Why frugality is an important part of personal finance

Why frugality is an important part of personal finance

In a recent article in The Atlantic, Joe Pinsker shared some thoughts on why many ultrarich people aren't satisfied with their wealth.

There seem to be two reasons.

  • First, people tend to ask themselves: Am I doing better than I was before? Do I have more today than I did yesterday? “All the way up the income-wealth spectrum,” one researcher told Pinsker, “basically everyone says [they'd need] two or three times as much” to be perfectly happy. It's the hedonic treadmill in action.
  • Second, people can't help but compare themselves to others. They ask themselves: Do I have as much (or more) than the people I'm comparing myself with? Do I have more than other folks in my family? Do I have more than my friends? Do I have more than my co-workers? We measure our personal success by comparing what we have to what other people have. This is the proverbial “keeping up with the Joneses“.

While Pinsker's article is about the ultrarich, I think these tendencies apply to nearly everyone. Even me.

People in the middle class are just as inclined to hop on the hedonic treadmill. They're just as likely to compare what they have to what their friends have. The same goes for those who aren't well off. Even people in poverty get sucked into the comparison game.

In fact, I'd argue that for the poor and middle class, there's an added element. Time and again, statistics show that folks with lower incomes watch tons more TV than people who earn more. (Also here — and many more studies.) When you allow yourself to succumb to the “other world” of film and TV, you're exposed to more ideas about how people should and do live — even if these ideas are baseless. (It's like “The Grand Illusion” by Styx: “Don't be fooled by the radio, the TV, or the magazines. They show you photographs of how your life should be, but they're just someone else's fantasy.”)

The rich compare themselves to themselves and others. The poor do too but they also compare themselves to fictional characters on film and television.

The bottom line seems to be that comparing your situation to anyone is likely to lead to trouble. Whether you're comparing yourself to yourself, your family, your friends, or to people in Hollywood productions, doing so leads to a desire for more.

But it doesn't have to be this way.

Non-Consumer Advocates

Over the past few years, the early retirement movement has risen to prominence. People have figured out that they don't have to work for forty or fifty years at jobs they hate. If they manage to increase the gap between their earning and spending — if they can maintain a high saving rate — then then they can achieve financial independence at age fifty. Or forty. Or thirty-five.

Boosting income is a very important part of this equation, of course, but it's not the only piece of the puzzle. The fundamental equation of personal finance is this: Your wealth equals what you earn minus what you spend. Your spending plays a crucial role in how quickly you're able to build wealth and/or achieve your financial goals.

If you want to spend less, it's vital you resist the urge to compare yourself to others.

This is one of the FIRE movement's greatest virtues. From my experience, the folks in the early retirement community have consciously opted out of the comparison game. Thanks largely to the work of Joe Dominguez and Vicki Robin (authors of the classic Your Money or Your Life), financial independence is frequently framed as a life of non-consumption.

Here are some sample quotes from Dominguez and Robin:

  • “If you live for having it all, what you have is never enough.”
  • “How you spend your money is how you vote on what exists in the world.”
  • “Americans used to be ‘citizens'. Now we are ‘consumers'.”
  • “Consumption seems to be our favorite high, our nationally sanctioned addiction, the all-American form of substance abuse.”
  • “Frugality is enjoying the virtue of getting good value for every minute of your life energy and from everything you have the use of.”

Dominguez and Robin helped to found the financial independence movement, and they founded it as non-consumer advocates. It helps too that Mr. Money Mustache, who has helped popularize FIRE in recent years, is also a non-consumer advocate. He's written extensively about topics like hopping off the hedonic treadmill and the virtues of frugality.

Obviously, not everyone interested in early retirement wants to be thrifty. Some people want to achieve financial indendence in order to pursue lives that cost money. They want fancy houses and fancy cars. They do want to have more than the folks around them. And that's fine.

Most of us, however, have come to realize that this fancy shit won't make us happy.

Note: While it's great that there's no pressure to spend in FI circles, I don't want to pretend that it's without competition. In fact, there's a sort of perverse opposite pressure. Too many people want to participate in frugal shaming and financial one-upmanship, racing to see who can spend the least. This sort of bragging is just as unhealthy as competitive spending and I wish that it would stop. But at least competitive frugality helps your finances instead of hurting them.

