The Connection Between Financial Freedom and Being Frugal

In past articles, I’ve made the case that earning more money is more important than being frugal. On balance, this is a position that I still hold to. However, there are significant ways that being frugal can complement the effort to earn more money. And bigger picture, there does seem to be a strong connection between financial freedom and being frugal.

Achieving financial freedom usually centers on investment strategies that will enable us to reach some magic number at which point the goal be obtained. But investing is only half of the equation with financial freedom.

The other half is spending.

We can think of being frugal as a system of controls that force us to limit our spending. What are some ways that being frugal can contribute to reaching financial freedom?

Being frugal = lower cost of living = less need for income

The Connection Between Financial Freedom and Being Frugal
The Connection Between Financial Freedom and Being Frugal
The most obvious advantage that comes from being frugal is that by lowering your cost of living, you will need less income just to survive. That will mean that you’ll have more money to save and invest so that you’ll have a large enough savings cushion and investment portfolio to enable you to have the financial freedom that you want.

We’re talking here about being frugal as a strategic financial decision, so we don’t want to confuse that for penny-pinching. Some people are that way by nature, and it‘s not always a pleasant type of personality. We often refer to them as misers or cheapskates. It takes on the characteristic of being frugal for frugality’s sake, which is to say that it is an end in itself with no future goal. We need to think of being frugal as a strategy that will move us in a positive direction.

I believe that there are two major types of frugality – micro-frugality and macro-frugality. Micro-frugality is the process of cutting a lot of small expenses in the hope of producing big savings. Macro-frugality is cutting a small number of very large expenses to produce big savings.

In theory, you can – and probably should – put both macro- and micro-frugality into practice. But you’ll get the most bang for the buck with macro-frugality. You will cut your major expenses, such as housing, car expense, and perhaps even health insurance, to produce very big savings in your budget. That could be $1,000 per month or more, and that will create a lot of options.

These expenses are significantly harder to cut, but once you do it can have a domino effect. By cutting the big expenses (housing and cars), the smaller ones (utilities, insurance, and repairs and maintenance) fall automatically. And if you want, you can always supplement your macro-frugality efforts with as much micro-frugality as you can stand.

Frugality and investing

We touched on this a bit already, but let’s go deeper. Saving and investing money should be the endgame when it comes to being frugal. You are not cutting expenses to simply to cut expenses – you’re doing it to free up money to enable you to have the financial freedom a large investment portfolio can bring. That will make investing and being frugal two sides of the same coin.

But there’s something else about being frugal that is particularly important when you’re investing money in the stock market. By being frugal (as opposed to being cheap), you develop a natural ability to find value. This is no different than what successful stock market investors do all the time. They don’t simply invest in the trend of the moment – they find undervalued assets and markets to invest in. Those are where the richest returns will be found.

If you can bring the mindset of being frugal into investing, you’ll be on your way to a winning investment strategy.

Frugality and business options

That same frugal mindset can also be a big asset if you are either in business, or planning to be at some point in the future. I believe that there is a strong connection between being frugal and running your own business.

Just as with the stock market, being frugal helps you to identify value as a business owner. You will learn to buy low and sell high – which is the most critical component of any successful business. You will also be aware of the importance of making the best use of scarce financial resources, an ability that is also essential to business success.

But bigger picture, being frugal enables you to live on less money, which will make it easier for you to start a business in first place. Lower and fewer financial obligations almost always lead to more options in life.

Frugality and retirement

Being frugal can have a major impact on retirement planning. As noted above, by spending less, you’ll have more money to invest – and that includes investing for retirement. But being frugal also prepares you for retirement in an entirely different direction that is at least as important.

The less money than you need to live on, the less income you will need in retirement.

That will mean that your retirement portfolio will not need to be as large as it would be absent frugality. The smaller retirement portfolio requirement will also mean that your retirement goal will be both more attainable, and achieved more quickly.

Then you can start giving some serious consideration to early retirement!

Coming up on Monday, we’ll explore how frugality can impact happiness in The Connection Between Happiness and Being Frugal.

( Photo by lululemon athletica )

6 Responses to The Connection Between Financial Freedom and Being Frugal

  1. I agree with your article about frugal as being part of the equation of financial freedom. I also believe that frugality is a way of life. I look at it as lessening expenses but still living richer than you did before. That is the power of being frugal.

    You can still go on that much needed vacation and spend a quarter of that amount. Or you can buy that nice jacket you’ve wanted and pay half the price for it using daily deals. The rest being placed in a savings/retirement or goal fund.

    Yes, frugal means cutting expenses to bear necessities but with so many options that are available we can still be frugal and live rich. It’s a matter of knowing what resources and tools are available.

  2. Hi Jason–That’s been another of the surprises for me. Being frugal doesn’t mean cutting your standard of living. It means having the same standard of living but at a much lower cost. Of course, one major “sacrifice” is that you can’t participate in lifestyle inflation without undoing all the good that you’ve done by being frugal.

  3. Alongside maintaining your standard of living at a lower cost, I think it living frugally can also mean reevaluating your standard of living. There are elements to most people’s lives that we’ve acquired through habit or tradition or through conforming with the lifestyles of people around us. Examining your life through a frugal lens can mean evaluating whether or not the expensive things you’ve become accustomed to actually make you happy, even if they are things that other people take for granted.

  4. Hi Adam – I agree, I think we often convince ourselves that we’re happy because we have what others have without seriously evaluating whether or not it actually makes us happy. This is where conformity becomes an enemy. Complicating it is the fact that the cost of comforming to the standard suburban lifestyle has become more expensive than ever. Many people might need to choose between conforming and achieving financial freedom. The two are no longer the same, if they ever were.

  5. Definitely! And to bring yet another element to the discussion, I think we can sometimes trick ourselves into thinking that others are in a better financial situation than us just because of the things they own and that we need to step it up in order to keep up with them.

    My wife had a post about this on our blog recently — we’re at the age where many of our friends are buying houses and nice cars and taking . It’s easy to be envious of that, because we’re not at that place yet. But when we really start to examine it, we see that many of those same friends aren’t in good financial places either — they’ve just accepted huge amounts of debt to get the nice things they have.

  6. I think that’s also a values problem. They want the trappings of prosperity even if they can’t really afford it. Buying what you want with debt means you really can’t afford it, but it becomes so important that they’ll compromise the future to get it.

    Sit that out if you can, save your money, avoid debt, and in a few years you’ll have the financial acheivement and freedom that they’ll all wish they had. You may never have as much stuff, but I’d rather have financial freedom than a bunch of stuff any day!

Leave a reply