you answer this question will determine the outcome of your life. If you save and invest the extra $1,000/month, your life will be significantly easier in 5-10 years.
If you upgrade your car and increase the payment by $700/month, you’ll be working until you are 80 years old. Which sounds better to you?
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If you can keep your life at $4,000/month for a few years while increasing your income, your saving rate will keep growing.
The process of building wealth. Part of my seven principles of building wealth is living below your means. Rich people don’t work for money; they work for assets.
Indeed, assets (things that produce money) separate the rich from the poor and working classes. The only way to purchase assets is by living below your means and investing in assets.
As you LBYM and increase your savings rate, you purchase dividend-paying stocks from your excess cash flow. These blue-chip stocks then pay you monthly dividends that you can use to fund parts of your lifestyle.
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Our lifestyle budget maybe $4,000/month; however, our dividends may pay $1,000/month. As we keep living below our means, our investment income from royalties, business, dividends, bonds, and real estate keeps increasing.
I’m at this stage now. My wife and I live on our budget (mine is $3,000/month in San Diego). I increase my savings rate by earning more money at work, writing books, investing in dividends, and receiving rental income from houses and rooms.
Conclusion. By LYBM, I can slowly increase my lifestyle. I can order extra streaming channels and get a monthly Loot Crate delivery.
Eventually, we will have so much money coming in that we can completely change our lives. That’s right; we will be able to spend freely.
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Living below your means is only for a season. If you do it right, you can live your dream life within ten years (or less).
It just takes that initial shock of “saying no” to the spending culture that advertisers created for us. Is it going to be hard to resist the appeal of spending money? Yes.
However, things will fall into place once you find your purpose (freeing your family) and start setting goals (i.e., saving $5,000 this year).
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I used to be an Amazon spender. There was a point where I couldn’t keep my credit cards on file out of fear of random spending. Today, I have zero urge to spend without a plan.
I find solace in buying some Taco Bell or McDonald’s from time to time or getting some grocery store sushi.
The highlight of my day (outside of talking to my wife) is opening my savings and investment accounts. That’s the true magic of living below your means—increasing your financial intelligence, confidence, and freedom. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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