Frugal Manifesto: 5 Critical Success Factors for Frugal Living
My experience has shown me that achieving a high savings rate is not the result of any one particular tactic. Rather, the key is adopting a frugal way of thinking, and letting that mindset guide you as you make many money-related decisions every day.
In this post, I will explore five critical success factors for frugal living that are all about the way you think:
Being selective about your spending is probably the most important contributor to a high savings rate.
As human beings, our main driver is the pursuit of happiness. Our life decisions, including decisions over how to allocate our limited financial resources, should be made with that goal in mind. But many of the purchases we make do not make us any happier and are therefore wasteful.
In today’s society, we are constantly surrounded by opportunities to spend money. Each of these opportunities will have some sort of selling point to it - a potential advantage that could be conferred on you if you make the purchase. The ability to distinguish between a purchase that will make you happier and a purchase that is only masquerading as a source of happiness is critical. With time and practice, it becomes an instinct.
In my opinion, these “happiness impostors” can usually be classified in one of the following categories:
- Cool or pretty items: We all see items, especially goods, that appeal to us. Maybe they are cool and unique, like an ingenious gadget; maybe they are beautiful or cute, like a nice print or a funny magnet. We feel infatuated with the item and imagine how nice it would be to walk out of the store with it. But what happens the next day, a week later, a month? Is the item still bringing you happiness? Usually, once we have gotten used to the nature of the item and have moved past the original excitement, it has no further impact on our happiness.
New items: As their belongings get older, many people have an itch to replace them with a newer version. At its most extreme version, this applies to expensive belongings like cars, which are often replaced even though they are still working well and meeting all of their owner’s transportation needs. However, this also applies to small and perfectly sensible items. I often think of kitchen tools which are a little worn or not as aesthetically pleasing as they used to be. If the item is still meeting your needs, will replacing it with a shinier version have any real impact on your happiness? It is unlikely that a person would be more joyful or relaxed because they have a new roasting pan.
Goods and services that other people buy, or that someone encourages you to buy: Every time you buy something you don’t particularly need or want because it is expected of you, you are making a purchase that will not increase your happiness. In its most common manifestation, this is “keeping up with the Joneses” - accumulating material goods in order to portray a certain image to your neighbours or acquaintances. But this can take more innocuous forms as well. Perhaps you are being encouraged to buy something by someone you respect, such as a close relative or friend? You may even be unsure what to do and truly welcome the input. Obtaining other people’s opinion is fine, and listening with an open heart and mind will make you a better-rounded person. But before you make a purchasing decision, always go back to your instincts, because no one can know better than you what will bring you happiness. Your advisors may have the best intentions in the world, but each person is unique, and their sources of happiness may simply not match yours.
- Minor conveniences: Many purchases provide a bit of additional convenience when compared to the non-spending alternative. These include items like taxi rides (versus the longer bus ride), food delivery (versus just walking to the restaurant for pick-up) and buying coffee every day (rather than making it at home and bringing it to work). However, when you look at these situations closely, you will see that the added convenience is truly minor in the grand scheme of things. You are also likely to feel healthier and less lazy if you choose the slightly more demanding alternative. In addition, you will often feel proud of yourself for exercising discipline.
Go back to basics, and think about what truly makes you happy in life. Most likely, it is a combination of interaction with the people you love, accomplishments that make you proud, and pastimes/hobbies that bring you pleasure. To live a fulfilling frugal life, spend your money in service of these goals and ONLY these goals.
“Okay then,” you might tell me, “I understand that some purchases make you happier than others. But even if something will only give me a brief moment of convenience or excitement, why not buy it? Brief is still better than nothing.”
To see why this is not a good approach, we have to understand - and fully internalize - the concept of opportunity cost.
Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen. For 99.9% of the population, money is a finite resource. While certain actions can be taken to increase our income, most of us will never be in a situation where we have unlimited money. This means that when you spend money on an item, you are losing one of the following:
The potential gain you could have from spending that money on another item that might make you happier – now or later.
