I am a big believer that saving is one key component to building wealth. After all, saving is part of a simple wealth equation of
Earn + Save + Invest = Wealth.
I’ve been a saver all my life. It probably has to do with growing in a financially poor household.
My parents worked very hard just to put food on the table and a roof over our heads. When they were just trying to make ends meet, there just wasn’t much money for anything else.
The choice of which nice pair of Nike sneakers to buy or which JanSport backpack to get wasn’t something that occupied my mind as a child. My parents simply didn’t have the discretionary money to indulge in such spending.
Despite not having money to spend when I was younger, I still had a very happy childhood. That is when I learned I don’t need money to be happy. And I know that I can live with very little money in the bank since that was how I grew up.
No wonder I think there are benefits to growing up financially poor in helping to build wealth later on in life.
When I graduated from college and started working full time, it was pretty easy for me to continue my frugal ways.
The top 3 household expenses are housing, transportation, and food according to the US Bureau of Labor Statistics. On average, they account for over 60% of annual household expenditures.
I Was Able To Save On Top 3 Expenditures By Living At Home
I was fortunate enough to be able to save significantly on those top 3 expenses when I started working full time.
I lived at home with my parents the first few years working my corporate job right after college. That provided me with huge savings early on by not having to pay rent, which is typically the number one expense for most people. I saved a boatload of money by living at home for the first few years of work.
Living at home also brought a number of other economic benefits which further reduced my expenses. Whenever I needed to use a car, I can just use my parents’ car. That sure reduced my overall transportation cost.
Additionally, for the first few years, I mostly ate breakfast at home, brought lunch from home into work, and ate dinner at home. Actually, I spent countless dinners at the office but those dinners were covered as corporate expenses for working late nights. My food expenses were kept at a minimum outside of the occasional meals with friends and dates.
That served as a great financial start for me in building the foundation of my wealth. I invested the money saved during those early years. I was able to buy my first home from those invested savings.
I also became a 401(k) millionaire because I started saving my money at such a young age.
Extreme Savings Is Good While In 20’s
So that is a long winded way of saying I am a big fan of being frugal and being a saver. However, I do think one can be too frugal. At times, savings can just be too extreme.
Extreme savings can provide for a very good financial start for someone starting out. There is very little expectation for someone in their early to mid-20’s to have money. Hence, there is very little expectation for someone that age to spend money.
You can get away with living in a 5th floor walk-up, shoebox apartment with a couple of roommates to save on housing cost. That is simply an extension of college. There is no need to have a lifestyle upgrade so early on.
Why Extreme Frugality Is Bad
But I do think everything needs to be done in moderation. That is why I believe there are 8 negatives with extreme frugality for someone in their 30’s and beyond.
Negative #1: Extreme Frugality Is Hard To Sustain For An Extended Period Of Time
I am a believer that in order to be wealthy, most people have to play the long game. Sure, there are certain people who can create multi-billion dollar companies in a short period of time such as Instacart.
The average millionaire is minted in their late 50’s. It takes time for accumulation of assets to drive the wealth up.
I think extreme frugality early on is a great way to save the initial investment nut that can be put to investing to generate more money in the future. After all, there is no more powerful force in the financial universe than compounding.
But with anything taken to the extreme, I believe it is very hard to sustain in the long run.
Eating ramen noodles and taking free strolls at the local park can only last for so long. At some point, you might start to wonder to yourself “what’s the point of this? What’s the whole point of saving money if I don’t use money?”
I would classify myself as extremely frugal my first few years right after college. Obviously, I had the benefit of living under the roof of mom and dad. But it was hard for me to go beyond a year or two even for a person who grew up in a financially poor household.
I just don’t believe this can be a long term sustainable model for most people.
Negative #2: Extreme Frugality Sets Up False Standard Of Living
Extreme frugality also sets up an artificial standard of living for most people because there are just too many sacrifices needed when compared to a normal lifestyle.
