Can Being Frugal Make You Rich
Can being frugal make you rich? Let me tell you this: The average person needs to be frugal to become rich. A frugal lifestyle lays the groundwork for growing wealth.
Your view on the purpose of money is an important factor in determining if you’ll become“rich.” What do you want your money to do for you? Most people want a comfortable life. As money comes in, they use their funds to make it as comfortable as possible. They may have a fairly rich lifestyle—at least for a while.
In and of itself, being frugal won’t make you rich. Frugal living in the form of living below your means allows you to put some of your money to work as investments. It’s the return on those investments that can make you rich.
But what about the future? While most of us concern ourselves with making life comfortable now, we recognize that the truly rich don’t have to worry too much about being comfortable even in the future. The rest of us would like that luxury. Frugal living can provide the means to finance comfort now and in the future. That’s a goal that translates to “becoming rich”.
Living Hand-to-Mouth
Before I get too much into living frugally and becoming rich, let’s look at what it means to not be rich…
According to Forbes, 78% of the employed live paycheck to paycheck. It’s surprising that many people with a middle-to upper middle income of $50k – $100k a year are included in that statistic. Twenty-eight percent of them are living paycheck to paycheck.
Being broke the day after payday is not symptomatic of just low-wage earners. It’s a condition that manifests through most of our income levels. Frugal living gives us a way to avoid inclusion.
“Rich” and “frugal” are not contradictory terms. To understand how a frugal lifestyle enhances your opportunity to become rich, you need to understand what it means to be rich and what it means to be frugal.
Definition of Rich
A dictionary definition of being rich is having abundant possessions, especially material wealth.
There’s no exact dollar amount assigned to being rich. It’s up to you to decide how much money you need to be rich. I’ll tell you what I think: Any of us should accept that we are rich when we have enough to reasonably maintain dignity now and in the future. I do realize this is just my opinion. You may have a different standard. Regardless of our monetary goals, frugal living can significantly influence the probability of reaching them.
Frugal Living
A frugal lifestyle is a money management practice. If you’re frugal, you manage your money for a purpose. That purpose is to empower it to do more than just meet the needs of the day…
Do you have wants or wishes it would take a lot of money to fulfill? For example: Maybe you’d like to take an Alaskan cruise, save half the money it will take to put your kid through college, buy a house, or not depend on Social Security when you retire. Most of us have a wide and varied list of “I’d likes…”. Any of those requires more money than anyone payday gives us. You must live below your means if you want the money to make these things happen.
Living Below Your Means
Living below your means is one major tenet of frugal living. When you live below your means, you bring in money that is not immediately necessary to sustain your life or lifestyle. You can achieve this by living on a budget that doesn’t require every penny you earn. You want to have leftover money.
Quite a few people have a budget they adhere to, and many regularly have some extra cash. What they do with that extra money can determine if they’re on their way to becoming rich. That money needs a purpose. Securing a comfortable future for yourself is an ideal—and practical—purpose. BTW: “Future” is not just a vague “some time.” Your future is coming at you continuously: next week, next year, ten years from now, 25, 50…
Many of us think of “Retirement” when we think of the future. Long before that, however, we may need to buy a car, we may need to further our education, we may want to take a nice vacation, we may have some kids to raise… The better we can prepare financially for these and a myriad other events, the closer we come to being rich, and as we approach “rich,” the more comfort we can afford. We need to have goals for that extra money.
Our Savings
When it comes to achieving financial goals, our gut reaction is to save, to hoard. Saving is another integral part of living frugally. But banking funds for long-term savings, in essence, stuffing our money into a pillowcase, minimizes potential gain.
Note: In other posts, I do advocate having a savings account. Savings are important, but funds kept in my savings account are mostly sinking funds or other money that’s more or less “on call” for use.
You Can’t Save Enough to Get Rich
Many people believe you can save to become rich. Thinking logically, you know the average person can’t do that. We don’t earn enough money. Even when we live below our means, we still need the greater part of our income just to get by. Saving for anything requires commitment and determination. We need to do something that multiplies our funds quickly. The following example will show you why…
Let’s say you are 20 or 30 years old and you’ve decided $1,000,000 is the amount of money you want to be available when you retire—sometime before you are 70. And let’s say you’ve managed to accumulate $1000. You put it in a savings account at your bank, and you figure that you can add $400 a month to that, and your bank pays interest at our current average rate of .06% APY. How long do you think it would take to build a balance of million dollars? It would be over 196 years! None of us is going to live long enough to enjoy what that $1,000,000 could do for us.
