How Frugality Becomes Counterproductive

One year ago ? just about to the day ? I took my first stab at this topic in Why Earning More Money is More Important than Frugality. It was one of the most popular posts I?ve done in the five years that I?ve had this site up and running. It seemed for a while that I?d covered the topic as thoroughly as I could imagine, but the subject has hit the blogosphere with a vengeance in the past couple of weeks stimulating additional thinking. Now I’d like to take it one step farther and tackle how frugality becomes counterproductive.

Frugality in a changing world

I believe we?re in the early days of a massive era of change that will eventually earn itself a chapter or two in the history books. Think Industrial Revolution here ? an event so all-encompassing that it will change life as we know it. Space doesn?t permit presenting all of my thoughts here, but it’s a topic I’ve covered in some detail on several other posts.

How Frugality Becomes Counterproductive
How Frugality Becomes Counterproductive
We can safely say that we?re living in world of rapidly changing circumstances ? I?d dare say negative for most, though I think the very long term will hold many positive surprises. When change comes, and it seems disruptive in nature, we can do one of two things. We can either circle the wagons and work to protect what we have, or we can plunge forward and try to reinvent ourselves to thrive in a very different looking world.

The obsession with frugality strikes me as part and parcel of the circle the wagons strategy. Inside the wagons, we may feel secure and think that we?re in control, but as conditions outside deteriorate they?ll eventually drag us down in spite of our best efforts.

Frugality works best when you have something approximating employment for life, in a job that pays a living wage WITH full benefits AND predictable increases in pay. In that situation, your income is reliable and rises with time. By cutting expenses and saving the difference you save your way to prosperity.

But that?s not the world we live in any more. Jobs and long term employment are no longer certain, benefits are being cut, and raises ? if you get them ? are puny. Frugality doesn?t work as well in that situation and isn?t a long term solution to that problem.

The ultimate solution is to move beyond the circle, charge forward and work to cut a new path. Frugality doesn?t prepare us for that, at least not the way it?s generally used.

Micro-frugality vs. macro-frugality

So I don?t risk painting with too broad a brush, let me say that I think there are different types of frugality, and I can identify two as general categories.

Micro-frugality. This type of frugality is searching two dozen expenses for savings in each in the hope that collectively they?ll reach the level of real money. While that may (or may not) happen, the effort itself is exhausting, and requires constant vigilance. It has us researching, analyzing, discussing and executing cuts in nearly all expenses that make up our financial lives, and the effort can easily rise to the level of a part time job.

Macro-frugality. This is cutting the two or three biggest expenses that have the greatest impact on your finances. If your house is costing you $2,000 per month between the basic house payment, utilities and upkeep, you replace it with one that you could live in for $1,200 a month. A car with a $600 payment is replaced by a used car with no payment.

Macro-frugality makes abundant sense, especially if you?re trying to lighten your load to make a career push forward. You cut the structural expenses ? which often causes other expenses to drop as well ? and let the rest go. It?s a better strategy because you make two or three major changes and then move on. Simple, with maximum effectiveness.

Micro-frugality on the other hand, has us buried in small details. While we should be focused on generating fresh income streams, we?re busy plugging small leaks in our budget. What?s the end game to that strategy?

Is frugality motivated by a hatred of work?

That?s a strong statement but before you judge me too harshly for writing it, I came up with it while reading the comments posted on a New York Times article, Forget Frugality: Focus on Earning More.

The article was written by Ramit Sethi at I Will Teach You To Be Rich, an author and personal finance blogger who?s been very outspoken in his criticism of the frugality faith. There were 90-something comments responding to the article, and from the 40 or so that I scanned, the responses were overwhelmingly negative. I?d even go so far as to say that some of them were hateful, as though Ramit struck a deep emotional nerve.

Why the rabid responses? Ramit was suggesting that rather than use their free time to find new ways to save money, that they instead find ways to earn more money. That was the bone of contention ? the frugal wanted to save money precisely so they wouldn?t have to work more.

But was Ramit suggesting that they become workaholics? Hardly. He was suggesting that they think long term. What he was pointing out was that the better use of spare time is to use it to earn more money so that credit cards and other loans can be paid off or savings can be accumulated. With less debt and/or more savings, structural improvements in life take place ultimately resulting in less work, more free time and more money. Its old fashioned work-save-invest, but the masses apparently want no part of it ? too much work in the short run.

The primary risk of over-emphasizing frugality

Ever wonder why human beings are creatures of habit? It?s because life is easier that way. We don?t want to have to stop and think about everything we do, to hatch new ideas for the things we do every day, especially those that are mostly about survival. Going into automatic pilot is what we might think of as ?brain save mode?, and there?s a good reason for that.

