I’ll admit I used to think frugality was a distasteful lifestyle forced upon the poor. I believed it was synonymous with never buying new clothes and dumpster diving under the cover of night. Boy, did I have a lot to learn. And learn I did — and I continue to learn — that it is the path to building wealth with any income.
I’d say the most fun I’ve had learning the fine art of frugality has been in reading The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William D. Danko. Webster’s dictionary defines “frugal” as behavior characterized by or reflecting economy in the use of resources. The opposite is “wasteful,” a lifestyle marked by lavish spending and hyperconsumption. Wealth has nothing to do with how much you earn. It’s about what you do with it and how much you keep.
Ask most people to name a financially savvy American and a regular guy like 41-year-old Paul Kieffer, profiled several years ago in Money Magazine, wouldn’t even be in the running. At that time, Kieffer lived in St. Charles, Minnesota (population 3,735), spent about $38,000 a year to support his wife and two kids, drove a three-year-old used car, refused to sign up for cable TV and worked six days a week at the local Red Wing shoe store. Oh, yes. Kieffer also happened to own the store, as well as five trailer parks in the St. Charles area, which gave him a net worth of $1.4 million.
The reason folks like Kieffer are financially independent is because they live understated lifestyles. They live frugally. They aren’t showy; they are careful how they spend and invest their money.
Stanley and Danko identify the following self-imposed rules of self-made wealthy Americans:
Live below your means. Reduce your spending as necessary, so you eventually save 15 to 20 percent of your annual income before taxes.
Meticulously budget your spending. Make a belt-tightening plan for everything you spend, and do whatever it takes to stick to it.
Take on secured debt sparingly. Every dollar you pay in interest is one less you have to invest. Unsecured debt is not in the vocabulary of the authentically wealthy.
Participate in serious tax sheltering. Pay as little as legally possible in income taxes by maxing out on contributions to tax-deferred retirement accounts.
Launch a disciplined investment plan. More important than the amount of money you put away now is establishing the habit of regular investing.
Get help from a sharp fee-only financial advisor. Such a professional can assist with a wide range of financial needs for a flat fee. To find a good one, go to the National Association of Personal Financial Advisors website. Another good resource is the Garrett Planning Network.
Work hard, ideally in your own business. Salaried workers are pretty much limited to what an employer will pay them. Savvy business owners can grow their business and thereby increase their income.
Keep in mind as you consider what role frugality will play in your household and in your life that any of the people who flaunt the trappings of success often have little wealth. I’m told that Texans describe these people who live flashy lifestyles in a very simple yet colorful way: Big hat, no cattle!
By Mary Hunt