Practice Frugal Wealth
If you follow the slow and steady money principles that we review in this channel; living below your means, saving steadily and investing slowly for the long run, it's not a matter of if you will build wealth. But rather the question of when.
But one of the big dilemmas that many of us will face once you have a sizable amount of wealth is this; the temptation to let the world know how successful we are. Before you couldn’t afford it, but now that fancy new car keeps catching your eye. Maybe your parents might finally come around to praising you instead of criticizing you for your frugal lifestyle? Or how about that huge home down the street that always seemed to have all the toys? It's finally on the market. And you can finally afford the downpayment. Why not go for it right? You only live once.
But this is where I would caution all of us and recommend we all continue to practice the principle of Frugal wealth. Where despite how wealthy you become, you continue to live out the life of frugality.
1 - Keep Us Grounded
Once you have some breathing room in your finances; having a fully funded emergency fund, a well funded retirement account and even some extra money for other things, it's a natural pull to want to splurge a bit.
I mean I sure felt that way. And this was only after my wife and I had paid off our student loans. We weren’t anywhere close to having sizable wealth yet. However, when we saw some extra dollars in our bank account we couldn’t help ourselves but fantasize about what we could do with that money.
But when we look deeply into ourselves to why these thoughts even occur, it's because we all have a natural inclination to be seen. To be seen by our families, our friends and even random people on the street. We want them to acknowledge us as human beings and the quickest way to get attention is with nice, expensive things. Nothing says “hey look at me” louder than a fancy new sports car, a huge house or a designer wear bag.
However, money at its fundamental level is nothing more than a piece of paper. It has no emotion. No morals. No value except the ones we assign to it. So when we can continue to live a life of frugality, because remember, it was the frugal habit that built your wealth in the first place, it will continue to keep us grounded in what's truly important in our lives.
If we need a real live example of frugal living from an actual billionaire, let’s take a page out of Mr. Warren Buffet’s book. Mr Warren Buffet, the oracle of Omaha, is worth over $100 billion dollars today. And is probably one of the few individuals in the world for whom buying a multimillionaire dollar home wouldn’t even make a dent in his net worth. Yet he continues to live in the same house he purchased in 1958 for $31,500. A nice simple home, but a home for a billionaire? I say if Mr Warren Buffet can remain frugal, so should we.
2 - Less Taxes
When you live a life of frugality, the biggest immediate benefit is that you have a lower cost of living. You don’t have fancy car payments. No crazy mortgages. No private club membership dues. Therefore when you have a lower cost of living, you need less income to maintain that lifestyle. Thus in turn less taxes you have to pay.
In America we have what is commonly called a progressive tax system. Which means that the percentage of income an individual or household pays in taxes tends to increase with increasing income. So not only do those with higher incomes pay more in total taxes, they pay a higher rate of taxes. For a married couple filing jointly, in 2023 if your income is over$190,750, you are in the 24% federal tax bracket.
Just think about that for a second. You are paying close to a quarter of your paycheck to the federal government and this doesn’t even include payroll taxes like Medicare and Social Security and depending on where you live, state income tax. And this keeps going up higher the income ladder you move up - 32%, 35% and at the highest, even 37% of your income to the federal government.
I’ve seen individuals who make close to $300,000 a year and pay up to $50,000 to $80,000 in taxes alone. And the key reason they are paying this much in taxes is because their lifestyle requires them to recognize that full $300,000 of income.
But when you can practice frugal wealth, continuously living below your means regardless of how much your net worth is and how much income you bring in annually, you have means to dramatically reduce the taxes you pay.
Max out tax advantaged accounts like the 401k and the HSA, invest in real estate properties where you can take advantage of property depreciation, make charitable donations or even start a side business to deduct expenses that would normally just be an expense in your budget.
The bottom line is that when you practice frugal wealth, you have a lot of flexibility to manage your finances and taxes to your benefit because you aren’t needing to fund a high expense lifestyle.
3 - Low Expectations
When you drive a not too fancy car and you don’t wear expensive designer clothes, people will automatically assume you are a nobody. I mean I get this reception pretty much everywhere I go. Though for some, this may be hard to swallow, I find it quite liberating. When you’re a nobody, nobody expects you to do anything or do anything special.
