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No. of Recommendations: 7
I think it is helpful to distinguish between "Top Down" and "Bottom Up" LBYM.

Top Down LBYM is when you economize in the large, repeated areas of your budget. These would include mortgage/rent, car payment, insurance...decisions that you make very seldom, but represent large budget items. Once a Top Down spending decision is made, it's usually hard to change. Because these budget items repeat every month, the cumulative effect over time is large.

An example would be deciding to pay cash for a used car, instead of buying a new car and paying interest on a loan.

Always add up the cumulative interest (over the entire life of the loan) before taking out a loan. It might add up to the entire cost of what you are buying! This is what encouraged me to pay cash for my small car, and pay off my house.

Bottom Up LBYM is when you economize in the many small areas of your budget. These do add up over time.

An example would be brown-bagging lunch at work, versus eating out at lunch. You have more flexibility with Bottom Up LBYM, because you can make a different decision every day.

Both Top Down and Bottom Up LBYM are useful. Both add up over time. But the rare decisions for Top Down LBYM have a greater impact. Buying a more modest home and car, and paying cash instead of taking on debt, often add up to much more than the myriad little acts of self-control that are required for Bottom Up LBYM to work.

Other hints:

1. Base your pride and self-respect on your personality, integrity, skills and actions, not on your possessions. Don't try to impress people or buy status with material objects. If people value you by your possessions, they aren't the kind of people you need as friends.

2. Do not take on debt to buy anything that will lose value over time. If it isn't worth more after you pay it off, don't borrow to buy it! Include the time value and opportunity cost of use -- if you pay off a car in 3 years, but drive it for 10 years, include the extra use time in the value. Many LBYMers drive cars for well over 10 years.

3. Start an automatic savings plan into an account that is separate from your spending money. Like a roach motel, that money should check in but not check out. This is your investment capital.

4. Maintain what you own! Develop the skills to keep your possessions in good order to lengthen their use time.

Wendy
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