The Virtue of Frugality

While the non-consumer core of the FIRE movement naturally leads followers toward frugality, frugality has very real financial benefits regardless whether you care about consumption.

  • The less you consume, the less you have to earn to support your lifestyle.
  • The less you consume, the less baggage you have in your life.
  • The less you consume, the sooner you can retire.

Like me, you've probably seen this math a million times. But I hope that, like me, you never tire of its beauty.

Let's say you have an average job. Maybe you're a box salesman (or saleswoman). You earn $50,000 per year selling corrugated packaging to industrial clients in your hometown. If you earn $50,000 per year and you spend $50,000 per year, you have no “margin”. If something goes wrong — you get sick, you lose your job — you have no choice but to cut back because your living expenses are the same as your income.

If, on the other hand, you spend only $25,000 per year, you have a buffer. If you suffer some sort of catastrophic box injury that prevents you from working for six months, you'll be better able to cope with the crisis. If you lose your job, you only have to find a job that pays $25,000 instead of a job that pays $50,000. By spending less, you give yourself more options for work.

The less you consume, the less you have to earn to support your current lifestyle. And the less you consume, the sooner you can retire in the future.

By maintaining an ambitious saving rate of 50 or even 70 percent in your twenties and thirties, you can retire when you're 40 years old instead of 65. This gives you forty years of freedom to do what you want with life rather than fifteen.

This table demonstrates the power of profit margin, the power of frugality:

[The Power of Profit Margin]

Spending less makes all financial goals easier to achieve. As Dave wrote in his guest post earlier this week, frugality buys discipline — and discipline equals freedom.

Depriving yourself of certain “standard” choices now means you don't have to lead a life of deprivation when you're older. When you choose to spend less, you're not just boosting your bottom line. You're also gaining the time and freedom that would have been required to earn that money. Thrift isn't deprivation. It's wealth.

(This reminds me of Dave Ramsey's famous quote: “If you will live like no one else, later you can live like no one else.”)

Frugality and Me

So, why am I writing about this? Why have I been thinking so much about frugality lately? After all, I'm hardly a poster boy for thrift. I am by nature a spender. This is a known issue and has been all of my life.

That said, I do aspire to frugality. I admire frugal people. Because frugality is a core value of the early retirement movement, and because I spend much of my time with the FIRE crowd, their inclination toward frugality tends to act as a brake on my own spending. This is a good thing. And because many of my colleagues are non-consumer advocates, I find myself thinking about frugal alternatives (even if I don't always follow through with them).

This year, in particular, I've been focused on spending less. After writing about my plans for 2019 earlier this month, I've done my best to get back to basics. Here are some examples:

  • Kim and I are both actively trying to spend less on food. So far, we're succeeding. (Minor victory: We both wanted to eat out at our favorite bar last week. Instead, she picked up a $5 frozen pizza on her way home from work. That probably saved us forty bucks!)
  • Both of our cars are beginning to show their age. Kim's 1997 Honda Accord has never had any major issues, but currently has a variety of minor mechanical problems. My 2004 Mini Cooper has had two major repairs in the past two years. Right now, the sunroof is leaking, which isn't good during a rainy Oregon winter. We've talked about buying a new vehicle. (And we still might.) For now, however, I bought a 1993 Toyota pickup for $1900. We've become a three-car household — but those three vehicles have an average age of 21 years and an average value of $1500.
  • After spending so much on home repairs during our first eighteen months in this house, we've been diving deep into DIY mode. This month, Kim has been painting the bedrooms. I'm repairing fences and faucets. There's still plenty that needs to be done around here, but we're going to take our time and learn how to do much of it ourselves.
  • We're both out of shape and we know it. Our gym contracts have some time left on them, so we'll keep going for a while. Meanwhile, we've begun to set ourselves up for success here at home. We re-arranged the family room so that it's yoga-friendly. I set up an indoor bike trainer so that I have no excuse for not pedaling thirty minutes per day. We've both decided to reduce our alcohol intake.
  • We've stopped thinking “new” and started thinking “used”. Twice this month, I've shopped at local thrift stores instead of defaulting to Amazon. I recently traded some concert tickets to my ex-wife for my old Nintendo Wii. We've been giving our used clothes and dishes to friends. Instead of meeting friends in restaurants for dinner, we're planning to meet at each other's homes. (How old fashioned!)