For example, I used to bring a brown bag to work every day for the first couple of years of full-time work. What I ate for most days was a ham sandwich, some fruit slices, and a juice box.
Unless I wanted to eat a ham sandwich every day for the rest of my life, the amount of money saved by bringing in a ham sandwich from home every day isn’t a true reflection of what my standard of living will be in the future.
And no, I wouldn’t want to only eat a ham sandwich for lunch for the rest of my life.
Negative #3: Spending Can Increase Substantially Later In Life, Especially With Kids
People experience many changes in life. What is someone’s spending habit early on won’t necessarily be the same later on in life.
Lifestyle inflation is real. It is hard to maintain a Spartan lifestyle with a few kids in tow.
While I can survive with one pair of sneakers for years, a growing child would require numerous pairs of sneakers.
We’ve seen the highlight number of how much it takes to raise a kid in America. It is over $200,000. Of course there is more cost effective ways to raise kids, but the point is the same.
It will cost extra on raising a family. That is why extra frugality for an extended period is tough. It can happen if there is no change in family situation.
Once kids come into the equation, all bets are off.
Negative #4: Savings Has Its Limits; It Is Better To Increase Earnings
There is only so much a person can save. The savings amount has a limit and that limit is based off of the amount earned. Even a super extreme frugal saver can’t save more than 100% of income.
Wouldn’t it be better to focus on increasing earnings instead of trying to squeeze the last cent of savings? Unlike savings, there is no limit to how high one’s earning can be.
Instead of spending hours a week on clipping coupons to save $20 on your next grocery run, wouldn’t it be a better economic use of your time to spend those hours per week on starting a side hustle business?
The economic payoff for increasing earnings can be so much higher than trying to save a few bucks.
Negative #5: Extreme Frugality Can Have A Detrimental Effect On Relationships
Extreme frugality can also be detrimental to relationships.
How do you show your first date a good time if you can’t spend any money or hesitate to spend any money? The typical pre-COVID-19 date of hitting the movie and enjoying a nice dinner at a restaurant isn’t cheap.
There are only so many times one can take a stroll with a partner at the local park without it starting to be a bore.
Finding a partner that is also into extreme frugality would be a challenge.
What about the impact on hanging out with friends? It becomes a lot harder to maintain friendships if you opt to not join them for drinks or dinner in order to not spend the money. Your friends would get the hint not to invite you after a couple of declines on traveling together.
Building relationships with colleagues also becomes harder when you can’t join them for lunch or a drink after work because you are too busy watching your wallet.
Negative #6: You Get What You Paid For
One thing I’ve learned over the years is that cost is one consideration that goes into the decision of buying an item or not. Another consideration is the quality you get from the item.
At the end of the day, there is no such thing as a free lunch and you get what you paid for. Obviously, in order to live an extremely frugal lifestyle, one must forego buying luxury items.
A quality or well-made item might be more costly upfront, but they can last longer which might end up being more cost effective over the long run.
Additionally, you are forgoing the quality aspect of the more expensive item when opting to purchase the lower cost item. For example, a well-made shoe can result in less foot pain than one of low quality and design.
A more expensive but quality mattress can result in better nights of sleep and cause you to be more refreshed and energized. I would say that is a good usage of your money.
Negative #7: Not Spending Money Can Limit Life Experiences
I believe personal growth comes from expanding life’s experiences.
Experiencing more of life involves the spending of money. Travel, for instance, can help grow one’s understanding and awareness of different cultures. It is hard to travel without spending money.
Trying different food can help further refine one’s taste buds. Eating at a nice restaurant can further enhance one’s palate. That involves spending money.
How about getting better at a hobby or attending a concert, Broadway show, or a play? All those experiences involve money.
Sure, other experiences can be had without money or very little. But the point remains the same, life experiences become limiting without spending money.
Negative #8: Extreme Frugality Can Result In Trading Time For Money
Extremely frugal people tend to trade time for money. What I mean by this is that they go out of their way to save a few bucks.
