You Can’t Frugal Your Way to Wealth

It sounds so simple, doesn’t it? If you want to save money, simply spend less than you earn. It’s a common piece of advice that’s thrown around all the time. Expert gurus will tell you about the latte effect, explaining how if you were to cut that $5 latte from your daily routine, you’d save nearly $2,000 a year. And how if you were to keep up with that, you’d accumulate over $30,000 in 10 years thanks to the wonders of compound interest.

You’re richer than you think! Right?

Making Ends Meet?

And it’s true, on some level, that you should spend less than you earn. That’s how you can stave off lifestyle inflation, for example. Living below your means is admirable and it demonstrates a certain level of financial responsibility. You’re adulting so well!

But, you see, here’s the thing. It doesn’t matter how many lattes you cut out or how many other frugal living strategies you put into play if your initial savings and earning level aren’t high enough.

If you’re barely scraping by on $25,000 a year in a big American city and you’re saddled with skyrocketing rents and crippling student debt, there’s only so much you can cut from your life. You can choose to eat out less. You can choose to take the bus.

But, you still have to eat and you still have to get around. It is impossible for you to frugal your way to wealth, because there are inherent limits to how much you can cut out of your expenses.

Burned by FIRE?

By now, you’ve likely heard about the FIRE movement. FIRE stands for financial independence, retire early. Many of the movement’s proponents subscribe to very aggressive savings plans, living well below their means. In some cases, they’re saving (and investing) more than half of their regular income with the goal of achieving financial independence at a much younger age than the traditional retirement age of 65.

You may or may not agree with some of the life decisions FIRE people are making. That’s perfectly fair. You want to live your life for the present, and that means indulging in certain lifestyle choices and creature comforts.

The bigger point, though, is that the grand goals put forth by the FIRE movement are really only possible for individuals who already have (well above) average earning potential. I’m going to say it’s pretty tough to save 50% of your income if you’re already struggling to pay rent each month.

Saving isn’t enough. And indeed, sometimes it makes much more sense to spend money to make money. Not all spending is made alike, after all.

More Building Blocks

Spend less than you earn. That’s how you’re going to accumulate wealth, right? Well, there are at least a couple more pieces to that equation if you want that dream to come true.

First, you should spend less than you earn, but you need to make sure you invest the difference. Simply having your cash sit in a savings account is literally losing you money. That’s where the “compound interest” of inflation will eat away at your savings. If you’re not making a return above the inflation rate, you are literally losing money each and every day.

Second, it’s not just about spending less; it’s about earning more. So, you need to look for ways to increase your income. On top of that, for true financial independence, you need to find a way to remove yourself from the income earning equation. That means building passive income streams that continue to earn money for you, even with little to no further input on your part. These systems make money while you’re sleeping.

And, before you ask, blogging is not passive income, but it is a potential pathway to a better life. One with financial independence and time freedom. In this way, it’s not just about cutting out unnecessary expenses; it’s about looking for ways to gain more of what you love.