I mean think about all the pressure that celebrities have to always look good in public. I’m pretty sure many of them just want to put on some comfortable clothes after waking up and go for a leisurely walk without anybody taking their picture. But I doubt famous movie stars like Brad Pitt or Tom Cruise can do that.
And what about if you were a child prodigy? The moment you picked up a violin adults lined up to see you play. People thought you were destined to be the next Mozart. However the truth is that many prodigies don’t meet the high expectations that people have of them. Malcolm Gladwell talks about in his 2008 book Outliers how IQ for life success is important only up to a threshold. He quotes a study of Nobel Prize winners
“A mature scientist with an adult IQ of 130 is as likely to win a Nobel Prize as is one whose IQ is 180.” - Outliers, Malcolm Gladwell
The fact is that when we live a life where we are showing wealth to everyone, people have higher expectations of you. People will expect that you have a lot of money, because you have a lot of fancy things. That you must have a million dollars in the bank account. That you have a ridiculously profitable business. Thus when it comes to spending money, they might expect that you pay for things. Or if there is a fundraiser, that you donate the most amount. Whereas the probability is people that are the showiest of their wealth probably have the least amount of actual wealth.
One of my favorite scenes in the movie Forrest Gump is the last scene when Forrest sits down on a tree stump after dropping his son off at the school bus. A passerby might assume that Forrest is a loser with no job and no prospects just based on his outer appearance. Not knowing that he is a multi-millionaire, a war hero and champion ping-pong player.
Forrest Gump - The True Frugal Wealth
But what is most amazing is Forrest probably could care less. He gets to do whatever he wants with his life and that is true wealth. No one is going to bother him because he looks like a nobody and that is completely fine with him.
4 - Focus On What Matters
You aren’t distracted by all the trinkets and toys. You don’t need the latest gadgets just for the sake of getting them. You don’t need to fancy private club membership because you frankly don’t feel comfortable in that environment. When you can cut out all those things in your life, it frees you up to really focus on the things that matter in your life. Just like Forrest from earlier, because he didn’t need additional things in his life, he was able to focus on the most important thing in his life at the time; his son.
When we allow ourselves to get swept up by the culture of wanting and needing something newer, something more and something better, it actually becomes a mental burden that's hard to get rid of. Whenever we pass by the car dealership we are tempted to test drive the latest model. I mean it's just a test drive right? It can’t hurt. Whenever we drive by the mall, we have to pull to just drop in and check out what’s on sale. I mean shopping is the American pastime. Nothing wrong with getting a good deal on that jacket I didn’t intend to buy, right?
But when you practice frugal wealth, we condition ourselves to make do with what we have rather than sprinting around for something new. We become more comfortable with accepting what we currently own rather than trying to replace it. And this in turn frees us up to concentrate on the more important things in life.
5 - Frugal Wealth = Happier Life
Like I mentioned earlier in the post, if you are following the slow and steady path to wealth principles of this channel, you will eventually achieve wealth one day. If you build strong career capital, manage your expenses and invest for the long run I’m confident many of you will be wealthier, if not millionaires one day. But when you arrive at your financial goal, you will wonder what’s next. That is if you haven’t spent the time to discover your ideal lifestyle in the process.
“Life is a journey, not a destination.” - Ralph Waldo Emerson
In the same way, the pursuit of Financial Independence and financial wealth is a journey, not a destination. In 1938, Harvard set out what came to be known as one the longest studies ever done by following 268 Harvard students for the next 80 years. Harvard wanted to know - what are the key components to a healthy and happy life? And they found a clear winner:
"Close relationships, more than money or fame, are what keep people happy throughout their lives." - Harvard Study
When you focus on frugal wealth, as I mentioned earlier it cuts out a lot of distractions in your life because you naturally gravitate towards focusing on what's right near us. Not constantly trying to buy new things to fill the gaps in our lives. When we have more room, we have more space for important things like relationships that bring us more joy and happiness in the long run.
