I hear and read this piece of advice a lot, but I got to thinking about it the other day. Why are we always talking about “living below our means”? Is this just another way of saying spend less than you earn?
I have to be honest. The more I thought about it, the less I liked the phrase. It has a confining connotation to it: We should rein in our spending to fit nicely under some fixed ceiling. This is definitely “inside the box” thinking.
A slightly better way to look at things would be to “live below your means while expanding your means”. This is also commonly promulgated among personal finance and money gurus. Focus on the top line and the bottom line. I’ll admit that I’m also not such a fan of this way of thinking either.
The inherent problem is that as the “means” expand, so does the “living”. You finally are able to trade in the junker for a nice new car. No longer will you eat Ramen noodles. They’re soon replaced with trips to the Olive Garden or MacDo (that’s McDonald’s). People’s lives are seemingly richer, but they still wonder why they’re not getting ahead. This, too, is a case of “inside the box” thinking; the box just keeps getting bigger.
My advice, then, is to stop thinking and living “inside the box”. Why not try sitting on top of the box instead of living in it. Most people spend their whole lives trying to accumulate enough assets to live on when they retire at age 65. I say, start living on your assets now.
Live according to your investments and not your income. This is how you can stop living within your means, and start living on top of them.
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by frugal zeitgeist, on April 11 2007 @ 5:02 pm
Maybe I’m just tired, but I’m missing something. I’m not following what you mean by living on my assets now as opposed to later. Little help?
by limeade, on April 11 2007 @ 5:35 pm
Living on your assets means to have your assets or investments pay for your lifestyle and not your job.
Buy a bond that gives you income for example and use that money to pay for your living expenses. Now you can redirect your job income towards buying more investments.
Eventually your investments will be able to support all your living expenses.
by frugal zeitgeist, on April 11 2007 @ 6:24 pm
Right, that’s what I thought. I couldn’t work it out because very few of my non-retirement investments pay much in the way of income, so it would be something like a few hundred a year if I did that.
I owned a wonderful 7% corporate bond once. It got called eight years early. Le sigh.
by limeade, on April 11 2007 @ 6:47 pm
I don’t exactly recommend using bonds for this strategy, but I do focus on cash flow producing investments rather than capital appreciation investments.
One of the reasons I like real estate.
by Jose Anes, on April 12 2007 @ 1:49 am
Dividend income is a great way of achieving this, especially with the reduced dividend tax rate (until 2011 I believe, when the tax cuts expire).
Money And Investing
by Mike, on April 13 2007 @ 3:41 am
I’ve been reading recently that dividends aren’t really providing as much as they used to. Is this the case?
In the UK for instance, it is quite possible to get 5.5% return on a cash ISA (Individual Savings Account) for up to £3,000 tax free. Dividends (on average), so I hear, are more like 4.2% and are still taxed!
I’m going to be looking into real estate once I have some pennies saved up!
by limeade, on April 13 2007 @ 5:55 am
Dividends vary on a case by case basis and the percent yield is also affected day to day by the stock price.
Dividends are also taxed unless you hold them in a tax advantaged account.
Dividend yield will most likely be lower than some cash accounts because of the opportunity for capital appreciation that isn’t there for cash.
-limeade
by JPMartin, on April 14 2007 @ 2:27 am
Gist: Create Passive Income, and live off that!
by KMull, on April 19 2007 @ 8:43 am
To generate $36,000 worth of income, at a yield of 4.5%, I would need $800,000 invested. I can see your point, but it is a long way uphill.
by limeade, on April 19 2007 @ 9:25 am
Interest off of savings is only one way to generate income.
Look at rental real estate, or owning a laundromat, or vending machines or anything that would generate income.
by Fiscal Musings » » Accepted to Grad School and more, on January 31 2008 @ 7:52 pm
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