Monday, 10 October 2011

LBYM : Live Below Your Means

The key factor in building a retirement corpus, by far, is your ability to save (and invest) a portion of your income during your working years to fund your post-retirement expenses.  For those dreaming of an early retirement, it becomes imperative to save early and aggresively during your working days.  This concept has been discussed in great detail across the internet, and you can find many articles related to savings, frugality and a key retirement concept called Living Below Your Means (LBYM).  Simply described, LBYM refers to intentionally maintaining a lifestyle that is a little below what you can comfortably maintain.  The savings achieved by this approach can then be ploughed back into building your retirement corpus.  Now of course, this requires a lot of discipline to achieve, since in effect, you are giving up on your present comforts, to enable future well being.  Still, based on all the data I have seen so far, particularly from folks who have already achieved their early retirement goals, the key factor to enable this dream, is to save as much of your income as you can during your working years.  Thus, the earlier you want to retire, the larger percentage of your take home pay, you should be saving and investing for the future. 

This is something that should come particularly naturally for us folks in India.  Most of our family financial upbringing revolves around saving for a rainy day.  Interestingly I came across this lovely equation that describes the Indian philosophy beautifully.  The thought is that a persons happiness or contentment is a function of 2 factors; his/her needs or desires, and his/her belongings or assets.  This is represented as follows:

The western approach to enhancing happiness/contentment, is to aggresively increase ones assets and belongings.  The more one owns and possesses, the higher the numerator, and hence the higher the happiness levels.  The Indian (or eastern) approach is diametrically opposite to this philosophy.  The Indian approach suggests reducing ones needs/desires/wants.  This will reduce the denominator of the equation, thus leading to an increase in ones happiness quotient.  I found this simple concept a very intuitive way to understand and explain the LBYM concept, which fundamentally talks about the same thing in different words. 

Think about this.  In the meantime, my next post will focus on some number crunching to determine what would be the right percentage of take home pay to target for savings and investments to enable early retirement.

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