By Brice Hogan
I want to take some time and really delve into the problem that we have as a nation in wasting the money we spend and how to avoid it and gain real wealth. I want to start out with an observation that most people make including myself on occasion. I grew up in Michigan in a fairly affluent area. My family was not rich by any stretch of the imagination but we knew or thought we knew some family’s who were, and another family who appeared to be relatively plain but was not.
I will refer to the affluent gentleman as the Mr. Jones and the other gentleman as the Mr. Smith. Mr. Jones owned a beautiful home in an affluent neighborhood where you expect to see million dollar homes. He owned a high profile consulting business. Not only that he had a membership to a country club that was fairly exclusive, drove the nice BMW, had a boat all the nice expensive toys that you could dream of. His appearance was impeccable he wore a nice Armani suit, and had really expensive shoes. He exuded that persona of being wealthy.
On the other hand the Mr. Smith was relatively plain. He owned a window washing company. He owned a minivan for transportation that he used to carry his equipment. His appearance was neat but not extravagant. He really looked like the average Joe. The one thing you would not think about Mr. Smith was that he was wealthy or had money.
Eventually I found out that even though Mr. Jones made a lot of money ($300,000 a year) but he also spent a lot, and eventually he went bankrupt and had to get rid of everything. His marriage crumbled and he was reduced to nothing.
Mr. Smith on the other hand, I found out, did very well. He made a decent living but his wealth was in the millions. The reason behind this was because he did not waste his money on frivolous things.
The word that might best describe Mr. Smith is frugal. Now when I was a kid I thought frugal meant cheap. So I really didn’t want to be frugal, however the real definition of frugal is “behavior characterized by or reflecting economy in the use of resources� (Webster’s dictionary)
Day to day we observe the flash bulb lifestyles of our favorite pop star or sports star. The fact of the matter is that a relatively small number of people are able accumulate wealth. Most of the time they throw it away on lavish expensive stuff. That is why year after year we see these people end up filing bankruptcy.
I was talking to a client the other day and she was explaining to me her displeasure with not making any progress with her financial plan. I asked her what she was doing to work on it. She paused for a moment and said “Now that I think about nothing.� I asked her what her spending habits were like on a day to day basis. She said in matter of fact way, “Well I go to Starbucks every day and get 2 coffee’s� I clarified “So you do that what 5 days a week.� “No�, she said, “I go every day.� I was flabbergasted I couldn’t believe it. I asked her how much she spent on coffee each time she went. “About $7� “So basically each month you waste $210 on coffee while you languish in debt.� “But I need it� was her excuse. So I wanted to get her attention. I said, “Well let’s take that $210 (which translates into $2400 wasted on coffee every year) and invest it year after year for 10 years in an account that yields 10%. If she did that in ten years she would have over $500,000. She right now is making the choice to sacrifice a cup of coffee for a half a million dollars, and her reasoning behind it was because she needed that coffee everyday to keep her going.
It is amazing the stuff we will waste money on for the sake of appearance. We do it every day. When people ask us out lunch we feel the social pressure to go and spend the money we don’t have. We spend money, really, because of the social factor. We want to appear that we are keeping up with the Joneses. But as I illustrated in our real life example the Joneses are sinking and those who choose to live frugally are not.
Living frugally is all about opportunity cost. It is what we choose now that will affect our wealth later. A great example of this is Warren Buffet. I you don’t know if you know who he is, but he happens to be the 2nd richest man in the world. His net worth is somewhere around $30 billion. For a man this rich he still likes eating at McDonalds, he drives a Cadillac and lives in the same home he bought over 30 years ago. His philosophy is really the definition of frugal. He would rather buy a $15,000 car than a $50,000 car and use the $45,000 to invest and grow his money.
So how can you develop a frugal mentality? It really comes down to 3 things: Know where your money is going, understand value based spending, and discipline.
To be Frugal you need to know where your money is going. A habit of wealthy people is know where every dime is being spent. If you know where it is going you can stop leaks in you finances. Something to consider would be to start a monthly way to track all of your expenses and then review it at the end of the month. By doing it at the end of the month you can see where your money is going.
Develop a value based spending philosophy and not a social peer pressure philosophy. What I mean by that is buy what you need not what you want. When you purchase something ask yourself is this something I need and at what expense am I getting it at. Do not buy something because you feel pressured to by friends or family.
Be disciplined. When you get into the situation where you are feeling pressured by friends or family exercise discipline which means not folding in to the pressure. As you develop that discipline, you will see that you will be able to save yourself a lot of money which you can then in turn reinvest in something that will grow your money.
Being frugal for people who are wealthy is a way of life. It is something that is engrained in their DNA. These people do not waste money. They use every single dime that they save to grow their wealth. Be like MR. Smith, Warren Buffet and you too will frugal your way to wealth.
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