Frugality may not a natural thing for me but I can do it. Plus, it's fun. It's fun for me to challenge myself, to look at how and why I engage in consumer behavior — then to think about ways I can “opt out”.

As I mentioned at the start of this article, even the ultrarich compare themselves to others (and to their past selves). I'm just as guilty as anyone else. I always want more. Nothing is ever enough for me. I'm not sure why this is the case but it is. It's a reality that I have to deal with.

It's because of this constant craving that it's so important for me to spend time with my friends in the early retirement community. They apply peer pressure, but it's positive peer pressure. I see the frugal choices they make and I want to make similar choices. I hear how they get by with less and I want to get by with less.

“As you take your eyes off the false prize (of more, better, and different stuff), you put them on the real prizes: friends, family, sharing, caring, learning, meeting challenges, intimacy, rest, and being present, connected, and respected. In other words, those best things in life that are free.” — Joe Dominguez and Vicki Robin, Your Money or Your Life

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Dave @ Accidental FIRE

Really insightful stuff here JD and tanks again for the shout out and the opportunity to express my thoughts on your blog. I agree with the television example and I think it makes unhealthy comparisons too easy. As does social media, especially Instagram IMHO. But besides comparison to others behind a screen, I think the “who you hang out with” comparison game is probably more important. I listened to Robert Greene on the Bigger Pockets podcast this morning and he said that he was invited to speak once at Microsoft headquarters and was amazed at how homogeneous the employees were.… Read more »

Alena
Alena
1 year ago

Such a good point about the unconscious comparisons! The people you hang out with compete in their favorite categories and it’s really hard not to get sucked into that. Especially because my favorite game is finances and therefore private. Maybe that’s why it would be seen as bragging? My colleagues can talk about their new stuff at the lunch table, but I can just fantasize about answering “We’ve been looking at a BMW X3” with “Cool! My husband and i reached a 64% savings rate last year!” 😀

olga
olga
1 year ago

I like to compare myself with my former self. In general, and definitely in financial/lifestyle ways. And since I hail from former Soviet Union/Russia (despite being raised there in a more or less above-average family) and made through the Big Collapse (a.k.a. stamps for 1 kilo of flour and meat a month and all the money devaluation with 24 hrs of exchange – bye-bye, little savings!), my life EVERY day is better than yesterday. I say I am blessed with NOT having an envy in materialistic world. And frugality is still normal – you know, when you simply a) can’t… Read more »

S.G.
S.G.
1 year ago

I realized while talking to my husband about bikes that everything is a competition. Some people shy away from participation, but they’re still in the game. And some people think they aren’t participating, but they are. Specifically the conversation we had was about how much some of our friends spend on their bikes. Much of the spending is to shave seconds off a literal competition. But some of it is also so they can say they spend $2000 per rim. If they can’t place in the race, they’ll place in the competition of how much they spent. It is important… Read more »

Steveark
Steveark
1 year ago

You spent five dollars on a frozen pizza? That’s crazy JD. You can get a great frozen pizza for $3 in Arkansas! Wow, you rich people just baffle me. Seriously, I’ve known two billionaires pretty well, one older guy I worked for and one is a friend who lives in my small town and is my age. They both had a lot of stuff, their own islands, jets at their disposal, multiple homes and vacation compounds. But neither went overboard with material things. They both worked harder than I did and both were very compassionate and educated people. Neither ever… Read more »

Eileen
Eileen
1 year ago
Reply to  J.D. Roth

We always have a “bail out” Frozen Pizza in the freezer (and we HAVE learned what ones we like and do not). Our grocery store also has fresh made pizzas at all time, so we can get a few slices + the adjacent salad bar for pretty cheap as well. On Mondays a (very) large pizza is $7.99 and it’s enough for dinner plus lunch the next day.

We find their rotisserie chicken + salad bar also a good deal for nights we don’t want to cook.

Eileen
Eileen
1 year ago
Reply to  Eileen

Also — make sure you are doctoring up those frozen pizzas! Add some olives, extra cheese if you’ve got it, oregano, or whatever else you’ve got. Makes a difference!

