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