Are you barely able to save? Here are some reasons why you should not overlook the value of frugality.
In this article:
- Higher Savings Rate, Earlier Retirement
- Need For A Smaller Emergency Fund
- Better Overall Health
- More Peaceful Mind
- Allows You To Take Bigger Breaks Between Jobs
- Allows You To Take Riskier, But Higher-Paying Jobs
- Lets You Invest In More Volatile, But Higher-Reward Portfolios
- Lower Withdrawal Rate, Lower Taxes
9 Reasons Why You Should Be Practicing Frugality
1. Higher Savings Rate, Earlier Retirement
The biggest factor people consider in retiring is the amount of savings they have. While this may seem like a daunting task, frugality is actually the simplest answer to it.
On average, a person saving about 25% of their income after taxes is able to retire at the age of 56. Doubling the portion he is saving to 50% allows that person to retire at the age of 40. Those who know the value of frugality can save by as much as 75% of their income after taxes, allowing them to retire after only 8-10 years of working.
Additionally, frugality also allows people to retire early because they know how to budget their money and spend less on things they have no need for. Most people waste so much money on interest for their credit card purchases, student loans, auto loans, etc. They could have easily invested that money and allowed it to compound over the years. Investing that money — making it work for you — and allowing it to compound over the years would have been a wiser option.
2. Need For A Smaller Emergency Fund
An emergency fund should typically be worth 3-6 months of your monthly expenses. This means that in case you lose your job, you would still be able to live the same lifestyle for that period of time.
Those who know how to live frugally have small monthly expenses. Smaller monthly expenses mean that they would need to build a smaller emergency fund.
More than that, a smaller emergency fund means less cash sitting idly in some bank account with a low interest rate. The excess money would be better spent on investments to further grow your income and your savings.
Furthermore, your own frugality might inspire your family to be frugal as well, further reducing the need to have a large emergency fund. Typically, part of people’s emergency funds is allocated for the emergencies of loved ones. If your family learns the value of frugality, their lifestyles would cost less. This translates to a smaller emergency fund for the both of you.
3. Better Overall Health
Frugality naturally tends to make your lifestyle healthier and more active.
Those who know how to save money prefer to ride a bike or even walk towards their destinations. Taking public transit also requires more physical activity such as walking and standing compared to driving.
Those frugal habits burn an additional few calories that add up and help you build better strength, stamina, and endurance. Too much convenience not only costs more, but it can also bring about bad health.
4. More Peaceful Mind
Perhaps the greatest thing frugality brings to those who value it is a much greater peace of mind.
Thriftiness means your house is not overflowing with things you don’t need. It means you do not try to keep up with anyone. It also means you can move houses or cities whenever you want because you have a lean life.
Frugality helps you have peace of mind and lower stress knowing that you are happy with the simple things you have.
Frugality does not just equate to an economical lifestyle, it means a more eco-friendly lifestyle too.
Your levels of consumption are significantly less than that of the average American’s. That smaller level of consumption translates to less waste produced.
You can rest easy knowing that you are helping give your grandkids and even their grandkids a chance to live comfortably on our planet.
6. Allows You To Take Bigger Breaks Between Jobs
Having the capability to take bigger breaks between jobs is one of the most overlooked benefits of frugality.
Because you have a lower burn rate compared to others, the same amount of cash allows you to take a bigger break between jobs than them. You can use the extra time to improve on your skills, develop new ones, or simply to travel and take some time off.
Furthermore, frugality gives you more leeway to weigh your options in choosing a job. Most people who do not practice frugality would jump at the first job offer they receive, which may not always be the strongest one. Most people who do not value frugality do this because they often lack the resources to wait for better opportunities.
Brushing up on your skills and developing new ones shows future employers your commitment to your trade. It could even open up new opportunities that may not have been available to you before.
That extended break you can take has even allowed some people to take far bigger risks such as starting their own companies. During those months, they do their best to live frugally by dining less in fancy restaurants or opting to stay in instead of going on a night out. With enough planning, strategy, and luck, their startup ideas show traction quickly. Before they knew it, they had a business that was set up for the long haul.
7. Allows You To Take Riskier, But Higher-Paying Jobs
Frugality allows your money to work for you. How? Well, in places like Silicon Valley, for example, a lot of people make money from startup equity exits and not necessarily from high salaries and bonuses.
With that in mind, frugality allows you to take on lower-paying jobs at smaller and riskier companies. In exchange, you get a much higher startup equity. For a small pay cut in your annual salary, you might even be able to negotiate for several extra points (1 point = 0.01% ownership of the company).
Smaller companies that are just starting out are often very limited in terms of cash. They will do whatever it takes to acquire you for a lower wage rate. This lets them maintain a low burn rate, extending the initial runway of their capital. Afterward, they are forced to go to venture capitalists to raise more startup capital.
People who exploited this idea at Netflix around 6-7 years ago are now multi-millionaires. Netflix currently has a market cap of $80 billion and still continues to grow at a fast pace. Owning 0.01% of that company means that you now own $8 million in assets.
Furthermore, employees who practiced frugality did not need to sell their shares when it was worth a million dollars. Because of their frugality, they were able to hold on to those shares and sell them when they were multiple times higher in the future.
A person who did not practice frugality would have easily sold at $1 million. He probably would have asked how big a house he could buy for that amount. A frugal person would have simply asked how big a house he needed. He would have found that perhaps a $550k house in a normal and non-upscale neighborhood was enough. He would keep the extra $450k invested and growing.
8. Lets You Invest In More Volatile, But Higher-Reward Portfolios
Frugality further allows people to be more risk-tolerant. In the long term, those with a higher risk appetite are able to build far greater wealth over time.
They are able to opt for much higher asset allocation in high-risk, high-reward funds like equities rather than the less volatile ones like bonds and real estate. Practicing frugality allows those people to buy stocks and never sell them until they are actually retiring. Investment accounts, especially of those who started younger, will be able to build great wealth as it continuously compounds over decades.
Those people tend to have bigger emergency funds that will survive much longer should they lose their jobs. They also tend to be more flexible in adjusting their expenses, allowing them to leave their stocks untouched in case of unexpected events.
9. Lower Withdrawal Rate, Lower Taxes
People who have mastered the value of frugality have retirement accounts that last much longer. Because of their thriftiness, they have a far lower need to withdraw from their retirement accounts, especially when they do not work post-retirement.
Your retirement account’s lifetime depends largely on your annual withdrawal rate. Reducing it also reduces the probability of you running out of money during your retirement. Withdrawing at a mere 2 or 3 percent essentially removes the possibility of you running out of money.
Plus, you will be paying much lower taxes to the IRS. The income you draw from your pre-tax accounts (such as Individual Retirement Accounts or IRA and 401(k)) and your taxable accounts are big determinants of your annual taxes.
Admittedly, frugal living can be challenging at first. It is a commitment to a few sacrifices today that most of us are unwilling to make. However, with enough patience, planning and a little bit of luck, frugal people reap the benefits of financial independence tenfold. Try to keep in mind the reasons we mentioned above and turn them into motivations to live frugally.
Are there other benefits to living a frugal lifestyle you might have experienced? Share them with us in the comments section below!