Just for fun, let’s say your child, who inherited this account, continues saving $400 a month at the same interest rate, and his progeny after him do the same… How many generations do you think would be involved before the balance reached $1,000,000? Depending on lifespan, including your own, I figure it would be a grandchild with 3 to 5 greats in front of the designation that gets to reap the benefit of your endeavor. Your descendant might not have much of an idea about who you were, but I’m sure the money would make him happy. Or would it? We haven’t thought about inflation, but that’s a topic for another time. (And, while we did this exercise just for fun, it shows how ridiculous it is to think we can save that kind of money in a regular savings account in time for it to be useful.)
Time isn’t the only factor that makes it improbable we’ll accumulate a large sum solely through savings. It’s rather naive to assume that in almost two hundred years, the funds in an account as convenient to get into as a savings account would not have been tapped for something. Also, there’s the simple (and probably most significant) fact that most of us can’t really afford to save $400 every month.
Choose to Invest
If saving isn’t the way to get rich, what is? The answer is investments. While the average interest on a savings account is .06% interest, the S&P 500 currently pays 10-11% in dividends. That’s a significant difference. Your balance grows quickly when you reinvest the dividends and make regular contributions. But you still need to have money to make those contributions.
Capital to Invest
We need extra money for investing (just as we would for saving). And sometimes, just as if we were trying to save, living on a budget and trying to live below our means doesn’t yield sufficient funds. In that case, we need to bring in extra money. (Finding or generating extra money is another component of a frugal lifestyle.) Second jobs, side gigs, getting a roommate… there are plenty of ways to bring in extra money with the idea of putting it to work and making more. And, remember, the closer you come to your concept of being rich, the more comfort you can afford; any extra work you do to secure funding for your investments will likely be temporary.
You Can Ease Your Way into Investing
You know there’s an easy way to begin investing. It can almost be a “set it and forget it” method. Most employers offer a 401k. As with any investment plan, there’ll be a minimum contribution, and you can go up from there. You’ll sign up. After that, it’s a deduction from your take-home pay. If the company you work for has some type of matching funds plan, you’ll probably want to take advantage of it.
If your employer doesn’t have a 401k plan, go to one of the many brokerage firms and have a professional advise you as you invest in a retirement plan. Even if you participate in your company’s 401k, you’ll probably want it to be only part of your retirement plan.
Money Is a Tool
I’d like you to reconsider the example I gave you about depositing $1,000 in a savings account and how long it would take to turn that into $1,000,000. Even with monthly deposits of $400 and incorporating the earned interest, it would take nearly two hundred years to achieve your goal. Your investment and the time factor are both huge. That illustration was devised, now, I want to present a real investment scenario:
Microsoft made shares available to the public in 1986. In 1987 an investment of $1,000 in Microsoft would be worth 1.6 million dollars today. I imagine some of you were in your 30s or 40s in 1987. That would put you in your 60s and 70s now. There’s a good chance that you’re very active even though you’re retired and still plan to live some LIFE. You could certainly derive some comfort from that money.
And what if you didn’t have $1000 to invest at the time? An investment of $500 or even $250 would have yielded a considerable profit by now. It isn’t so much about the money you start with that makes you rich. It’s about what you do with your money. So, being frugal does not necessarily make you rich. A frugal lifestyle is the best way for the average person to generate funds you can use to become rich.
A Common Question: What If I’m Really Poor
Why are you poor? Is debt the problem? You’re being robbed. Even the S&P 500 dividends of 10-11% don’t come near the 18-23% you’re paying for the use of someone else’s money. Don’t even think about getting rich at this point. Use frugal living principles to get out of debt as quickly as possible. After you’re debt free, you can use those principles to accumulate funds you can put to work to become rich.
Conclusion
The original question was, “can being frugal make you rich”? The short answer is being frugal will not make you rich, but you need to be frugal to have money to invest so you can become rich.