And I forgot to mention our grocery store also has ready/freshly prepped, but uncooked pizzas in their deli. So that’s another cheap option.

infmom
infmom
1 year ago

My husband and I had next to nothing for most of our married life. We pinched every penny twice, did without a lot of things, bought a lot of stuff second hand or by waiting to pick up last year’s edition at a bargain price. It’s become so ingrained that now, when the penny pinching has paid off and we actually have a comfortable amount of money, after 40+ years of frugality and thrift, it’s difficult for me to get past the thrift-store frame of mind. I have a lot of really old clothes (I am not hard on clothing… Read more »

K
K
1 year ago

“Am I doing better than I was before? Do I have more today than I did yesterday?”

In some ways, I feel this question can be the most difficult for people with an FI mindset, at least it can be for us. After you have maximized your savings and optimized your spending, it becomes harder to do “better than I did before”. With the yearly inflation in insurance premiums (all kinds), food, utilities, etc. outpacing the increases in pay raises, it can feel like the treadmill speeds up each year and you begin running harder just to stay in place.

Tyler Karaszewski
Tyler Karaszewski
1 year ago

Like you J.D., I’m inclined to spend more than save. I have one advantage is that I’m not inclined to spend on things I don’t much care about, so it’s easy not to buy a *lot* of stuff. However, for things I do care about, I’m inclined to buy the best I can afford, so I may not buy a whole lot of things, but when I do buy things, I often spend $1000+ on a very nice thing. Combine this with a desire to travel and do things, and it adds up. I remember that guy, a few years… Read more »

vand
vand
1 year ago

Yeah, agree. Living like a pauper so that you can live the rest of your life… like a pauper is a bit self-defeating. There’s deifnitely something to be said for buying quality. Last laptop I bought was a cheao $250 model that turned out to be a piece of crap. I struggled with it for a couple of years but my wife eventually put me out of my misery and bought me a $400 refurb, which is infinitely more useable.

Marco
Marco
1 year ago

As for the leaking sunroof, check to see if the drain lines are free and clear of a blockage. I have blown compressed air into the drain holes around the inside track that moves water away. If you don’t have a compressor a long piece of wire will work. Most likely it’s moss or mold growing in the drain lines. I’m in Corvallis and have had this problem before.

Little Seeds of Wealth
Little Seeds of Wealth
1 year ago

The virtue of being happy with what you have is certainly not easy. Comparison usually makes us jealousy and uncomfortable, but it can also serve as a good source of motivation if you channel your energy to making more money as opposed to spending more. I compare a lot when I read through FIRE blogs. Occasionally I wonder if I started too late and ask myself when I’ll get to >$1M net worth and how. So far it’s inspired me to start a blog and open a freelance consulting business! Will I get there? I don’t know but it’s exciting… Read more »

El Nerdo
El Nerdo
1 year ago

Hey JD It’s a very long article and so many points touched but I just quickly wanted to question one thing. You seem to be saying that watching a lot of TV causes poverty because it fills people’s minds with desires etc. But are you sure that’s the causation? What if poor people watch more tv just because they can’t afford anything else? Rich people can afford vast tracts of manicured land to play golf in, they can travel for the holidays, go to parties while they leave the children with the babysitter, get someone else to clean their house… Read more »

El Nerdo
El Nerdo
1 year ago
Reply to  J.D. Roth

Ha ha ha. I read the whole enchilada, just wanted to discuss that particular premise. Because I think a TV (or games) can be a great money saver in the leisure department. And I hear you on the brainwashing part, but I think that actual social interaction is a much greater force for pecuniary emulation (borrowing a Veblen term here) than TV. When you watch rich people on TV you can say “oh it’s a fantasy” and move on. Enjoy vicarious pressures without having to actually be there. Shark Tank! Think like a billionaire… You know it’s Fantasyland. But when… Read more »

El Nerdo
El Nerdo
1 year ago
Reply to  J.D. Roth

Trust me, an evening binge-watching “Til Debt Do Us Part” is an evening well spent for any couple. Hilarious (some times disturbing like a horror movie), educational, and super low-cost.

