Are there any financial disadvantages to living significantly "below your means"?

Question

By living "below" your means I'm asking about spending significantly less than you could, rather than living "within" your means which of course is sensible if you are able to do it!

So for example:

Buying a house that's much smaller / in a worse neighbourhood / etc because it's much cheaper, even though you could afford the payments comfortably on a larger mortgage for a 'better' place and most people with the same income would buy the 'better' house.

Buying a (reputable) used car rather than new.

(Edited to add: buying a car, even used, rather than taking out one of those "contract" schemes.)

That's assuming the money "saved" would be put into savings/investments... not just spent on 'women and whisky'.

I've heard most of the "financially independent, retire early" upsides to living significantly below your means, but are there any (primarily financial) downsides?

Answer 1

It's important to differentiate between "living below your means" and being smart about money.

Buying a used car with low mileage is generally a smart financial decision considering every car becomes a used car the second you drive it off the lot.

Financially, there are only advantages to living below your means. You will save more money which can be invested and/or used for retirement.

The disadvantages are both subjective and personal. For example, not everyone wants a big house. If you prefer a house that is only a fraction of what you could spend, then go for it. If you can afford your dream home and settle for something below your means, that's a personal decision. There's no right or wrong approach to this.

You should also consider the hidden costs of saving money. For example, buying a beatdown car could lead to more repair costs down the line and buying the cheapest junk food could lead to health issues.

I prefer a middle ground between frugality and enjoyability. I'm not going to buy a crazy sports car just because I can afford it but I'm not going to buy the cheapest car just to save money. At the end of the day, you're working for a reason so you may as well enjoy some of the fruits of your labor.

Answer 2

Other answers do a good job explaining direct financial disadvantages, so here's another point of view:

Living frugally might negatively affect your social life. For example, if your friends like going out for expensive dinners, choosing not to join may damage your relationship. Appearing to be rich, for example by driving a nice car, may increase your social status in ways that can be hard to measure. Vice versa for appearing to be cheap or poor. Depending on your career, you could lose potential networking chances, affecting your finance.

Of course, this is something you need to balance on your own, but I think it's worth mentioning that it is very possible to have regrets about living too frugally.

Answer 3

The big financial disadvantage is likely to be the risk that the low priced home you purchase appreciates more slowly (or declines in value) compared to the better house you could have afforded. This is obviously very location dependent but there are, for example, plenty of neighborhoods in Detroit where home prices haven't recovered since the 2008 recession. If you buy a home in a relatively high crime area that is in a lousy school district and a lot of your neighbors go into foreclosure, the demand for your house will decline significantly which can very quickly put you underwater in your mortgage. If you invested in a home in a nicer neighborhood with a better school district, you're likely to see a higher rate of appreciation at least over the mid to long term. Of course, this is an extreme example-- there are plenty of "less desirable" neighborhoods that are going to see strong appreciation.

If we assume that "high crime area with a lousy school district" correlates roughly with neighborhoods that were redlined in previous decades (which is going to be a decent correlation), you can find plenty of evidence that home price appreciation is dramatically lower over time than in those neighborhoods that were able to access government sponsored mortgages in previous years.

As for how much appreciation you'd need in order to break even rather than investing the difference, imagine a "good" house runs $300,000 in your area and a "bad" house runs $200,000. At 4% interest rates, that's roughly the difference between a $1500 monthly payment and a $1000 monthly payment. Assume that you live in the home 10 years before moving (a bit less than the median but not unreasonable).

At a 4% rate, the $300,000 home has a monthly payment of $1432. After 10 years, the balance on the loan will be $236,352. You'll have paid $108,192 in interest. At that same rate, the $200,000 home has a monthly payment of $955. After 10 years, the balance on the loan will be $157,568 and you'll have paid $72,168 in interest. If we assume the good house has appreciated at 6% a year (a bit below the 1968-2004 rate) and the bad house has appreciated at 4% a year, the good house will be worth $537,254 and the bad house will be worth $296,048. You'll have $301,902 in equity in the good home vs. $138,480 in the bad home. So the question is whether investing the $477 monthly payment difference for 10 years will produce a portfolio worth more than the difference in equity ($163,422). If you invest $477 a month and get 8% return over 10 years, you'd end up with a portfolio worth $88,324. That plus the equity in the bad home would put you $75,098 behind where you would be with the more expensive home.

Of course, I could construct the example to show going with the less expensive home and investing the difference winning in the end. I'm using some reasonable numbers but there is a pretty wide range in plausible values on a lot of these values. Local market factors are going to be significant-- a hot Boston property market is going to behave differently than Cleveland. Historical returns are no guarantee of future returns, etc.

