Frugality – The Benefits and Dangers Explained
Frugality is often presented as a new religion. The internet seems to be full of people who preach frugality these days.
I find frugality an interesting concept and have philosophized about it on more than one occasion. Evidently, if you want to become financially free, the road becomes shorter if you become more frugal with your money. So, what is frugality and what makes frugality so popular these days? What are the benefits and what are the dangers of frugality?
In this article I’ll explain you everything about frugality.
If we look at Wikipedia we can find a pretty good definition of frugality:
“Frugality is the quality of being frugal, sparing, thrifty, prudent or economical in the consumption of consumable resources such as food, time or money, and avoiding waste, lavishness or extravagance” - source (https://en.wikipedia.org/wiki/Frugality)
Simply said, people who are frugal are among other things, very conscious about their money and about spending it lavishly.
As with everything, there are many different ways to approach frugality. Frugality is mostly a means for people who have some sort of goal like financial freedom.
But, it is also easy to lose yourself in it and let frugality become an end to itself.
Why is frugality so popular?
Frugality has grown in popularity greatly the last few years. I think that the popularity of frugality is mostly accelerated by the three events and trends that I’ll explain you below.
Lessons learnt from the economic recession
We have just bounced back from a major economic recession and have learned many wise lessons during this recession.
As the economy progresses it is quite likely that many of us will face a new recession somewhere in the future. If the next recession is as severe as the previous one, then unfortunately a lot of people will lose their jobs or have to close their business.
If we’ve learned one thing from the previous recession its that you’ll need a stash of rainy day money to live through the bad times. A lot of people realize this and are cutting back on their expenses.
Being frugal with your money is a good way to be prepared for tough times that may come.
An increased consciousness about lifestyle inflation
A lot of younger folks are coming to realize that life, for many people over the last few decades, has unfolded into a rat race.
Money, and the luxuries one can buy with it, are considered a status symbol for many people. Those who fall into the trap of competing with others for these status symbols soon find themselves trying to “keep up with the Joneses”.
The “keeping up with the Joneses” lifestyle particularly unfolded in the 80’s, 90’s and 0’s. The economy grew and people’s incomes crossed a threshold where they would have money left after providing for their primary needs like food and shelter.
Many people started spending this excess money on material luxuries as a display of wealth and status.
They started to compete with their families, friends and neighbors. A bigger house, a new car, fancier tech gadgets and even yachts were all bought on credit and loans. While their parents were living paycheck to paycheck to be able to pay for their primary needs, they were and perhaps still are, living paycheck to paycheck to finance their lavish lifestyle.
Then, a significant pay raise comes along…. but nothing changes.
Their spending increases even more and they remain living paycheck to paycheck. Their credit card limits increase and they will remain stuck in the treadmill. And then… shit hits the fan.
A recession comes by and they lose their job. They have no savings and their lavish lifestyle can’t even be sustained for a few months without them going broke. They are forced to sell their house, their car, the boat and all the other stuff with great losses to pay off their debt.
They get hit so hard that it takes them years to recover.
I believe that, particularly people who practice frugality are quite conscious about this phenomenon. A lot of them have seen their parents or other family members living this lifestyle and are very aware of how dangerous and toxic it is.
Not only is it financially dangerous to live from paycheck to paycheck. It is also toxic for the mind.
Academic research has shown that the pursuit of materialism leads to anxiety, stress and depression. The amount of stress it gives to always be competing with others in every aspect of one’s life and to always be living on the edge of financial bankruptcy is enormous.
Instead of doing the same they choose to be frugal with their money. This way, debt won’t kill you and you will always have some rainy day money for when shit really hits the fan.
The increase of life expectancy and the retirement age
Better medical technology and an increase of welfare allows us to live longer. Though this is a good development, it makes many countries face issues regarding retirement.
On average, people profit from their retirement funds longer and thus more money for retirement funds is needed.
Retirement funds and governments could no longer sustain everyone retiring at 65. As a measure, a lot of governments are increasing the age of retirement. This is evidently not so unfair. Considering that we have a longer life expectancy we will need to continue working for longer to balance the retirement plans.
However, it just doesn’t feel the same to retire at 71 as it feels to retire at 65. Hence, people are taking matters into their own hands. They are no longer relying on the government pension plans with the insecurity surrounding the retirement age.
A lot of frugality enthusiasts are cutting back on their expenses so that they can take retirement in their own hands.
How do you practice frugality?
There are a million ways to practice frugality but they all come down to one thing. Being thrifty with your money.
The first thing about practicing frugality is to become conscious about what you value, what your objectives in life are and how frugal you are willing to be. Frugality means that you’ll have to give up things that you may like.
Luxurious goods, dining out, fancy cars and your brand-new iPhone are examples of these. What giving up these things provide you in return is money. Money that can be used to acquire financial freedom or to reach other financial goals.
Determine your objective
The first step in frugality is determining what you want. As a frugalist you’re obviously going to cut your expenses and do something else with the money. It would be foolish to put the money in a bank account and let it grow into millions just to take it with you into your grave.
As a first step it is important to determine an objective. Why do you want to be frugal?
Most people are frugal because they want to use the money to retire early. Retiring early is what gives them more freedom to do what they want in life. Some other people whose paths I’ve crossed with are practicing frugality because they want to cut down on their working hours. They figure if they cut their expenses then they need less income.
Whatever your goal may be, it needs to be a clear and strong desire in order to keep practicing frugality on a long term basis.
