FRUGALITY
“Make no expense but to do good to others or yourself; i.e., waste nothing."
This is the 5th of the 13 Virtues of Banjamin Franklin. This article is part of an overall Chapter in my upcoming book, WEALTH VIRTUES.
People often think that frugality means “doing without” and to deny the pleasurable things in life. Rather we need to look at it as a means of appreciating what we have, and to make the best use of our resources to accomplish goals we set for ourselves.
The means to achieve a frugal lifestyle will include the following practices:
- Reduce or eliminate costly habits, vices, and unhealthy foods.
- Reduce the amount of waste we create intentionally or unintentionally.
- Curtail the need for instant gratification by restraining ourselves from making unnecessary purchases.
- Improve efficiency by optimizing our time and streamlining the way we accomplish tasks.
- Defy the need to spend money on things just because it is popular. Some people try to “Keep up with the Jones’” without realizing that the Jones’ are currently deep in debt.
- Explore ways of getting the things you need for free or through the use of barter.
Frugality builds upon the Virtues Franklin placed before it - Temperance, Silence, Order, and Resolution. Temperance teaches us to restrain ourselves to attain a healthy lifestyle and not eat or drink to excess (care of self). Silence allows us to open our ears to ideas and solutions. Order allows us structure and a freedom from clutter allowing us to focus on our goals. Resolution is the practice of diligence allowing us to overcome short-term problems to attain long-term goals. Frugality puts to practice the lessons of the previous Virtues to gain and preserve wealth for the things we need or desire.
The book The Millionaire Next Door by Thomas J. Stanley and William D. Danko is a great study of real wealth. Stanly and Danko have seven rules for working your way towards wealth. The first rule is, always live well below your means. Buying expensive items simply for providing others the illusion that you are wealthy leads you to a cycle of depreciating assets. For example, the real value of $200 sneakers is simply the cost of materials and labor – or roughly less than twelve dollars. Once they are on your feet, you have just lost $188.00. Is that wise? Is it better to have a $40,000 Mercedes while paying over a thousand dollars a month on an item that depreciates in value (unless you can truly afford it), or a low mileage pre-owned pickup truck for $12,000 in cash? Investing the difference will allow you to buy things of real value, and save for the “want to have” items when you can afford them.
An entrepreneur I know started her business with a batch of fresh water pearls, some tools and the talent for making exquisite necklaces and bracelets. She started on weekends in Washington D.C.’s Eastern Market selling a quality necklace for about $99. This was five times the cost of her materials. Smart, frugal people would come and buy from her because, they knew that similar items of same or less quality were selling at the department stores for $500 to $600. They obtained a wonderful piece of jewelry at an 80% savings. The creator of the pieces went on to build a multi-million dollar business in a few years, and further in the book, WEALTH VIRTUES, I will go into more depth on her interesting story. She herself applied the lessons of frugality for many years to focus on the long-term goal of real wealth.
The lesson of frugality should also prompt you to save first, spend second. One of the things I did early in my life was to put as much as I could into a 401K. Soon I was putting the maximum federal limit away plus more for a Roth IRA and my wife’s IRA. The remainder is what we used to buy our home, cars, furniture, etc. I was shocked recently to learn that the average person in their 40’s earning a median salary of $60-80 thousand only had about $50,000 saved. By putting away the maximum amount possible, a person can reach 8 times the average by the time they reach the same salary level. Barring any unforeseen events, and proper adjustment of assets for risk based on age, anyone can have at least several million dollars to live comfortably after age 65.
Do you think it may be too late for you? Even a person who is 44 and has little or nothing in their 401K can make enough contributions to allow for a comfortable retirement. Starting in 2009, the maximum federal 401K contribution limit for an employee is $16,500. If a person where to put away only the $16,500 for the next 20 years, with no matching employer funds and an average of 10% annual return, it is possible that this person will have $1,064,660, with an annual retirement income of $117,000 until the age of 90. Realistically, the average rate of return in the market over 30 years is 11.8% and most employers have matching funds to add to your account. If you are thinking that you cannot afford to put away the maximum federal contribution, then lower your retirement expectatons, or increase your use of frugality by better evaluating your wants vs needs.
For those of you that have 40 years left until retirement, consider maximizing your 401K contributions as well as contributions to a Roth IRA. Over 40 years, the results could put you well over $10 Million in retirement savings. If you are starting out in investing, 2009 is a tremendous starting point. The market is at a wonderful low. If guys like Warren Buffet are buying, so should you.
One of the lessons of Robert Kayosaki, the author of the Rich Dad Poor Dad series of books, is that you always "pay yourself first." By automatically deducting the maximum federal limit (or whatever you can reasobaly afford) for 401Ks, and IRAs from your paycheck, the balance should prompt you to live frugally and within your means. That does not mean you cannot have luxuries. You will just able to better plan the purchase of such items.
Remember, Frugality does not mean doing without. Rather, it is a discipline that when practiced properly will lead to real long-term wealth.