Answer 4

For quite a number of products, the cheaper option ends up being more expensive over time, an often quoted paragraph in that context is the Boots theory of socio-economic unfairness which highlights the problem well even if it is completely fictional.

The running cost of a used car is likely to be higher than for a new car, because there is usually a reason why that car was sold. Maybe it has been in an accident, the previous owner doesn't feel safe in it anymore and can afford a new car, maybe it was a leasing return that was driven very aggressively for two years, or maybe it stood in a garage for a few years because the owner was too old to drive it, and the heirs now sold it.

There are a lot of expensive things that certainly aren't worth it. Lots of luxury designer clothing brands are still produced in the cheapest way possible, and will not hold up well if worn and washed often.

The art of saving money is to spend wisely, which is largely context dependent. In some cities, a bike may be the best investment, in others a bus pass, in other places having your own car ends up being the best choice, and I am fairly sure there exist places where a reliable Internet connection and telecommuting is the cheapest option if your job allows it, but in any case you have to choose one of these options as a cost of holding a job, so you can't avoid them. You can try to go for the cheapest option, but you should factor in the cost of your time as well (spending two hours to save $5 is a hourly wage of $2.50 -- would you get out of bed for that?).

Answer 5

The downside to living below your means, is that you don't have the same level of luxuries attainable if you lived at your means. You may also have fewer opportunities.

This can impact your life in many ways, including financial. Living in a worse area to save money would be the most common example where the benefits may be deceiving. e.g. your commute might be longer [make sure you factor in the higher transportation costs, and the value of your time lost stuck in traffic!]. So there's a difference between living in a small home that suits your needs, but has access to good employment opportunities, and buying an acreage 2 hours away from your job. Both ideas save money at first glance, but one will cost you more in the long run.

Beyond that, does the worse area have good schools for your children, if applicable? There are many ways that your quality of life would improve by living somewhere nicer - as long as you live within / below your means enough that you don't become destitute when you retire!

Answer 6

What is not mentioned in the other answers, that is listed in the question:

If you live in a "worse" neighborhood, there might be a higher criminal rate. That could be a big disadvantage and worth considering, especially if you have kids.

This could cost money in the long run, repairs on house or car, stolen goods, and the risk and costs of being injured/killed.

Environment issues could also potentially be a disadvantage in health and again also costs money to resolve/treat:

• living next to a railway/highway or any other loud noise environment
• close to a waste deposit/nuclear power plant or other potentially harmful areas

Quality and Distance to medical care or even the non-existence of it could be a negative point as mentioned by @Forbin in the comments

Answer 7

It’s important to be able to distinguish an expenditure from an investment, which isn’t always easy (except in hindsight). A more expensive house whose price will appreciate is an investment, especially if it will save you money on things like commuting costs. An education is an investment. A car is an investment if it gives you access to more and better-paid jobs (but it doesn’t need to be new). If your idea of living frugally includes cutting back on investments, then you will suffer financially in the long run.

Answer 8

You should live "below your means"!

It's vital to save and invest, particularly for retirement. I am troubled by your definition, because it seems to equate living-at-means with spending no more than your income. That definition leaves enough room for the person with no debt whose account just hits 0 as the next paycheck arrives. You need an emergency fund. You need retirement savings (unless you aim to have a sad retirement). Life really works better when you are able to save for a home, buy cars with cash, take bargains when they're bargains, etc.

I observe some have an internal principle of pushing money away. As if money is toxic or corrupting, that one is contaminated by having it. There's a saying "money is the root of all evil" and it's wrong. Actually the saying is "the love of (avarice of, obsession with) money is the root of all evil." That makes a lot more sense. The Buddhists use he word shankara to describe something you have emotionally charged thoughts about.

But money doesn't have to be one. Different deal if you think of money as a tool... like a 3/8" ratchet. It has a job, it does something for you, and it's essential to your success, but you don't compromise your moral values in pursuit of a 3/8" ratchet.

Be strategic about it

It's about having a clear sense of what matters, what gives you true fulfillment. I know so many techies with houses full of once-used gadgets they tried on a lark and abandoned, or the home DIYer who buys a $200 power nailer because he can't be bothered to swing a hammer.

It's fine to think cheap, reusable, simple... But for your few key tools, make them first-rate. Is a Fluke meter better than a Gardner Bender? You bet it is. SawStop, Apple, Morningstar, Bridgeport, Stihl... If you spend a lot of time with that, make it something you trust and that work well. Don't you dare go through your life fighting the limitations of a weak tool. Same goes for food - that's a key tool, and don't eat rubbish.

