The Role of Thrift in Long-Term Financial Success
Like many people who suddenly realize how bad their financial situation is, in the first few months of our financial recovery, we took a deep dive into frugality. Thrift is the best personal finance tactic to get immediate results.
This post was originally published on The Simple Dollar .
If you do not want to spend or you decide to spend less, you see the results from this choice immediately in your wallet. There’s just more money.
There are undoubtedly many approaches to personal finance that offer great results. One of them is to get a part-time job. Another challenge is going back to school to get a better degree. Another challenge is to start a microbusiness. Investing is another matter, of course. However, all of these tactics take time to work – you won’t get really quick results with any of these tactics. Thrift is fast , which is why people so often resort to it when their finances are in dire straits.
What about the long term?
Many people see lean as a less effective strategy in the long term. Their argument is simple. Not much money can be saved with frugality – once you optimize many areas of your life, you begin to reach a point where you can’t squeeze much more out of it. Not only that, once you reach this point, further lean changes tend to really get in the way of the joy of life. At the same time, other strategies, such as increasing your income and investing wisely, do start to gain traction like a rocket for longer periods (several years and longer).
I don’t really think so.
In my opinion, investing and increasing income is like a financial rocket that will take you wherever you go. As you increase your income, or when your investment value rises, your net worth can feel like a powerful rocket bouncing off the launch pad with incredible force and going up and up, faster and faster.
However, every rocket ship needs rocket fuel, and that is frugality. Thrift is the fuel needed to ignite and launch a rocket. Thrift is the fuel that keeps burning and makes the rocket fly higher and higher.
Without fuel, a rocket cannot fly. The fuel won’t go anywhere without a rocket. You both need them to be successful.
But what does this mean in terms of practical use?
First, thrift gives you the money you need to start investing. The vast majority of Americans live paycheck to paycheck and thus have no money in their daily lives to contribute to their investments, their 401 (k) or their Roth IRA. Thrift can help with this. If you can use frugal strategies to cut your expenses by, say, $ 100 a month, then you suddenly have $ 100 a month to invest. That’s $ 1200 a year for investment. If this investment generates a 7% annual return, you will be investing tens of thousands of dollars over the course of a decade. Thrift provided the seed money for investing, and the power of investing and compound interest made that money skyrocket.
Second, frugality helps you survive on lower incomes, such as when you are pursuing an advanced degree or moving on to a new career. Again, without the use of frugal strategies, the average American paycheck to paycheck has a very hard time coping with all of this. Choosing economically makes this possible.
So, of course, frugality plays a big role in financial improvement.
But what about when the financial crisis is in full swing? Maybe you have a lot of money in your retirement account, or maybe you’ve just found a high-paying job after several lean years. Isn’t frugality a strategy that you throw away the moment you have the resources for a big life?
If you think so, you are making another financial mistake.
First of all, most of the best economy strategies are those that don’t have a real negative impact on your daily life. Your life won’t get worse if you choose store-bought hand soap. Your life won’t get any worse with store-brand diced tomatoes. Your life won’t get worse if you drive an economical car until you run out of big repair bills. Your life won’t get worse if you negotiate with your cable TV provider for a cheaper bill that allows you to keep the few channels you actually watch. Your life won’t get worse if you cancel the bill for something you don’t use at all. Your life will not get worse if you look in the library for a book you haven’t read, instead of buying it.
I can go on and on with examples of how making smart little humble changes in your life can have a largely non-negative impact on your life by keeping money in your pocket. The question is, why would you want to abandon these changes at all? Why would you ever buy more expensive hand soap when the soap now cleans your hands? Why would you need to replace a reliable car that does not require repair or replacement? Why would you keep paying your gym bill if you haven’t been there for six months? This choice is a terrible choice, regardless of your income level. You can spend money on stupid purchases, whether you are making $ 20,000 or $ 100,000 a year.
Second, thrift continues to fuel the rocket ship of financial success in your life even after it takes off. Even after your income has jumped, even after your investments start to pile up and grow rapidly, finding a way to save $ 20 a month and then using that $ 20 a month to make that investment grow even faster remains a good thing.
Channeling savings on investment means you get to your destination even faster. This means you can retire sooner or buy your dream home sooner. This will never change, regardless of your financial success.
This brings me back to one of my core principles of personal finance: it doesn’t matter if you make $ 10,000, $ 100,000, or $ 1 million a year by spending money on something that is not of value to you, or on something what you don’t. in fact, caring is a waste of money.
Thrift is about getting through areas of your life that aren’t interesting to you and minimizing your spending in those areas. It’s also about finding better deals for the same in those areas of your life that you really care about.
Whether you’re making $ 10,000, $ 100,000, or $ 1 million a year, it’s worth finding an easy way to save $ 10 a month that doesn’t negatively impact your life. That’s $ 10 a month that you can invest for retirement. That’s $ 10 a month that you can set aside for an emergency fund. That’s $ 10 a month that you can spend to pay off your debt a little faster.
This brings me to one reasonable argument against some forms of frugality: the time value of money. Many critics of frugality as a personal finance tool argue that it does not provide enough return on your money in the time you invest, so anyone who talks about frugality should be ignored.
But here’s the thing: how much is your time worth? How much is an hour of free time for you? Is it worth $ 20? Would you pay $ 20 for an hour of uninterrupted free time? How about $ 40? Different people will give different answers here.
So now that you know how you value your time, the question arises whether a frugal tactic can save you that much money, or more if you spend an hour on it.
There’s also the fact that many lean tactics will pay off the time you save later. Example: Our family prepares many dishes in advance – for example, if we cook lasagna, we usually make four pans at once and freeze three of them . We do this in order to buy ingredients in bulk and really benefit from selling things like lasagna noodles. This eats up maybe 20% or 30% more time during the initial lasagna cooking process, but then we have three frozen lasagna pans in the freezer and we save time by using one of them for dinner. He ends up saving us time, and saves us money.
It’s the same with putting together a meal plan and shopping list – it saves us money by making our grocery shopping more focused, but it takes time to put together that plan and that list. However, when I’m in the store, I’m actually there much less time than I would have been without the list, and this ultimately gives me that time back. It usually takes time, but I end up spending a lot less at the grocery store.
In fact, if I don’t make so much money that it would be effective for me to hire a personal chef and / or personal shopper, it would be foolish to give up these modest strategies. There are many, many, many other strategies like this that save money and take very little time (or even save time).
Plus, many of the humble options are just replacements for what you usually do when you just don’t know the difference between the “cheaper” and more expensive options. This goes back to my hand soap example – I literally can’t tell the difference between branded hand soaps and brand name hand soaps, but they definitely have a price difference. There are so many products that I can’t tell the difference for, so I just buy the brand in the store. Again, there are many things like this, like “buying” books and movies from the library instead of buying them or paying for Redbox or Amazon Instant Video.
All of these different savings options have no real negative impact on your daily life, but they will certainly have a positive effect on the money in your checking account. It doesn’t matter how much you make each year – you will make the mistake of just leaving that money on the table.
This is why, 10 years after the start of my financial crisis, I am still very frugal. I buy a lot of sundries at the store . I go to the library every two weeks and usually leave with a bag full of books and films. I make a meal plan and shopping list before every grocery visit. I look for better prices for my car insurance at least once a year. These things don’t take long – some of them really save time – and they don’t negatively impact my life, but they do save money. Why don’t I make them? Why don’t I enjoy the money these tactics have saved me over 10 years?
Thrift may be the fuel you need for financial recovery, but it can also be part of the fuel that launches your financial rocket into the stratosphere. Don’t lose sight of this.
Thrift and Long-Term Financial Success | Simple dollar