Each of us has only so much creative capacity, and so much time. True, some people are more creative than others, but all of us have the ability. The difference is primarily that some people make better use of their creative skills than others. The same is true of time. Each of us have only 24 hours a day, and much of that is consumed by work and sleep, leaving precious little time for much else.

That begs an obvious question: what are we spending our creative energy and time on?

Are we going to spend it analyzing four cell phone plans to see which is the cheapest? Running from store to store to see who has the best price on laundry detergent? Investing 100 hours of our time on research and efforts to weather proof the home so we can save $25 a month on energy bills?

All of these can seem like noble pursuits, but making a deep dive into details can also be a form of creative avoidance – that?s majoring on the minors, and it?s guaranteed to keep us right where we are.

That?s the risk that frugality brings ? that the lion’s share of our creative energy and time will be dedicated to what amounts to an effort to keep what we have. In a time of changing circumstances and declining economic fortunes, will that be enough? Will it move us successfully into the future? I have serious doubts.

Yes, income generation IS more important

Frugality has its place ? certainly macro-frugality does ? but what I?m challenging is the notion of frugality as some sort of overriding financial guiding principal. That?s a role it can never fill. If your income shrinks down to zero, you won?t be able to cut enough expenses to survive.

Only by increasing income and generating new sources can we move forward, but it may be even more important than that. Why?

  1. Jobs and careers are disappearing fast, and many of us need to completely retool in order to be economically relevant
  2. Employers are no longer providing the type of training that will lead us to relevant new careers (they too are circling the wagons and have largely abandoned forward strategies like training in favor of cost cutting and survival)
  3. Entrepreneurial skills are becoming critical, as the choice for the unemployed is increasingly between self-employment and no employment
  4. Developing multiple income streams may be the single best survival strategy in a world where fulltime, fully benefited, living wage jobs are becoming increasingly rare
  5. University educations are not only prohibitively expensive, but the coursework is increasingly out of step with the most recent developments in the economy and job markets
  6. Developing new businesses and income streams will take time, so the time to get started is now

Income earning ability is our single greatest financial asset. Our overriding financial principle then needs to be that we?ll always have an income ? preferably a generous one. Making that happen is now completely up to us, and where we spend our creative energy and time will determine how well we do on that front more than anything else.

If you’re looking for a way to spend more time earning income to help your cash flow, check out my post, The Freelance Blog Writer Side Hustle. Even if you?ve never written professionally in the past, this post will help you get started converting your passions and interests into an income earning business that you can work in from the comfort of your own home.

Your thoughts?

( Photo by johndal )

20 Responses to How Frugality Becomes Counterproductive

  1. This is a terrific treatise on frugality, Kevin. In fact, I love the macro- vs. micro-frugality angle. I too believe micro-frugality can often be utterly counter-productive. The time many people spend saving nickels and dimes can often be spent so much more productively (financially speaking) by thinking up and taking advantage of income earning schemes.

    All the best,

    Len Penzo dot Com

  2. Thanks Len, your post was one of my inspirations! On the micro/macro analogy, it ocurred to me that people spend so much time and effort cutting small expenses, when the real savings can only come by hitting the big ones, where the real outgo is. We only have so much time and energy, so we need to concentrate it where it will make the greatest improvement.

  3. Since I consider myself frugal, I would love to jump to the aid of your concept of “Micro-frugality”, but unfortunately, I violate it so much that I can (almost daily lattes are my downfall).

    I think you make great points about focusing on the income side of the formula! Gaining Wealth is a sport’s team and it needs both a great offense (income) and a great defense (frugality).

    Great write-up!!!

  4. Money Reasons – Believe it or not, the micro- macro-frugality thing was a last minute idea, but it seems to be the primary take away on the post (I thought it was a relatively minor point, but I’ve never had much of a sense of proportion anyway).

    Anyway, I think frugality has it’s place but I don’t think it’s as important as increasing income.

  5. Hi Kevin, I love your idea of micro vs. macro-frugality. This is similar to a concept in Elizabeth Warren’s book, All Your Worth. She suggests cutting the big expenses first, like home and car. Then she advises looking at painless cuts like switching to a cheaper insurance company. There’s no sense in saving $5 on a latte if you can’t afford the mortgage.

    It’s true also that saving money takes time, and unless you are unemployed, you are probably better off using that time to figure out how to earn more money. I totally agree that we need to focus on being nimble – keeping valuable skills up to date while learning the new skills desired in the global marketplace.

    One activity I think is worthwhile is getting rid of junk you don’t want. You can get extra money while decreasing the amount of crap you own, and hopefully be able to downsize into a smaller home.

