The Definition of Frugal
Frugality is a term often used synonymous with being "cheap". However, is that really a fair comparison?
What is frugality really?
1. Frugality arranges itself with value as the central tenet.
So what should we value? Value your time, because there is no amount of money that buys more of it. Value your life energy, it is not an infinitely renewable resource. Value your freedom, the freedom of choice (yes, you always have a choice). Value your relationships, because this is really all that you have in this world. Value your beliefs, because nobody can take them away from you.
I admit, most of the above is more from a philosophical life perspective. Most of you are looking for the secrets to money and wealth. So what should we value from a financial perspective? From a financial perspective you should value:
Saving money is one of the most important values of frugality. Frugal people differ from "cheap people" in that frugal living takes a long term view on spending money rather than a short term perspective. A cheap person has a tendency to assess the cost in a short term horizon and miss the benefits of how extra money can accumulate into significant wealth over time.
For example, avoiding the more expensive organic produce at the grocery store solely based on price is a characteristic of the cheap. A frugal individual will consider the long term potential reductions in healthcare spending of eating healthier organic produce with lower pesticide and herbicide contaminants as part of a thorough cost-benefit analysis.
2. Frugality is also the act of gaining awareness.
Become aware of your daily routines. Assess your spending habits and scrutinize your budget. Do you have a list of things that really make you happy? If not, sit down right now and list the top five things that have the potential to make you smile everyday (do not read another word on this site if you are not willing to sit down and literally write down your five sources of potential happiness).
To become aware you need to become present in life. Become conscious about where you are directing a majority of your time and energy. This is about efficiency, not goal setting. I am not a firm believer on the traditional concepts of goal setting (which you will notice in future posts). Gaining awareness and becoming present, avoiding the torment of merely existing through life, is actually a potent wealth generator throughout life.
3. Frugality is about gaining back your freedom.
We all had it after birth, but lost it shortly thereafter. I am of course referring to our freedom. Freedom to choose and freedom to live your life according to your standards, not others.
Let us be honest, there is very little you can do in life without money. Period. At the end of the day, most people would be much better off in life with more savings and less debt. I suspect quite a bit of mental health issues would be drastically improved if just those two numbers were adjusted, meaning less debt and more savings.
Consider the correlation drawn between mental health status and money problems according to a Money and Mental Health survey:
Remember however, correlation does not equal causation. The survey above could just as easily mean that these folks had mental health problems long before they had money problems. Nevertheless, there is a strong correlation between mental health problems and financial difficulties, regardless of which one happened first.
Using the above findings, I would suggest that most folks who would like to improve there overall well-being take a look at their finances. If you happen to also find yourself in problem debt or financial struggles, perhaps consider if improving your financial health would make life much more tolerable.
Personally, I believe that improving debt to savings ratio- amount of debt relative to your savings- is a forceful method towards gaining back your freedom in life.
Think about what life would be like if you did not have to spend your 40's and 50's sprinting towards retirement savings. Think about how much freedom you would have if, by age 40 (or 50 - if you are older than this my statement likely will not apply), you no longer needed to save another dime for retirement because you were saving aggressively towards retirement when you were younger. You could spend these years traveling with your family, embarking on new experiences, all while likely enjoying some of your best earning years. Your children (if you have any) would like be of the age where they can also benefit from these experiences and memories as well.
So how do I gain back some freedom in my life? By examining your "Margin of Potential" against your income and your expenses. Quite simply, Margin of Potential = Income - Expenses
How to Assess Your "Margin of Potential"
Everyone has a "Margin of Potential" equation. Whether your are on public assistance, or make over six figures, this equation applies to you.
However, I frequently find that most folks just take the difference between their income and expenses, and turn around and spend it anyway. That is why I call it the margin of potential. The difference between income and expenses is not saving unless you do something with it!
After calculating your margin of potential, write down the top three things that you do with that number. If saving and investing are not in the top three, we have a problem.
If you do not have a positive number when assessing your margin of potential you will likely find yourself amidst significant financial troubles. One might ask, "How could I possibly have a negative number?". Answer: credit. You can borrow your way right into misery and allow your expenses to be greater than your income (the "American Dream").
The truth is, frugality is really about making your margin of potential a positive number. Of course, one way to make this number positive is simply make more money. However, for many, increasing income is quite a bit more difficult than decreasing expenses. Decreasing expenses is where frugality truly shines. By lowering your own cost of living and decreasing the inflation of your lifestyle, you will lower your expenses and give yourself the opportunity to have a positive margin of potential.
So what will you do next after establishing a positive margin of potential? My hopes is that you will begin to investigate what using this margin can truly do for your happiness.