“Being frugal is the cornerstone of wealth-building.” – Thomas J. Stanley, The Millionaire Next Door
Most self made millionaires built their financial independence through being frugal and living within their means. Warren Buffett is a prime example. He is the second richest man in the world. yet he still lives in the same house that he bought in 1958 for $31,500 ($250,000 in today’s money).
In today’s world, there is so much thrown at us all the time. With advances in technology, these goods look like they will change our lives but the advanced technology comes with a higher price tag too. Look at the new iPhone X; the top model costs €1,349. You can buy 5 laptops for that!
If you are a high income earner it is easy to get into the consumption lifestyle. You have money in your bank account and so you can buy these items on impulse without having to think about whether you can afford it. Suddenly, you are caught in the consumption lifestyle and you are giving the outward impression of being rich without actually being wealthy at all.
What happens then when you are too tired to work as hard as you have been to maintain this lifestyle? You haven’t been accumulating wealth as you should, so you are going to need a major adjustment to your lifestyle when you stop earning. Given that most people live 20- 30 years in retirement, that’s a pretty miserable last few decades of your life. The alternative is that you keep on working just to maintain the life you have become accustomed to.
I hear you saying ” sure, the mortgage will be paid off and the kids will be gone, so I won’t need as much money.” That is not necessarily true. As well as living the consumption lifestyle, you have raised your children to be spenders too. Unless they have high earning jobs themselves, they will not be able to maintain the type of lifestyle you brought them up. Who do you think they will come to when they need some money?
A lot of people believe that a frugal lifestyle means being mean with money. That is incorrect, it means living on less than you earn. What you don’t spend, you save and accumulate wealth. It is a long road but if you save regularly you will get to a position where you do not need to work to maintain your lifestyle. We call this financial independence, the holy grail in financial planning.
Living within your means also has an effect on your children. Not growing up in a consumption lifestyle means they are less likely to have high consumption lifestyles themselves. They will also be brought up knowing the importance of savings and live frugally themselves.
How do you start the road to financial independence? Having a budget and automating your savings.
If you are having issues with your budget or would like to know how to start automating your savings, drop me me an email at steven@bluewaterfp.ie