The potential gain you could have from saving that money, increasing your net worth and ultimately reaching a state of financial freedom where you can live off of your investment income and/or principal.
These two alternatives are always available to you and apply to any amount of money. Therefore, when you make a purchase, you are choosing the gain from that purchase over the gain from the two options above.
Some purchases will certainly be worth that trade-off. But the key is this: When you come across an opportunity to spend money, your mind should be doing some quick analysis in the background. You need to ask yourself, “is the gain from the item I am thinking of buying superior to what I would gain from spending it on something else or investing it?
Your thinking should go something like this: “Sure, I could buy it. I can afford it, and it would provide me with some kind of benefit. But am I so interested in it that I feel it is worth more to me than the two alternatives? Do I prefer to spend my money on this item, or on something else that really matters to me, such as a life-changing trip, a gift for a family member, or a house in a central part of town? If I knew that foregoing purchases like this would allow me to retire early and spend my time doing what I love most, would I still want to make this purchase?
This type of thinking should be applied even for reasonable and affordable purchases. If the opportunity cost for them is greater than the gain, they are simply not a good deal.
Those who are able to see a direct link between the restraint they exercise now and the rewards they will enjoy later are the ones who find it easiest to be frugal. This way of thinking may sound like a lot of work if you have never done it, but it actually becomes extremely instinctual. You simply come to know that many common spending opportunities are unworthy and ignore them automatically.
To achieve a high savings rate, you have to question every expense.
It begins with a ruthless challenge of every category of expenses that you currently incur. Nothing should be spared. Each category must be classified as either a) unavoidable, such as shelter and food, or b) avoidable, in which case you have to consider whether the benefit you get from it is worth the cost. We all have a tendency to let our eyes scan right past certain expenses, assuming that they simply could not be eliminated. These are our spending blind spots. But if you want to get serious about your saving rate, everything should be on the chopping block.
Then, for each expense (avoidable or unavoidable), you must ask yourself: “What can I do to reduce this expense?” Options include behavioural changes (using or consuming less), replacing the item that is driving the cost (e.g. your car or your house), negotiating prices with vendors, and finding less expensive sources.
This attitude should also be applied on an ongoing basis as spending ideas come to your mind. Always take the time to ask yourself: Do I really need this item? And if I do, how can I get it for the lowest price possible?
No one will dispute that a large purchase has a greater impact on your savings rate than a small purchase. Large purchases need to be vetted extremely carefully. In this blog, you will see us dedicate a lot of space to life’s biggest expenses, such as buying a house.
However, small purchases matter too, and they cannot be ignored. Frequent low-dollar purchases can add up to a significant amount. For example, buying a $10 lunch every day at work adds up to $2,500 a year. Over one’s working career of approximately 40 years, this is $100,000! In contrast, a good homemade lunch can be made for $3 or less per meal, resulting in lifetime savings of at least $70,000.
Even a daily coffee at $2 adds up to $20,000 over your working career - much more than the cost of a good-quality coffee maker, a thermos and store-bought coffee beans…
All of the other small one-time purchases that people make also add up. We have more opportunities to make small purchases than we do large ones. If you give yourself a pass on small purchases, they will expand and multiply, and take a decent chunk of your money.
In my opinion, another reason it is important to question all purchases, including the smallest ones, is that it trains your frugality muscles. It ensures that you are applying the principles described in this post on a regular basis. Then, when you find yourself considering a larger purchase of a few hundreds (or thousands) of dollars, you will be sure to ask yourself the right questions and make a smart decision.
So far, I have focused on ways of thinking that you should adopt if you want to save more. However, there are also ways of thinking that you need to avoid - mental habits which, if left unchecked, could seriously impede your savings efforts.
One of the potential hurdles to overcome is a tendency to see spending as something to do for fun - an activity that you turn to when you are bored or looking to enjoy yourself. You may feel that you enjoy the actual process of shopping - looking at options, comparing, assessing and making the decision to buy. Alternatively, you may get satisfaction from the act of using your money to get something new, relishing the excitement you get from converting your dollars to a new element in your life. This act can give us a sense of power; there is so much that we can buy with money, and a new good or service has the potential to bring new and exciting emotions.