Beau
Beau
1 year ago
Reply to  J.D. Roth

I believe the studies show that affluent people tend to read more. They never stop learning. I believe this is why they don’t watch as much tv.

Joe
Joe
1 year ago

Good luck with being more frugal this year. It sounds like you’re on the right path. Luckily, I’m naturally frugal so I usually don’t have a problem with spending too much. That’s a big advantage.
I’ve never been able to exercise at home, though. I need to go to the gym or outside to exercise. Good luck on that front too.

Sandy
Sandy
1 year ago

I will be interested to see how the eating at home with friends works out. My friends and I started doing it when the great recession hit. We learned to cook! And you know what? Now most of my friends and I prefer it, the food is better, there is no rush to turn over the table and no interruptions in the conversational flow. My only gripe is one group of friends has gone back to eating out. I go out because I want to see them but I groan because I get annoyed by another bad meal which I… Read more »

Marcus
Marcus
1 year ago

Long time reader- maybe 10 years? Is that possible?? Any way, the reason I continue to invest in your writing is this exact kind of point of view. Humility, access, and care. Thank you for providing quality discussions in a world sometimes absent of nuance.

Kristen
Kristen
1 year ago

Minis are very expensive to repair. My first was a 2005, which I bought new and drove until it had 150K miles and I finally tired of the manual transmission. A couple of years ago I bought another one (automatic transmission this time) that was 4 years old but had just 16K miles on it. I got a good deal on it. I adore the car, but a mechanic does everything on it for me. My husband refuses to touch it because the engine compartment is so tiny! You don’t buy a Mini if frugality is your most important consideration…

Beau
Beau
1 year ago

Skip the 5 dollar frozen pizza! Costco’s Deli Pizza is $10 and is twice as big and very delicious. Biggest Pizza chain in the US (per a few articles I’ve read). Plus you don’t have to cook it so it saves you money on you power bill! Ok maybe that part is going a little too far haha.

S.G.
S.G.
1 year ago
Reply to  Beau

If you’re going to Costco then skip the Peter Piper and pick a pack of premade peppers! 😀 Costco is actually a great idea if you just dont want to cook your own food. Pizza isn’t good for you, but if you pick up a rotisserie chicken and pack of 4 peppers you have almost what you’d need for 4 moderately healthy dinners: 1) chicken with a bag if salad (slice the breasts and serve on top of a premixed bag) 2) 2 stuffed peppers 3) pick remaining chicken from carcass and toss with cooked veggies (I like roasted or… Read more »

Sara
Sara
1 year ago

“Am I doing better than I was before? Do I have more today than I did yesterday?” Reading this article today, this just struck me as “continuous improvement.” From a business perspective we’re always charged to find ways to do things better (even if they are working just fine – if you can make a widget in 20 minutes and still be fairly profitable, the continuous improvement people are STILL out there looking for ways to make one in 19 minutes). As someone who’s been newly promoted into management I still struggle with this at work, as I have a… Read more »

Sheila
Sheila
1 year ago

We have a supper club with three other couples that meets monthly at people’s houses. The hosts make the main dish and the others choose to bring appetizers, veggies or dessert. Besides the social aspect, it’s fun to try new recipes (there’s often a theme) and eat someone else’s cooking. When my oldest son was young, he saw a TV ad that had someone eating a cracker and doing a backflip. He really wanted me to buy those crackers because he thought he’d be able to do a backflip. Pretty insidious with regard to kids. And adults, too. I had… Read more »

S.G.
S.G.
1 year ago
Reply to  Sheila

How would only changing your sheets every 3 months save wear and tear? Just bc she’s washing them less frequently?

Depending on how you wash things, actually using the thing puts a lot of wear on it. I remember as a kid I wore a pair of socks once for something like a week. They were trashed at the end. You need to remove the dirt and tighten up the fibers occasionally or they actually wear FASTER.

Carol
Carol
1 year ago

Love to see Tyler and El Nerdo commenting again!

Sam
Sam
1 year ago

New reader here. Suggestion: can you either explain the acronym, and then use the abbreviation, such as Internal revenue Service (IRS)? Or maybe a link to definitions on another page, etc. So far, in this one article, I’m trying to figure out FIRE and MMM.

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