How do I manage to save 75% of my income each month?
In a series of three separate posts I elaborate on my views on personal finance and go into detail how I am able to save three dollars of every four I make. More importantly, I will give you the insights, tips and practical examples to obtain similar results for your own.
In this first part, I will explain what frugality really entails, and that it is much more than the general misconception of simply refraining to spend money.
I read a quote somewhere along the lines of
“Being rich means earning more than you spend, being poor means spending more than you earn”.
As is often the case with quotes, it oversimplifies the situation, but clearly has some truth in it. At the end of this post, I will propose a modified version which is both closer to the truth and entails the essence of frugality, and at the same time explains how I manage to sustain such a high savings rate with a moderate income.
Generally, there are two approaches to enhancing your personal finances, two schools of thought if you like. One focuses on increasing income, with proponents like Gary Vaynerchuck and Grant Cardone obsessively advocating for hustle and grind. Entire generations have been brought up with the maxim of earning more for the sake of being able to afford more. Even though income is an important factor in financial well being, I will make the case that because contemporary commerce is centered around consumption, focusing on increasing your income turns into an unsustainable treadmill, with financial satisfaction remaining forever around the corner. This is a well studied and documented effect of wealth and income.
The second approach targets the careless use of money as a primary factor for financial dissatisfaction, and proposes an alternative with frugal and deliberate spending at its core. Despite the increasing interest in the frugal financial lifestyle, mainly among young people, the proponents remain a minority which is far less vocal than their income focused counterparts. The reason for this can be found in an entire advertising industry focused around consumption. Combine this with social media offering a view of the life of societies richest, and the general public gets hooked on excessive spending and glamorous lifestyle.
The number one reason for the dis-appeal of frugality among the majority of western societies, is the misconception that exists about its practices and core intention. Most people think of frugality as austerity measures, counting every dollar spent, and going through the discomforting feeling of refraining to buy something they want. They are turned off because they associate it with financial inadequacy and poverty. This notion of equating frugality with simply not spending your earned money misses the point entirely. Let me explain why.
Frugality does not dictate that you refrain from spending money on the things you want to buy. This would only lead to situations where you trade small daily purchases with sporadic large purchases as a sort of reward of your daily discomfort, wiping your savings in the process (see example below). Instead, frugality shifts the focus on what it is that you want to buy, and on deliberate purchases that have a lasting effect on your life. The ideal situation you want to find yourself in, is when you have enough money to buy whatever you want, as this is considered the epitome of being rich. When you become progressively lower in maintenance of what you want, then this financial situation becomes increasingly easier to obtain. The intent of a frugal financial lifestyle is to alter your compulsive buying habits to get to a point where you stop buying excessively without having the urge to do so.
At this point it makes sense to touch upon a distinction between what I call financial situation and financial well being. The former signifies the numbers game, and is determined solely by income and spending. The latter is determined by income and what you want to spend it on, or in other words, how adequate your income is for the lifestyle you ideally want to have. Unfortunately, in Western culture people are often judged by their financial situation, which then implicitly determines their self worth. This then leads to the financial treadmill mentioned before. The reason why society focuses more on financial situation instead of financial well being, is that the former is easier to quantify and compare with, whereas the latter is highly personal since it is determined by how you feel. In this sense, being frugal means being concerned about your financial well being, which in my opinion is the ultimate measure when it comes to money.
Whereas the call to action for income focused paradigm is straightforward; work more, earn more, spend more (which is a large part of its appeal to the general public), the practices that constitute a frugal lifestyle are more intricate and require a shift in mindset. In a sense, you try to get rid of an impulsive buying habit, which can be difficult but not insurmountable as I discuss in a separate post on the power of habits. This will require some effort and time. However, when accomplished, the resulting lifestyle offers a sustainable way of feeling rich and cultivates a healthy relationship with money.
As I promised in the beginning, let me revise and modify the quote in light of what you know now:
“Being rich means earning more than you want to spend, being poor means wanting to spend more than you earn”
Now the question naturally arises of how to change what you want to buy, how do I tackle my spending habits without feeling strong refrain of buying things? I will dedicate an entire separate post on this topic, filled with tips, tricks and concrete practical examples of how I am able to save over 75% of my income.
Thanks for reading.