Living a life of frugality is a proven way to reach financial independence and retire early. In my previous post I looked at how to design your life to save on the biggest ticket money items. If you can save so much on the necessary expenses like housing, transport and food you can imagine how much you can save on discretionary spending. You can design the ideal frugal life and become a millionaire. For most professionals there is a reasonable amount of disposable income left over. Increasing this disposable income is the key to increasing your savings rate.
The opposite is what happens with lifestyle creep where this disposable income is used to increase the quality of your lifestyle. Continuing on from the last post the objective here is to reach financial freedom as fast as possible. So that means that all this disposable income needs to go straight into settling all your debt. Thereafter it needs to go into investments. You can read more here about 7 practical ways to avoid lifestyle creep.
There are some overall principles that you need to know about how to maximise savings. If you understand and apply these principles then you can save a fortune.
Frugal is a misunderstood term by many and often seen as depriving yourself. Frugality is about sustaneability and eliminating wastage. Especially wastage of money but also avoiding buying things that you don’t really need. It is about using just what you need. If frugal is uncomfortable for you then it means that it has struck a nerve. If you feel it will be cheap or depriving then you are attaching a lot of emotional value to the stuff you buy. You could be spending more than you should and that is not going to lead to wealth.
Frugal done right means that you maximise value by prioritising your spending. There is a big difference between being cheap and being frugal. It also means prioritising your time and getting the most value out of the important things in life.
There are some overall principles that you need to know about how to maximise savings. If you understand and apply these four principles then you can save a even more.
1. Small increments cost exponentially more
You need to be aware of how the perception of everything from branded products to the right address will cost you dearly. The incremental improvement or the additional feature on an item costs significantly more than the value that it ads. There are many examples with medicine, clothing, cars houses etc.
I am not saying there isn’t a difference between an unbranded vs a branded item. There is a difference but the question is does that difference justify the increase in price. Do you get a significant increase in value from that item or is it just incremental or the name? Do you need to have that incremental improvement? Is it necessary?
Consider generic medicines. The generic version costs less than the branded version but is as effective. Another example is branded cars. Two cars have identical features but the German luxury brand costs way more than the Korean brand. Or the brand new BMW costs way more than a 3 year old model with no difference in reliability or features.
2. Maximise useful life – save the rubbish dump
We live in a replace rather than fix world. Innovation is happening so fast that in just a year or two there is a newer better model. Resist the urge to continually upgrade or get a newer item. Every time you do that you are wasting money and generating more waste.
Rather use an item until it won’t work anymore. Buy good quality stuff and use it for 5-10 years or longer if you can. Most good quality items will last that long. Don’t replace for the sake of replacing.
In fact you can go one step better. Drop your obsession with buying new. Buy a used item that is one or two years old for half the price of a new item and still get +90% of its life.
Cars are a great example here again. Twice I have bought a new car and sold it becuase I thought it was getting old. But since then I have bought used cars and used them for longer than the new car and saved a fortune. Cell phones, bicycles, cameras are the same and there are many other examples of where you can buy a nearly new used item for a fraction of the cost.
3. Less is more – buy only what you need
The more you buy and own the more you complicate your life and add cost. Everything you buy needs to be stored, insured and maintained. All of this adds more cost. Eventually you need a bigger house or a storage unit to store all the stuff you bought.
Think twice about buying anything. Be sure that you really need it and will use it all the time. If you can avoid buying it for a few weeks or months then you probably don’t need it.
4. Live on the edge of luxury
You don’t need the latest and greatest. Buy one model down or buy the best used. That way you still get the best but at a fraction of the price. Luxury goods are multiples more expensive than something similar without the status. When you are trying to save the most money possible you cannot afford to live a life of luxury. Luxury is extravagant, expensive and excessive. Let that wait for when you have so much money that you don’t even notice spending it. But before then you need to focus on accumulating money not wasting it.
This comes down to looking rich vs being wealthy to design the ideal frugal life and become a millionaire. It is about what you buy and where you shop. Without looking rich you can still have all the nice things that work well and last. You can still live in a good area without paying the premium of being in the exclusive area. Its a mindset that says building my wealth is more important than fitting in.
The ideal FIRE lifestyle
Now lets put all of this together and see how to design the ideal frugal life and become a millionaire.
You plan your career doing a job that challenges you, has growing demand and pays well. You continually upskill yourself and look for opportunities to grow and earn more. Everytime you earn more money from an increase or a bonus you use it all to increase your savings rate.
You live in a small but comfortable home close to work, bought or rented doesn’t matter. Ideally you want to walk or cycle to work, you don’t want to commute in a car.
If you do buy a house or a car you buy as small as possible and pay as much if not all in cash. You avoid incurring debt at all costs.
You maintain a frugal lifestyle by not wasting and only buying what you need. You keep things for longer and buy used where you can. Its not a life of depravation but rather one of considered consumption. Your focus is maximising savings rate.
Every month you maintain or increase your savings rate. You focus first on settling all debt. Then you maximise all tax free savings options and company supported pension schemes. The rest of your savings you invest for the long term in a diversified high growth portfolio.
A lifestyle like this will guarantee you financial independence and on opportunity to retire early. The more aggressive you are the sooner it will happen. It all depends on you.