Map your income and your expenses
One of the major requirements for frugality is insight in your finances. To get insights in your finances it is important that you map your income and expenses thoroughly.
A lot of people tend to skip this step. They think that they have a good idea about where their money flows. However, often this “good idea” is rather skewed.
I highly recommend you not to skip this step. Mapping one’s finances often brings very surprising insights. It’s very easy to lose track of exactly how much money you spend.
Especially in some domains like subscription services, eating out and online shopping the expenses tend to rise quickly without one noticing.
There are several ways to map ones finances. The first step is to extract the data from your bank account. Most internet banking portals offer you the opportunity to do this. You can do this for a month, several months or even a year.
I’d recommend you to do this for at least a year because you will be able to see trends in your expenses. After this, put all the expenses in an excel sheet and start categorizing them. Groceries, rent, mortgage, subscription services, shopping, utilities, insurance etcetera.
Classify your expenses
After you have categorized your expenses you need to start classifying them. Classify them based on if you can or can’t live without them. Evidently there are expenses that you can’t live without.
You need food, a roof over your head, electricity and such to be able to sustain a normal household. However, don’t fool yourself here.
You don’t need Netflix, Spotify or that second car to sustain a normal household.
What brings you joy and happiness?
After you have categorized and classified your expenses, take all the expenses you can live without and rank them according to the amount of happiness that these expenses give you.
The easiest is to just rank them from 1 to 5 where 1 equals “meh” and 5 makes you smile about just the thought of it.
Now, cut out everything that is 3 stars and lower out of your life. It’s just not worth spending money on. Cancel the subscription, sell it or whatever you can do with it. Just get rid of it.
Cut costs of mandatory expenses
Now, look at the expenses you have classified as “can’t live without” and start thinking about opportunities to cut costs. There are many opportunities to cut costs in mandatory expenses.
When was the last time you checked if your insurances are still the cheapest? Do you really need to eat steak for dinner twice a week? Do you really need to shower for 40 minutes? Do you really need these A brand groceries?
The opportunities to cut costs here are endless. Identify all areas where you can cut costs and estimate how much money this will save you every month.
Calculate your projected savings
After you have determined which expenses you will cut completely and which expenses you will try to downsize you can calculate your projected savings.
Calculating your projected savings is important for a few things. The first is that it will show you what you can achieve with being frugal. It will give you the “wow, can I save so much money?” surprise.
It will also be used as input for your further game plan. If you plan to retire early then you need a good ballpark figure of the amount of money you will have left every month. The projected savings are also used to keep you on track and in balance.
If by the end of the year you have only 30% of your projected savings in actual savings you might come to the conclusion that you have fooled yourself..
Take action immediately
After you are done calculating and all the stuff, take action immediately.
All the steps above set in motion a chain of thoughts that you’ll want to have when making tough decisions to get rid of your excess luxury. If you sit down and wait for a few days then the inspiration will fade and you will likely be back where you started.
Cut all the needless expenses immediately. Cancel all the useless subscriptions and sell the liabilities that drain your money.
Create your personal money plan
So, now you have a goal and an idea of how much money you will have left you can create a money plan. Money plans are quite personal and depend on your goal, the amount of risk you want to take and how much time you are willing to spend to manage your money.
What will you do with the money and how will you achieve your goal? Are you going to invest it? Where, and how? Or do you prefer to just save it? How will this affect the timeline of your plan?
Creating your money plan will take some serious consideration and time. Don’t neglect it.
Track your progress
Track the amount of money that you save or invest every month. This will constantly keep you in check with your expenses.
By the end of the year you can compare your projected savings from step six to your realized savings. If only 30% of your projected savings have been realized then you might want to consider this a hint that you have been fooling yourself.
Have you really cut all the needless expenses or are did you give in to your desire and bought that new iPhone?
From experience I know that some expenses have a way of warping back into your life. My girlfriend and I for example are really into preparing tasty meals. However, cooking extensively has a price tag.
Thus, we decided that we will eat quick, easy and cheaper meals from Monday to Saturday and that we will cook extensively on Sundays. However, often we find ourselves cooking extensive meals on weekdays as well.
Tracking your savings is an excellent method to keep yourself in check with your goals.
Increase your income
When we talk about frugality people often focus on just one side; the expenses. However, frugality is only a means to an end. The goal is often gaining more freedom by for example retiring early.
Cutting your expenses and investing the money well will get you far. But, increasing your income will get you far as well. There are a lot of ways to increase one’s income.
Getting a promotion, starting an own business or hustle on the side. You can save or invest this extra money to contribute to your goal. Want to know more about how to increase your income? Read it on the increase your income page of my blog.
A last note on frugality
I’ll close this post with my view on frugality and how it can benefit someone.
I think that frugality encourages many good things. It offers people a new insight on their finances and how they spend their money. Being conscious about one’s money is a good habit. It prevents money stress and encourages people to be prepared for rainy days. It also teaches people to have a long term focus on life.
So, in its essence I think that frugality offers a lot of benefits.
However, as with many things in life I practice and encourage moderation. Sometimes I am wandering around on networks like Reddit and Quora and I stumble upon things that surprise me. I read stories about people who brag about how frugal they are. About how they live in apartments without a bedroom and eat noodles for breakfast, lunch and dinner seven days per week.
As much as I encourage a good reflection on one’s finances, frugality should fit one’s interests and desired lifestyle. It shouldn’t be a means for people to reach some kind of moral high ground.
If you practice frugality to give yourself a superior and self-righteous feeling over others who are less frugal, you’re doing it for the wrong reasons.
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