Many people may not even be aware that they have this instinct. They may think that this only applies to compulsive buyers with a weakness for a particular spending category. However, this is probably more common than you think. Do you ever find yourself, during your down time, turning to thoughts of the next product you may buy? If it has been a few weeks since you bought yourself an item outside of your normal household expenses, do you start to get a little antsy, thinking that it is almost time to get yourself a gift? I have had periods like this myself, and it took me a while to recognize it.
It seems to me that this feeling is more common during periods of drudgery - times where your daily routine is leaving something to be desired, and you are looking for the jolt of excitement that a purchase may bring.
If you are turning to the act of spending as a source of entertainment and satisfaction, you need to challenge yourself to get your fulfilment from other places. Make yourself see that it is not logical to look to spending to meet your emotional needs. It is a never-ending cycle because a few weeks later, you will yet again find your thoughts turning to your next purchase.
Instead, get your gratification from other sources. Spend more time with your loved ones, doing the activities you love to do. Make continuous learning a regular part of your life. The next time you find yourself craving something new, try taking up a new hobby, reading a new book genre, cooking a new cuisine or making a new friend. These changes don’t have to cost you much (if anything), and their impact will last well beyond the impact of a one-time purchase.
As humans, we all want to feel good about ourselves. We want to see ourselves as worthy, talented and impressive people.
Therefore, it stands to reason that we will not act frugally if it makes us feel inadequate or ridiculous. On the other hand, if a frugal choice makes us feel strong and smart, we will make that choice again and again.
This is why it is absolutely critical to be proud of your frugality. This does not mean that you have to boast about it to people. It simply means that you believe your frugal choices are good ones that will benefit you in the long-run, and that you hold on to that belief regardless of any resistance you may encounter. Because you will encounter resistance.
The danger to avoid is allowing the fact that your choice is different to make you feel ashamed or doubt yourself. In our daily life, we often come across situations where there is peer pressure to spend. A friend wants you to go out with him to an expensive restaurant or club. A parent encourages you to get rid of that old and ugly car already. Your colleagues just don’t understand how you could still have the original iPhone.
Sometimes, frugal people are not comfortable responding to these requests and comments with the truth - that they simply find that the purchase is not worth the cost - and that’s okay. You don’t have to justify yourself to anyone. What matters is how you feel inside.
Frugality is something to be proud of. It is smart and disciplined. It is an investment in your future. Frugal people avoid debt, minimize financial stress and open up their lives to all sorts of possibilities. They understand scarcity, trade-offs and opportunity cost. They are strong people who can delay gratification in order to improve their lives. These are all fantastic qualities, and absolutely nothing to ever feel embarrassed about.
What you need to do is get to a mental place where you are darn proud of your frugality. You know it is an immense virtue. You are actually excited about the fact that you, unlike so many other people, have figured out how money should be used. You know a secret that many other people don’t.
If you feel this way, you will actually find satisfaction in every frugal choice that you make. You will pat yourself on the back. You may even start to see it as a game, looking for more opportunities to make frugal choices, and taking pride in every chance you get to accomplish something for less money.
The truth is that people don’t mind being different if they feel they are different in a good way. So let yourself feel that way. Just remember to not become judgmental about it.
The five points outlined in this article are critical for achieving a successful frugal lifestyle. The first three - spending only on things that make you happier, understanding the opportunity cost of spending and questioning every expense - will ensure that your spending is thoughtful, wise and aligned with your goals. Not making spending a hobby will ensure that you are not constantly fighting against yourself, while being proud of your frugality will protect you from pressures to spend in ways that are contrary to your values.
What these points all have in common is that they comprise a philosophy about spending and money. They are ways of thinking that you can adopt TODAY and, with practice, they will become intuitive. Once they do, they will be like little angels on your shoulder, illuminating the frugal path forward.
Have you applied these principles in your own life? Which ones come naturally to you, and which ones require more effort? What are YOUR critical success factors for frugality?