And leverage skill -- my 20 year old car costs me less than $500/yr in maintenance because I do 95% of the work myself. And yes, that's averaging through big repairs like brakes, suspension and an engine and transmission change. (Is it still the same car?). But if I were in a different situation, I might need a prestige car. In that case, I would go for a well maintained classic like a Citroen DS21 or a 1980s Jaguar or Aston Martin (with a Camaro engine/trans/PCM retrofitted for reliability), again doing much of the work myself.

So an outsize, up-market, luxury home-for-entertaining is not incompatible with this philosophy, but it needs to be a consciously chosen priority, not merely done because the Joneses are doing it too.

All this to say, living below your means doesn't mean being frugal with everything. If you want to live simply but own a Beech King Air, then do it!

Answer 9

One potential disadvantage of living below your means I haven't seen fleshed out yet is that the appearance of being rich and successful can help you in the business world.

Even the best of us are still riddled with biases and assumptions. Study after study has shown than well dressed, attractive people are thought of as more intelligent, honest, more diligent, etc. If you are living below your means to the extent that your clothes or haircut are shabbier than your peers it can affect people's perception of you.

The degree that this matters depends on the field you are in. Sales is probably the #1 offender. If you are a real estate agent driving clients around in an old Toyota Camry I guarantee you won't be as successful as someone with equal skills that drives a Cadillac.

Answer 10

The only potential financial disadvantage I can see is potentially falling into the trap of penny wise pound foolish mentality. e.g.

• A cheap used car can be expensive in maintenance
• Houses in the cheaper region may need more maintenance. It may also mean longer travelling distance to work.

Nevertheless, one who refuses to succumb to peer pressure actually open themselves to more options and choices. As contradict to some answer given, frugal doesn't mean one needs to live like a church mouse. It is up to one to open to all choice, e.g. one may choose a cheap mid-income suburb that may have access to public transit and directly drop off next to working location.

Ironically, people living in frugal life need to make use of their System 2, which might not be pleasant for most people.

Answer 11

One big disadvantage I see - what if you drop dead before you reach retirement? If your goal is to save money to pass on to descendants you may be fine with that, but looking at a single individual money you can't spend is worth nothing. Money is only an artificial construction for tallying what you can do with it - things you can buy (including services like getting your hair cut or your lawn mowed) or things that it can do (eg supporting a political party of choice, or helping other people).

I am not advocating spending every cent the moment you get it, but there is a balance between saving enough for retirement or for your expected future and cutting down on living just to have bigger numbers on your balance sheet. If it makes no difference to you if your car is bigger or smaller then go with the smaller one, but if you have set aside savings for all of the things that you need to (emergency fund, retirement etc) and you have enough discretionary funds for the car you really want, then go for that.

Answer 12

Summary: I think the overall art is to find your sweet spot in these financial/economical matters and that's something where general advise on particular situations will very often not be appropriate. Overall it's clear that living well below your means is good.
Further than that, we can predict/think about particular scenarios, but many may be financially disadvantageous or advantageous depending on the exact circumstances.

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Disadvantages I can think of that are linked to living well below your means

• One disadvantage is that machine learning algorithms such as used by banks to classify their customers may have difficulties with you as you belong to a financial minority.
  For example, they may just deny everything to you because you are too much of an unknown. Then again, you may not need the stuff they'd deny because you are financially independent...

• I think we can safely say that financially suboptimal decisions will happen, and you probably have to pay for learning where your frugal sweet spot is at some points. Living well below your means, this can include making financial mistakes that someone living at the edge of their means would never have a chance to make. And again, being a financial minority, it may be more difficult to find relevant knowledge for your situation.

  However, as you mention being risk adverse, you'll probably not make financial decisions that would catapult you to living at the edge of or above your means. The financial mistakes are thus much less of a disaster than a financially suboptimal decision for someone who lives just below (= really right at the edge of) their means.

Buying a house that's much smaller / in a worse neighbourhood / etc because it's much cheaper

• worse or better neighbourhood can be very much in the eye of the observer.

  • Where I am, houses in rural areas are much cheaper than in towns (not to speak of big cities).
  • Many of my "town-friends" could not imagine to live in a rural area: for them it's clearly worse to living in a middle to upper middle class urban area.
  • To me, all but very expensive districts in towns (think 190x villa in its own x000 m² garden/park, preferrably at the corner of a further public park - clearly out of my budget) are clearly worse than many far cheaper rural living options.

