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 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.