|How big is your piggy bank?|
This is now the second time I've written an article about a 4-letter acronym. (See: YOLO). But this one is really what personal finance boils down to. All the fluff and talk aside, if you can't master LBYM you'll likely never achieve financial freedom.
LBYM = Live Below Your Means.
If there was ever an acronym you need to know, and live by, this is it. Most of my success so far can be attributed to this simple, yet powerful concept.
There's a ton of financial "advice" out there in the world. You can go to seminars, buy videos on how to change your life, read all the books in the world and even follow blogs like the one you're currently reading. But, it really boils down to living below your means. Once you have realized that, it's time to master it.
LBYM has two mechanisms. Income and expenses. One should focus first on maximizing the former, and then minimizing the latter. Obvious, right? You would think so, but like losing weight it's much harder to actually put the rubber to the road and and do what's necessary to get the results you really want. If you're looking for some magic nugget of advice to become rich overnight you're going to be sorely disappointed.
Let's talk about income. What have I done to increase this? What can you do?
I talked about an opportunity I had at work to increase my income dramatically and I, of course, jumped on it. This was at the beginning of 2012. Since then, you can see in my income/expense reports that the income side of the equation has been up noticeably. This opportunity didn't just come my way out of thin air. I worked hard for it. I did my best to bring value to my position and tried to make sure my employer and management was aware of exactly how hard I was working. Are you always going to be amply rewarded for hard work? No. But you are sure to never be amply rewarded if you're just looking to skate by and do the least amount of work as much as possible. Financial freedom doesn't come to those who are looking to follow the path of least resistance. Hard work is one of my many mantras.
I also started this blog back in early 2011, after about 1 year into my journey to early retirement. I didn't do it for the money, but there has been a modest income for my time. Lately, I've typically averaged somewhere around $150/month in income from this blog. Modest, right? Sure. But that's about $51,000 less I have to save up at a 3.5% yield ($1,800/.035). That's just the start, however. What this blog also offers, besides a modest income, is a public platform to keep me honest and on track. Any decisions or actions I'd be embarrassed to post about should probably be avoided. Also, this is a wonderful outlet/hobby for me. This blog can continue well after retirement, offering me a venture that keeps me busy, relevant and able to continue inspiring others. But most of all I look forward to using this forum to inspire others to achieve their dreams, and that's exactly why I'm writing this article today.
Let's also not forget about dividend income. This is a real, passive income stream I've built from $0 all the way into March's recent dividends of $413.72. That's progress, folks. Those are dollars that I'm currently reinvesting back into attractive equity positions, but one day I'll use that income to fund my day-to-day expenses. Dividend income is wonderful. While the high quality companies I'm invested in continue to sell products or services that people want/need on an everyday basis, I'll continue to receive my dividend checks. Those checks will be deposited into my brokerage account no matter where in the world I'm at. That's just one wonderful side-effect of living below your means: financial independence technically means you're also geographically independent. The world could be your oyster.
What can you do to increase your income? Are there opportunities you're not taking advantage of?
Those are some of the changes I've made, and it's possible for you to make changes to your income as well. What are you passionate about? Who are you? Is there a way to capitalize on that? Monetize it? What are the opportunities for advancement at your place of work? Come in early and stay late. Make sure that you're a valuable asset and when the opportunity is there, turn that value into real money that you can use to buy time. Once you're making more money, avoid lifestyle inflation. Use that excess money to accumulate appreciable assets, specifically ones that throw off passive income which can be used to reinvest in the interim until you're financially independent. That passive income will eventually pay your living expenses.
More income is wonderful, but you have a lot more control over your expenses. Live frugally, and learn how to value time more than money.
I talk a lot about frugal living on this blog. That's because I believe you have a lot more control over your expenses than you do your income. Sure, many people might say income is limitless and expenses can only be cut so much. That's partially true. I can't force my manager to give me a raise, but I can certainly control my expenses to the point where even on a modest middle class salary I can save more than half my net income.
I've used that control to my advantage. I decided to sell my car in mid-2011 because it was destroying my budget. I moved to a smaller apartment that was closer to the bus line and significantly cheaper. I then started using the bus on a daily basis and use my 16 year-old scooter to get around otherwise. I try to spend less than $1,300 per month on everything. That includes about $190 per month in student loan debt repayments. That means my living expenses are about $1,100 per month. That puts me right about the poverty level, according to the United States Department of Health and Human Services. I certainly don't feel like I'm in poverty. I live in a modest two bedroom apartment in a beautiful city that I share with my girlfriend and her child, I eat at least three times per day (tonight's dinner will be chicken chow mein), I have running hot water, electricity and air conditioning. I have a gym membership and work out three times per week most weeks (I've been bad about this lately). We go out to eat usually at least once per month, sometimes twice. I have access to a world-class hospital in my city. I have the #1 beach in the U.S. (Siesta Key beach) less than 10 miles from my apartment. It's currently 85 degrees and sunny outside. In my life, I have a wonderful network of supportive friends and family. That's poverty?
What are your monthly expenses? Can any fat be trimmed?
I think it's important to keep perspective. Modern-day Americans live better than royalty of yesteryear. It was just 20 years ago that the internet was in its infancy and relatively unknown. Cars are an anomaly of just the past century. Homes here in the U.S. have doubled since the 1950's. There is so much abundance. How much abundance do you have? How much do you really need? What do you want out of life? I recently watched the documentary "Happy" on Netflix streaming, and what it showed is that most people derive much of their happiness from experiences and a close network of family and friends. It doesn't take a lot of money to spend time with family and friends, but it does take a lot of money to keep up with a much bigger home than you really need. And the money that is required to keep up with that home is earned when you're spending vast portions of your time at work, rather than pursuing the relationships that actually mean something. Do you own that home, or does it own you?
What has LBYM meant to me? What does it mean to you?
LBYM, and the concept of it, has completely changed my life. I currently have a year-to-date savings rate of 60%. That means I save well over half of my net income. I've used my robust savings rate to my advantage as I've built my portfolio into a six-figure dividend income generating machine in just three years.
What can LBYM do for you? Well it won't get you rich quick. That's for sure. But, it can bring your financial dreams closer to reality every single day. It can allow you to pay off debt, buy income-generating assets, and slowly increase your net worth. Don't believe me? Think there's a secret I'm not telling you? Check out "The Millionaire Next Door", a book that focuses on how millionaires got to where they are. Guess how the majority built their wealth? You guessed it: they lived below their means by avoiding luxurious lifestyles and debt. They then used their savings to purchase assets and focused on building their net worth.
An excerpt from that book:
"In The Millionaire Next Door, Dr. Stanley shattered the contemporary held beliefs about America's rich - and how they got that way. It is seldom inheritance or advanced degrees or even intelligence that builds fortunes in this country. Wealth in America is more often the result of hard work, diligent savings, and living below your means. The Millionaire Next Door reveals the common denominators that show up again and again among those who have accumulated wealth."
Chasing dreams and freedom.
Live below your means and the you of 10 years from now will be thankful you did. Bring your dreams into reality. Maximize income, minimize unnecessary expenses and use the difference to purchase appreciable, income-producing assets. Financial freedom awaits you.
What about you? Do you live below your means?
Thanks for reading.
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