• financially better or worse will just differ as much:

  • too big a house/property will be a burden,
  • but if you happen to be a DIY house owner, that's a big financial advantage. However, if the house is so small that you cannot have a workshop or store tools and materials, you won't be able to realize this advantage.
  • a garden may be a pleasure (plus leading to healthy food and saving a gym membership) or a burden
  • There is no inherent natural law making houses/properties increase in value, they can also loose value.
    For many rural regions where I am, an actual loss in value of property is predicted for the next 20 years, while urban property (those regions that are already more expensive) is predicted to gain (both after inflation). Still, as in those rural areas the house prices are only 1/2 to 1/3 (per m² of house area) compared to the gaining urban areas, you may be better off in the end if e.g. you don't need mortgage on the rural house, but you do for the urban one. Or if the rural house leaves you money for investing.

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Slightly off topic as IMHO not a disadvantage, - but the topic cropped up in a number of answers:

Others have pointed out a number of penny-wise pound-foolish situations. I'd like to argue that they are often examples where it is not easy to decide whether there's an advantage or disadvantage financially

• I once bought a used washing mashine (75 €). It broke down very soon (after a couple of months in our shared flat, maybe 15x washing; and in a way that even with extensive DIY experience I decided not to be repair). So this could serve as the textbook example for buy cheap, buy twice.
• However, it's predecessor (20 €, "probably defective", < 30 min work) had lasted ≈ 5 years, and it's successor (90 €) still works after one repair for 30 € + 1 h work ≈ 10 years later.
• So: 225 € spent on ≈ 15+ years washing machine. Expectation for new washing mashine would be about 10 years for 400 €, i.e. 2,5x as much.
• Bottomline: we have a situation with very favorable mean, but high variance. The ability to afford "experiments" may allow substantial savings

Answer 13

The richer and more successful you are, the more you can afford to live below your means.

No one is going to be disappointed with, or unlikely to invest with, Warren Buffet, who lives in a middle-class house. From Business Insider:

Located in a quiet neighborhood of Omaha, Nebraska lies the home of billionaire Warren Buffett. He bought the house for $31,500 in 1958 or about $250,000 in today's dollars. It's now worth an estimated $652,619. He calls it the "third-best investment he's ever made.

However, Buffet finds it practical to travel via private jet. According to Forbes:

In short, Buffet says that having a private jet makes his life better and easier as he needs to do a considerable amount of traveling as the CEO of Berkshire Hathaway.

(In fact, Berkshire Hathaway owns Net Jets.)

Buffet has done a good job of distinguishing needs from wants, and even if you are not a billionaire, you can follow his philosophy, which seems to be to spend on true needs (e.g., the private jet) but not to splurge on things for show (e.g., a palatial house).

Other answers have cited a number of disadvantages of living "substantially below one's means", but I didn't notice anyone giving a quantitative estimate of he term. (See below). The question can be rephrased as: How much savings is too much savings? The answer to that is what you want to achieve. If you want to become rich, then there will be a period of time when you will have to live well below your means to save up working capital (unless you are a very good salesman). If you value things like travel and leisure and adventure then you will have to spend almost all your income....until you start worrying about retirement.

Not to take away from any of the excellent answers others have given you, I would not worry about high upkeep on an inexpensive car or house (learn how to evaluate a used car and how to do your own repairs on an old car or house). As for buying a cheap house in a neighborhood with poor schools, and employing other false economies, do your research before buying.

As long as you are well groomed and well dressed, and maintain a life-style in the bracket of your colleagues, albeit at the lower end, you will not be penalized as "not our sort", especially If you develop a knack for cooking and entertaining.

As for a quantitative estimate: If you save the order of 25% of your gross pay, and you have a middle class income, you will be living substantially below your means, but your frugality is unlikely to stand out to your detriment among your colleagues.

So decide what is important to you, and save (or spend) accordingly.

Answer 14

The obvious downside is in relation to home ownership. If you take out a bigger mortgage to get a more expensive house you will get a larger capital gain when you come to sell the house.

The return on investment may not be quite as good as stocks, but it is far cheaper to borrow money to buy a house. Many lenders won't lend you money to buy stocks at any price.

Answer 15

Yes, but not for the reasons that other answers have claimed. Rather, it's a matter of status symbols, personal image, and how these things (or their absence) impact your ability to increase income/wealth - whether that's through employment, investment/venture capital, building clientele, getting a mortgage (thereby avoiding having to pay rent), getting service providers to fix their mistakes at no cost to you, etc. etc. etc.

If you are reasonably-traditional-looking, white, male, speak without a rural or "weird" accent, etc. then the impact of living visibly "below your means" on "how rich you look" is fairly low. These mostly-innate characteristics already project status. Otherwise, spending on status symbols (big house, expensive car, watches, jewelry, iPhone X), and image (salon hair, makeup, cosmetic dentistry, ...) probably makes a difference.