  6. Jennifer – I’m not familiar with Elizabeth Warren, but I think she’s on to something. Most of the blogosphere seems hyper-focused on frugality, when it’s really the big expenses that are dragging so many people down. You can cut a boatload of minor expenses without materially improving your situation. And with where things seem to be heading, it doesn’t seem that will help most people.

    I think that had a lot to do with the housing meltdown as well. Too many people were burdened down with large expenses they couldn’t get rid of.

  7. Love your article. It really made me take a second look at where my effort is being spent. I beleive you have a point in that we do need to look for ways to increase our income in our efforts to bring our budgets in line.

  8. Hi Jackson, Yes, ultimately we can only cut so much, then we’re looking at Plan B, which is increase income. I think we have it wrong, increasing income should be Plan A, with cost cutting in the secondary role.

  9. I think of frugality as a lifestyle or a frame of mind, rather than a set of specific behaviors or tactics (e.g., making your own laundry detergent or darning your socks). I try to practice frugality in everything that I do. I don’t waste food at home. I get two meals out of almost every meal at a restaurant. I stock up on sale items at the grocery store. I buy for quality when it matters and I go as cheap as I can when it doesn’t. I cultivate hobbies that are low-cost or free. And so on and so on. None of this takes up any additional time in my life – I just look at normal activities from a frugal perspective.

    I think of spending and earning as a kind of a personal finance ying yang. You could focus all your time and energy on increasing your income, but if your spending habits are terrible, then it doesn’t really matter how much you earn – you’re never going to achieve financial independence. (Plus, you’re probably consuming at a really wasteful level.) A strong foundational understanding of frugality is necessary first before you can even responsibly appreciate the benefits of an increased income.

    On the flip side, if you’ve mastered that foundation, then of course the fastest means of reaching financial independence will be increasing your income, not cutting corners. Both sides of the ying yang are crucial and it doesn’t really make sense to me to emphasize one over the other.

  10. Corinne, I think you’ve hit on something with blending the two. It seems as if you’ve always been conservative in your spending, so perhaps it’s something you’ve grown up with??? If that’s the case, then it comes natural to you, and yes, you can do it wihout thinking.

    For most people who’ve never done it, it’s a real effort. Think of going on a diet, or moving into a new career. Your moves aren’t fluid because you have to think about everything you do and learn new skills and habits. That’s time consuming. But as you said, once you have that under control, it’s time to move on.

    The point of the post is that it seems many are camping out on frugality as if that’s the way forward, which I don’t think that it is. Frugality is best as a support role, as in support of earning more income.

    This isn’t to say we should spend our lives always chasing a higher income–that’s equally counterproductive. More to the point, we should be looking for additional income sources–because employment is no longer certain–and for work that we enjoy, because retirement is quickly becoming uncertain as well.

  11. It’s just that no matter how much we earn, the important thing is how best we should handle money. Ed McMahon (Johnny Carson sidekick) made more than $5 million a year. He was heavily in debt. Obviously his yearly expenses were more than his income.

    I was born and raised in a third world country. We didn’t have much but we always spent less than we earned. I never heard of anyone living on credit let alone credit cards.

    We always made ends meet. I read many blogs a day on personal finances. I get the impression that folks who were born here generally don’t care about their finances. They always look at others to imitate. The biggest culprit in people’s finances are Mr. & Mrs. Jones.

    Americans like to live on other people’s money. The problem is they borrow so much that they cannot pay back.

    Sure the economy is doing poorly but the blame is on ordinary folks as well for their bankruptcies and for leaving their homes to banks.

  12. DF – What you’re describing is really the cultural norm here in America, and you’re 100% correct. Many years ago Landon Jones described the Baby Boom generation as a generation of consumers, who define themselves by their patterns of consumption more than anything else. That would include what restaurants they eat in, what type of liquor they drink, clothing labels, cars and where they take their vacations. He wrote that long before the current economic/debt mess, but you could see the future in what he wrote.

    I think the real problem though is the view of debt as somehow being “normal”. In that situation a little debt becomes a lot and then too much before you even notice. We have a long way to go to fix that.

    But to get back to living beneath your means, yes we all need to be doing that all the time, but in the current economy and job market, it’s going to very difficult to keep pace with the cost of living, so we really do need to emphasize greater income.

  13. Kevin — It seems like the principle of frugality isn’t necessarily a bad thing, but as you’ve noted, it’s difficult to survive on frugality alone. Regardless of your approach is being frugal or looking to earn more, you still need to be adaptable.

    The economic climate changes so quickly that you need to adapt to survive. Do you think during the housing boom that most people were prepared or even thinking of the possibility of collapse?

