LBYM

Do you know what LBYM means? It is an acronym for Living Below Your Means. The number one secret to being financially stable is to live below your means. Not very sexy, but really easy to understand.

So what does this mean in practical terms?

If you make (earnings or income) x dollars a month, and y dollars is your taxes, then you have z dollars (net) left to spend. That is x - y = z. Instead of spending z, to live below your means, you spend z - 10% or z - 20%. The extra 10 to 20% goes to savings or to investments. Your means is z and you spend less than z.

Living below your means will lead to:

• ever increasing wealth
• having emergency funds for the downtimes due to layoff, illness, etc.
• the possibility of becoming financially independent
• the possibility of retiring someday without being poverty stricken
• instilling financial discipline in both for you and your children
• less stress and chaos around money
• having enough money to buy all necessities plus a little for fun, pleasure, recreation and hobbies.
• feelings of security and a sense of satisfaction with your financial strategy
• stability

Some of my clients and students, friends and family are in precarious financial straits. Why? It's usually not because they don't make enough money to live on. By that, I mean they make the US average or better and could live on that amount. But they choose not to. In fact, I know several wealthy (in the top 10% of the country's wealthiest) who live from paycheck to paycheck and are deeply in debt.

What are some characteristics of those individuals and families who do not live below their means?

• They have large balances on their credit cards.
• They pay the minimum amount due on credit cards each month.
• They buy too much house, meaning the payments are too high and may be going up. Sometimes they buy using interest-only loans or variable rate loans with balloon payments after some number of years.
• They buy new cars every few years.
• They buy every desired consumer good including big screen TVs, the newest electronics, expensive toys, recreational vehicles such as RVs, boats, ATVs, scooters, etc.
• They do not have 3 to 6 months of emergency funds to support their families in times of layoffs, illness or other mishap.
• They have no retirement savings to speak of.
• They have no way to help their children through college except by taking out loans or charging it on the credit card.
• They often do not deny themselves or their children anything.
• They do not budget.
• They do not know for sure what their income and expenses are.
• They often juggle payments, expenses, buying and selling and cash flow.
• They are stressed out, unhappy, and depressed.

Of course, one can be living below your means and have a few of the above, such as lots of toys, but these are typical for those living above their means, especially when taking them as a group.

Living below your means is a simple concept. You take your salary, subtract your taxes, subtract your savings amount (10 or 20 or 30%) and what's left is yours to spend. But it also means being wise with your money. Oftentimes, it means doing the opposite of what is listed above under the characteristics of those who do not live below their means. Things such as never using a credit card unless you can pay it off in full each month; buying less house than you can "afford"; tracking your expenses and your income so you have a clear picture of your finances; driving your cars longer and buying used; and so on.

If you are interested in this concept, you may want to read the book Your Money Or Your Life by Joe Dominguez and Vicki Robin. It's a classic and an easy read.