Frugal may mean a lot of different things to a variety of people. For those living the “average” life, you might think…
“Frugal? Isn’t that just another word for poor? Why would I live like that if I’m making all this money!”
Let’s start with a basic definition, courtesy of http://www.dictionary.com:
Sparing or economical with regard to money or food
I would go a step further and say it’s equally about controlling what my wife calls “The Wanting Mind“. On the surface, frugality is indeed about being rational with respect to physical resources, but it can put POWER back in your hands by knowing what is a true need versus a want. With that in mind, here’s my own definition:
Frugality is about making rational and economic choices with respect to physical resources, while consciously making the distinction between a need and a want.
Sound good? Got it? Good.
So the next time you’re in line for an elaborate coffee at Starbucks or going to an ultra-fancy restaurant because you “deserve it” – think about:
- Is this a rational or rash decision?
- How many personal work hours am I spending because I don’t want to make coffee or food at home? (More on this later)
The answer should be that it’s a rash decision (99.99% of the time). A choice to give yourself some instant gratification. In my opinion, that’s totally cool once in awhile. You deserve something nice once in awhile. But for many, this is habitual.
This elevates peoples’ expectations and makes them think that they should live like a movie star everyday! This is something to watch out for, called lifestyle inflation (More on this one later too).
People constantly line up time and time again to give orders to their local baristas spending north of five bucks on a sumptuous coffee. Let’s run a quick informative scenario since that’s what Actuaries like to do:
If you did this every work day (assuming 3 weeks vacation), you would be SPENDING $1,225 A YEAR. If you did this every year…
- For the next 15 years (assuming that’s your hypothetical early retirement date);
- Assuming you could have invested that money at 5% net of inflation (which is aggressive considering historical experience of the S&P 500 is more around 7-8%);
- Your habit is INSANELY expensive, coming out at an ASTRONOMICAL $26,433 at your hypothetical retirement date (net of inflation of course). That’s retirement cash gone out the window.
It only gets worse the longer you do this. Thanks to compound interest (You guessed it…more on this gem later as well!). In general, the power of compound interest coupled with small lifestyle changes will either make or break your retirement.