    And as you pointed out, universities seem out of sync with the times, as well. How long will it take to adapt to the current trends, not just in terms of one or two courses but an entire curriculum?

    Finally, do you think the main reason a lot of people seem less likely to work more is because they just feel let down by employers? With shrinking benefits and average wages, the idea of staying in the same job or even at the same company seems to have really gone the way of the dodo. But because of that, it also seems to be that people making their own way — through self-employment. But then, we’re responsible for paying our own benefits, basically. (And don’t even get me started on the cost of healthcare!)

  14. Hi Chris – That’s an excellent point on people’s attitude toward work. Conditions on the job have gotten more difficult in the past few years, and the last thing anyone wants is more work! But I think maybe it’s time for the average Joe to start thinking in terms of developing an outside income, as opposed to working more at the office or even getting a part time job. I talking a more entrepreneurial path.

    There’s a lot of work available through and on the web, and I’ve noticed that most of the homes in my “working class” neighborhood have lawn services cutting their grass–there has to be opportunity for extra income there.

    I think a lot of it is about stretching the gray matter to see what it is we might be able to do to improve cash flow.

  15. I am interested to live a frugal life not because of I am stingy or because of I am poor. It is about to teach my children to appreciate what they have and the community to live humbly and to invest for future. I encouraged my children to learn how to live frugally since young. I told them that it is not easy to earn and to save money. There are people who live with only $1 per day on the street in order to survive. We are good enough to live much better than them. So there?s no reason for us to waste things and money when we can actually give them to those who need them. I?ve been saving articles from the websites online and then write them down on my own website. That?s how the search engine brought me to your website. Thank you for sharing all of these valuable tips and thoughts. I will be back for more.

  16. Hi Edwin–I’m of the opinion that focusing on earning more money is generally more important than frugality, for all of the reasons given in the article. However, I think that its a real advantage to be able to live on practically nothing. If you can do that then you can do just about anything you want. Few people get to that point by choice, but if you can it’s a ticket to a level of freedom even rich people don’t have. There’s much to be said for needing little and traveling light.

    That’s an extreme form of frugality and it’s where the highest benefits are. Most of us practice it only up until a point, which is usually lowering most expenses just enough to give us budgetary flexibility. It still can leave you trapped in spending patterns that allow little true freedom.

  17. Love it, Kevin. I was just gathering my thoughts on a related topic and your article has really gotten my juices flowing. It?s funny isn?t it; the potential for cutting expenses is finite ? it ends at 0. But our potential for an increase the money we bring in has terrific upside.

    Personally, I believe that it is much better to direct efforts toward acquiring and perfecting a set of skills than it is to concentrate on eliminating superfluous spending. When I pour my efforts into doing something that provides value and service to others in exchange for money that I spend and invest, I not only simultaneously fill two needs (one for them one for me) but I also add stability to the framework that allows for the provision of goods and services to the economy.

  18. Hi Chaz – I love that: “the potential for cutting expenses is finite ? it ends at 0” – BINGO! I agree, I feel much better with a new skill, a new client or a new business direction. Not that saving money doesn’t feel good, it certainly does. Just not nearly as good as making more money. Saving money is like dodging a bullet, making more money feels like making progress. It’s a longer lasting benefit.

    Frugality is a good thing (except when you’re clipping coupons and re-using tea bags so you can keep a house or car that you really can’t afford), but not if it soaks up your creative energy. Most of that should be spent on generating more income.

  19. Bravo! Great article. I can attest to the fact that micro – frugality causes one to go 2 steps forward and 3 back. For example, I was elated to get one of my property tax bills just recently when I found out they went down 300 bucks for the year. Cool right? Hold on to that thought. A few days later I get a notice from my health insurance provider that my premium was going up 25 bucks. On the heels of that, I get notice from my auto insurance, after further yearly review, that claims in my area have gone up and so was my policy by 75 bucks. If that wasn’t bad enough, I go to my local market and find out that prices on much of the stuff I purchase went up by a few dollars. And who can control the cost at the gas pumps! My point is, that for every dollar I’m trying to find in order to loosen my budget a bit, I give to forces that are beyond my control. The answer truly is to generate more income because, unless it’s my property tax bill this year, things ain’t goin’ down anytime soon.

  20. That’s so true Barbara, it’s like a perpetual run to stay ahead of the price spriral. That said, we have done a few things to cut expenses, like trading down to a less expensive house. And we’re now working with Roku so that we can hopefully cut the cord on our cable TV (not that I watch TV much, but the family…got to have a substitute). But most of my efforts are centered on increasing income.

    And to my thinking, increasing my income by $500/mo creates a whole lot more opportunities than eliminating two or three $50/mo expense.

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