I came across a great discussion today between Michael Horton of White Horse Inn and Tullian Tchividjian. Tullian described the enemies of grace perfectly:
I’ve argued that that there is one primary enemy of the gospel—legalism—but it comes in two forms. Some people avoid the gospel and try to “save” themselves by keeping the rules, doing what they’re told, maintaining the standards, and so on (I call this “front-door legalism”). Other people avoid the gospel and try to “save” themselves by breaking the rules, doing whatever they want, developing their own autonomous standards, and so on (I call this “back-door legalism”). In other words, there are two “laws” we can choose to live by other than Christ: the law which says “I can find freedom and fullness of life if I keep the rules” or the law which says “I can find freedom and fullness of life if I break the rules.” Either way you’re still trying to “save” yourself—which means both are legalistic because both are self-salvation projects. So that, what some call license is just another form of legalism.
The key is this--does your salvation come from inside or out? You are following front-door legalism if you are trying to live according to a set of rules that define a "good" Christian. (If you don't think you would do that, how often have you said, or heard it said: "I just don't see how a saved person could do THAT." This indicates self-saving legalism). You are trying to live by back-door legalism if you are just hedonistically partaking in sin for the fun of it, and through this trying to "find yourself". Both are looking inward for salvation.
But real salvation comes from outside. Being holy--set apart for God's purposes--demands in its very definition that the setting apart is done by God, not us. Grace is from outside; law is from inside--in whatever form you choose.