Posted by Tim Stobbs on May 16, 2007
Getting rich is very easy to do. It involves the simplest math and the most fundamental rules of the universe: conservation of mass and energy (or in this case money).
It basically works like this, if money in equals money out then you are getting by. If money in is less than money out, you are going to be in trouble since your living beyond your means. Yet is money in is more than money out you are on the right path since you can now accumulating more money.
The problem with this idea is it is so simple that sometimes it doesn’t sink in how easy it is to use it. So let’s give an example. Suppose your a middle class family taking in $64,000/year, so after tax/CPP/EI in SK they would have $45,657 (use this handy calculator from Taxtips.ca to find out your after tax income). If you are only spending $31,635/year, that means you are living on a pretax income of approximately $43,000. So on a before tax and deductions basis you are saving $21,000/year or 33% of your income.
Now beyond the obvious cash flow for savings benefit of living this way there are a few additional benefits. First off you usually have cash saved up so what someone just getting by would consider an emergency, such as a furnace needing to be replaced, would be easy to deal with. Also if your find yourself on Employment Insurance between jobs some time you should be easily be able to maintain your standard of living even on lower income.
Yet the real crown jewel to LBYM is retirement planning. Since if your use to living on $31,635/year after tax and then you pay off your mortgage you would then be living off $21,495/year after tax. You can generate that kind of income in retirement a lot easier than someone else who is use to living off of the full $45,657, which in return means you can retire a lot earlier than someone that is just getting by.