How fast is frugality?


I love it when I read interesting posts on the personal finance blogs and other forums … take Mighty Bargain Hunter‘s view that frugality is the fastest way to a better bottom line:

It shouldn’t be the only way you’re improving your bottom line, but it does give results, fast.

For someone who already has their finances under good control, some money-saving activities are simply too little payback for too much time … [but] what about the people who aren’t as well off?  Maybe they’re making $40k or $50k, but have a lot less saved up than they probably should for their age.  This is the situation for which packing your lunch, buying generic, buying used, skipping Starbucks, and clipping coupons will help.

And it helps immediately.  The week you take lunch to work at $2 a day instead of hitting Subway at $5 a day, you’ve improved your bottom line by $15.  Boom.  Or brew your coffee in the morning instead of hitting Starbucks.  $10 per week.  Boom.  Instant gratification.

Building up income streams takes longer, especially the kind of income streams you want (passive ones) … higher income may be better in the long run, but that’s the long run.

Frugality is here and now.

Businesses have taken this view for a long time now … they call it cost-cutting 🙂

Usually a business that is spending its time cutting costs is a business that you should selling out of, not buying into …

… it’s current finances may begin to look great, but its future may be bloody awful (that’s why it’s busy cutting costs!).

On the other hand, a GREAT business invests in their future (sales and marketing, product development, R&D, production, etc.) while managing their costs.

So, let’s put it to the test: how fast is frugality?

Well, to find out, I put four scenarios into the Magic Excel Blender and here’s what it spat out:

Save: If you earned $100,000 a year and cut corners so that you could save 20% to stick in your mattress, at the end of 20 years, you’d have $400k stashed away.

Invest: If you only managed to save 10% a year and spent your time investing the proceeds wisely (@ 8% p.a.) you’d end up with $460k in (say) stocks.

Save + Invest: But, if you did the sensible thing and invested your savings instead of stashing it under your mattress (in other words, save 20% then invest it @ 8% … hardly rocket science), you’d end up with more than $920,000 after 20 years, and still have dividends each year to live off … a much better result for only a little extra work together with some belt-tightening.

MM101: However, if you did the really sensible thing, and built up your income (so that you can afford to reinvest the dividends), saved well (at least 20%, but only of your original level of income), and invested both the dividends and the savings wisely (@ 8% p.a.) after 20 years you’d have over $2.5 million.

Frugality may be quick (in that we can afford to pay a bill; pay down a pressing loan), but will never make us rich …

… that’s why we take a multi-faceted view to personal finance:

Making Money 101 – to ensure that our costs are under control and free up some cash to help us invest in MM201

Making Money 201 – to grow our income by investing what little cash we may have (to begin) wisely and maintaining sound MM101 ‘habits’ to ensure that we have ever-growing streams of investment income, keeping our growing personal ‘needs’ (read: expenses) in check, so that we can eventually reach our Number

Making Money 301 – to manage our Number (i.e. our nest-egg) so that it lasts as long as we do, while living the life that we have designed for ourselves, not the life that others have resigned us to.

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6 thoughts on “How fast is frugality?

  1. Great little summary. It’s good to take a moment every once in a while and see the ‘big picture’ and remind yourself of a few basic principles.

    Kinda like taking a little helicopter ride to view over the big, beautiful forest while you’ve been busy down there whacking away at one little tree. 😉

  2. i’m a little confused about the saving, investing, and reinvesting the dividends. part. i’m 26 and i’ve got a 403(b) that i’m putting 17% of my salary into, $5000 a year towards maxing out my Roth IRA, i’m building an emergency fund at a rate of about $500/mo and attempting to pay credit cards down (after which i won’t have any credit card debt EVER, EVER again. seriously.)

    anyway, i know this is gonna sound really stupid, but i want to be smart with my money, and i’m making a lot of sacrifices saving so i want those sacrifices to be worth it in the longrun. is dividend reinvestment something i have to do myself on a regular basis, or does it happen automatically? i saw a financial advisor who basically took all of my stuff and put it in mutual funds (JALBX), and my 403(b) is in a TIAA-CREF 2040 retirement date fund. truth be told, i have NO IDEA how this stuff works.

    i like your blog a lot. thanks for all the great information and interesting questions you pose. i’m reading through it tonight and taking notes. 🙂

  3. @ Zach – The chances are that if you are investing in a low-cost index fund (you don’t need to pay an adviser to do this for you … just go to or then your dividends are automatically being reinvested.

    If your financial adviser is doing stuff FOR you that YOU don’t understand, fire your adviser!

  4. okay cool. i haven’t seen any checks or any “realized” money directly from any of my investments so i guess that means the dividends are being reinvested…

    i kind of hate my financial advisor and feel like i know more than he does but i committed to him for a year (with ameriprise) so i’m kind of stuck with it for another 8 months.

    that said, getting a financial advisor was a swift kick in the ass to myself to get my act together and start taking these things seriously. i paid a flat fee ($500) and he helped me transfer all of my accounts to one place. i’m probably paying fees for all of this, but truth be told it’s made me much more responsible and kicked my savings into high gear, increased my 403(b) contributions, made me more aggressive about credit card payments…

    at the end of the day all of these are things i am doing myself, and now i know i don’t need someone to babysit me or steer me in a questionable direction. i just don’t know if i can fire someone… i’ve never been fired from a job, i’ve never had to fire someone, and it’s a conversation that i really don’t know how to approach at all. i made a mistake going with a big brokerage firm and someone who doesn’t show an interest in my personal goals. next time, i’m going to schedule quarterly meetings with someone for an hour, even if it costs a little more, and that person won’t have a vested interest in any particular product. would have been nice if i had done that four months ago, but the past is the past.

  5. Pingback: Debt Snowball, Debt Shmowball … as long as you’re RICH! « How to Make 7 Million in 7 Years™

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