I have seen far too much hate for frugality and frugal people these days. I consider myself a frugal person, even though I don’t make my own toilet paper, soap, nor laundry detergent. Does being frugal mean that we all have to go to extremes? Frugal people are all made out to be stupid and obtuse, simply because we prefer to save our money for the future, instead of blowing it all on a home that is larger than we need, or a car that will be near worthless in a decade, anyways.
Why do we get such a bum rap? Keynesians and advocates of government spending often hate frugal people and savers, and accuse us of all kinds of things, such as causing mass unemployment and depressions. It must all be our fault, right, because we don’t like to be up to our necks in debt? Stores hate us because we look for deals, and businesses hate us because we always try to save money on their services. Everywhere we go, we are shunned, simply because we have a different concept of the value of money than non-frugal people do.
I am not here to say that frugality is better than non-frugality, because it’s everyone’s personal choice after all. If someone else wants to blow all of their money on expensive trips and cars, and rely on the government to take care of them in their old age, that’s their business, not mine. I am here to defend frugality against the haters, and defend the frugal people that believe in the value of money. I believe that we are a force of good in society, and that although we get mistreated like donkeys, we are also indispensable supporters of the burdens of society, just like those same donkeys. Get rid of us, and there will be none to carry the burdens of the profligate.
Here is a frugal manifesto for all frugal and non-frugal people, everywhere in the world. It explains just a little bit on how we contribute to society, and why the mistreatment is undeserved.
Frugal people save a high percentage of their net income, building capital and making the world a better place.
Frugal people save a lot of their net income. How much is enough? Traditional wisdom says 10%, but I strongly believe that 40% to 50% is more appropriate, if you really care about financial freedom and getting out of the rat race. In lean times, you will greatly enjoy the gap between expenses and income. In better times, you will benefit from a pay raise of 5% to 8% per year. The only thing you may lose out on is on some present-day consumption, but with lifespans getting longer and the quality of life also increasing, a lower time preference may be a better thing to have.
If you are able to save 50% of your net income and survive on the other 50%, then essentially you only need half of your income to survive. That gives you a lot of resilience if you are a working couple, and a lot of room for error. Here is a table of how many years of income you can “buy”, assuming a real growth rate of 5% (which is less than the historical average), and that you don’t work another second of your life:
|Years spent saving 50% of net income||Years of income available|
If you can live off of 50% of net income, then 15 years is all you need to build up an infinite portfolio. Is it very realistic to assume that the portfolio will grow smoothly over time? No, but it’s also not very realistic to assume that you will sit on your ass and never earn another penny in your life, either. The more time your portfolio has to grow, the more resilience you will have to market crashes and depressions.
By maintaining a high savings rate, not only do you greatly brighten your own future, but you also make the world a better place. How do you do this?
- Your saved up capital will go toward financing enterprises and entrepreneurial ventures. You will contribute toward new medical technologies, investments in production and infrastructure, and business expansions, which lead to more jobs and more wealth to go around.
- You will be much less of a burden on your family and the government in your later years, and consequently much less of a burden on the rest of society, meaning the people that would actually have to pay taxes to support you. You will remain a producer throughout your life, adding to society instead of depending on others. You can even travel the world and become a philanthropist, and spend your time building up businesses and helping out communities.
- You will provide the seed capital needed to get the economy through rougher patches. Your money will be invaluable toward preserving employment, investment, and wealth. Frugal people, since time immemorial, have been the prudent ones that have helped their fellow man through tough times and lean winters, and this role is no less important today.
Frugal people invest in themselves, so that they can help others, too.
Frugal people never stop investing in themselves. They know that the best way they can help other people out is to first become the best people that they can be. They are always on the lookout for better ways of doing things, so that they can save their valuable money and time.
How can you stay on a path of continuous self-improvement?
- Continue studying, even after you leave high school or university. Study a second language, learn a trade, or go for that CFA: whatever interests you, and if it increases your value on the market, that’s a good thing, too.
- Surround yourself with people that are better than you, so that you have someone to look up to.
- Above all, stay humble, and realize that you know less than you think you do. Ironically, this attitude will help you to be wiser than most around you.
Think about how the Japanese were able to beat the pants off of the American car makers back in the 80s and 90s. Did they do it by sitting on their asses and watching TV all day? No! They embarked on a process of continuous improvement, making their factories more efficient, and empowering their employees to push forward change. They now employ tens of thousand and have contributed to greatly improving the quality of the overall car market. This is the frugal way of doing things, and you will get great benefits from having the same approach to your own life.
Frugal people make their dollars go far.
It is a maxim of economics that our dollars have a diminishing marginal value of utility, so that we first spend them on what we consider to be more important, and then spend them on what we consider to be less important. This is true, but frugal people take this to another level: We know that we don’t have to spend $5,000 on a couch when a $1,000 couch will do. Sure, we might give up a bit of enjoyment right now, but we understand just how much that $4,000 can bring to us in additional enjoyment down the road. We make a more accurate assessment of the utility of our dollars, not just for today, but for our futures.
What does this bring for the world? Well, a lot more of our money is going toward capital investment, and less is going toward direct consumption. That is better for the environment, as that means less stuff that gets thrown in the trash, and less resources being used to satisfy needs that, frankly, are not that important to us in the grand scheme of things.
How can you lower your time preference?
- Learn to focus on the unseen. As humans, we tend to ignore what is right under our noses, simply because it is not obvious. When we spend $5,000 instead of $1,000 on a couch, we must learn not only to evaluate the purchase in terms of “oh, a nice couch. Oh, a nicer couch!”, but also in terms of “Oh… if I buy this couch, that means we won’t have money for our trip to Hawaii later this year.” or “Oh… guess we won’t be able to afford daycare.”
- Learn to focus on the future. A popular saying talks about living each day as if it was our last. The problem with this is… what if it’s not? Trends are pointing to lengthening lifespans, less deaths from disease, and an increasing quality of life in the future. Betting on the future is a pretty good bet to make, in my opinion.
There is a place in this world for both frugal and non-frugal people, and we can all get along if we just understand each other a little better.
What are your thoughts? Are you ready to embrace frugality? Or are frugal people simply too extreme, and should spend more? I’d love to hear your thoughts.