Answer 16

If you are an entrepreneur and live well below your means potential clients might perceive you as unsuccessful and therefore decline to do business with you.

Answer 17

One point that hasn't been covered anywhere yet is

Inflation

Let's assume you're saving this money. If you're living in a modern Western democracy with a normal lifestyle, you'll probably keep your money in the bank. In other places, you may have to literally hide your spare cash somewhere it can't be found.

The problem you have now is that the cost of living (almost) always rises. After a year at 1% inflation, your $100 under the mattress will only buy you what you could have got for $99 the previous year. If you're unfortunate enough to live somewhere experiencing hyper-inflation, a loaf of bread hitting $1m is going to make your savings nothing but waste paper. Your bank account is no better, unless you're receiving interest which at least matches the rate of inflation. Most don't.

Your only solution is to use the spare money to buy things which rise in value at or above the rate of inflation, or which generate an annuity which does the same. This is always a gamble, because you cannot foresee the future and you cannot reliably tell what will earn you money and what will turn out to only break even or lose money. Of course this is the basis for all investments.

But you do need to make those investments. With investments, you may win or lose, at least in the short term, but long term you're pretty likely to keep going. If you just sit on that money in a bank account though, you're guaranteed to lose out.

Edit: A link to a BBC article with an extreme example of this. Zimbabwe after Mugabe: The country where pensions have disappeared Quoting from the article, "A year ago Teddie's monthly pension was worth $80 (£66), it's now worth $10."

Answer 18

Financial disadvantages to living below your means:

• you pay more taxes

• inflation is going to slowly eat up your savings, if you do not actively make it work for you (real estate/stock exchange/etc)

• you are ineligible for a lot of financial benefits from your government as you have too much money.

Answer 19

Intro

I'll start my answer by generalizing and rephrasing your question : What is the price of trading comfort against money?

Before going into details, I think comfort leads to happiness and a good prosperity. So mainly if you're thinking of trading your comfort (good house / neighborhood / car / lifestyle) then it has to absolutely for saving for even a better life and comfort in the future otherwise you're wasting your time and probably money.

Finally, Yes there's price for trading comfort against money.

How to ?

First, you need to take out buying real estate from the equation because buying nowadays it's more of an investment than a lifestyle. Basically, if you buy a good value house then it's value will increase with higher rate than a bad house in bad neighborhood. @JustinCave explained this matter with details in his answer.

Pro tips :

• Setup a goal before you do any of this and a time limit for this hole "living below your means" thing. Because at the end of the day you will always ask your self: what am I busting my a** for? Usually people adopt this policy for goals like saving money for a big project or paying huge dept.
• Always take the time to plan, think and study pros and cons before making any decision.
• Make a budget for everything.
• Think like your life is a company, calculate the depreciation value of things before you buy them.
• Think about investing in things that could lead to less spending. Example : move to a house closer to your workplace, ...

There are several tips that could qualify for "living below your means":

• The car: because cars always lose value, starting from your first ride with it.
• Food/Groceries: study well your spendings on food before making any decisions. Generally you have to eat/cook at home most of the time and buy food at sales (for lower price, sometimes from multiple stores) and keep a food stock.
• Smoking/Alcohol/...: quit smoking and lower your alcohol consumption.
• Commute: you have to spend the minimum on commuting to work and try to take advantage of all remote-working days you have (in France, there's a law for this). If possible commute using bicycle or invest in an electric scooter.
• Clothing and extras: always buy clothing on sales, fix a budget for clothing and buy from internet (usually cheaper). Cut spending on things that you don't use / use occasionally / can live without (TV/VOD subscription, buy Chinese phones, ...).
• Traveling: travel on cheap, visit places that are closer whose cost of life is low. Prioritize visiting on spending for fun.

Things that you can't spend less on:

• Real Estate investment: mentioned above.
• Health care: because you never know.
• Education: Education is the most important investment that one can make in a lifetime (doesn't have to be University). Lowering education costs is a very bad idea.

Cons

• Spending less when you earn more could affect your morale.
• It could affect your relationship with some people.

Answer 20

I will hook onto this consideration: "in a worse neighbourhood". This is a legitimate concern.

In the United States, for a variety of historical path-dependent reasons, there are known residential zipcodes (with lower per-square-foot costs) close to polluting industries with lower average life expectancy and/or higher incidences of conditions like cancer, asthma, etc. The most famous recent example is Cancer Alley between New Orleans and Baton Rouge, with a deep petrochemical industry cluster.