I am sometimes guilty of this. Sometimes I would drive an extra 10 minutes just to save a couple of bucks on gas because a particular gas station has a cheaper price per gallon.
Spending a few hours clipping coupons is also another way to save some money. Sometimes, I would spend a couple of hours online looking for a coupon on a purchase. The coupon I find might only be for $10 off.
That might not have been the best use of my time. I could have spent that time enjoying it with my family or spent it building an income stream instead.
Closing Thought
I believe in the power of savings. That is one component of reaching financial independence and accumulating wealth.
But just with about everything in life, it needs to be done in moderation.
I believe extreme frugality as a lifestyle is very challenging to maintain for most people.
There are negatives with being extremely frugal for an extended period of time.
Save, but don’t over-save just to live a Spartan lifestyle. Money is a means to help you get to your destination and should not be the destination itself.
To the audience: Can you think of other negatives with being extremely frugal? If you practice extreme frugality, do you agree with the negative points above? How are you able to maintain being extremely frugal for a long period of time?
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Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
You can read more about me here.
Thank you for visiting. Come again soon!
Extreme frugality leads to a mindset of scarcity (there is a floor in expenses) rather than a mindset of abundance when you focus on increasing your earnings (no ceiling on how much you can earn). I favor relative frugality over extreme frugality. Meaning I would rather earn $400,000 a year and save 50% then earn $40,000 and save 50%.
Agreed. It does become a lot easier to save a higher percentage as your income increases. A mindset of abundance when one focuses on increasing earnings should lead to a higher net worth and better for wealth building.
I consider myself very frugal but in no way extreme. I compare prices, I cook my own food for work to this day and I’ll use an item until it dies a natural death. To some this is extreme but for me it’s not.
However I’ll never skip out on social interactions because of money. I’ll never tell my spouse no to going out and I will never live in a shithole. Most importantly I never give two thoughts about spending money on things I love doing.
Common sense frugality paired with a high income is a winning combination in my opinion.
Extreme frugality at your 30s and beyond is borderline being cheap.
I couldn’t agree with you more that common sense frugality paired with a high income is a winning combination.
I do think being extremely frugal does convey being cheap and that is why I believe extreme frugality has a short shelf life. In my mind, it is okay to appear cheap in 20’s when expectations are low. But who wants to be known as a cheapskate for their entire life.
Extreme anything is rarely optimal. There is a reason that outliers are rare, it’s because normal people can’t handle extreme conditions. In our life my wife and I just kept lifestyle inflation at a slower pace than income inflation. We were able to have a constantly improving lifestyle while still increasing our saving rate. We never felt deprived and built a great portfolio over time. Great post!
I strongly believe that over time increasing spending is a must. If nothing else, inflation kills the buying power. But it should be done at a rate slower than income increases. That way, I can still enjoy lifestyle inflation but at the same time still watch my savings grow.
New reader…really love the meat and potatoes of the blog!
Unrelated question!
Read your real estate articles. Just need a little push over the edge. What is it that separates the real from the fake in RE? I understand the question may come off as primitive. Age 23 and new to RE investing but I can smell the bullshit people keep preaching….(just buy a property and watch the checks pile up). Just sounds too easy. Seeking wisdom rather than knowledge on the subject. I think I’m perceiving a lot of people make money “explaining real estate” rather than actually “living it”.
Thanks again!
Thanks for the kind words. Regarding your real estate questions:
(1) Do your research so you know what you are stepping into.
(2) But no amount of reading is actually the same as doing. Only by doing can you truly learn about the asset class.
(3) Numbers provided by real estate agents are inflated. With experience, you can come up with your own numbers. But as someone new, just discount the rent by 20% and increase expenses by 20% from what the real estate agent gives you. That should give you some sense of the real economics (agents don’t factor in vacancy, rental agent fee, touch-up on a move out, etc).
(4) Be selective with your first buy – but not so selective you won’t make a move. Need to act or it is just wasted time. But a good start will go a long way of encouraging you to build upon your first purchase.
(5) No one gets really rich buying just one property. I believe to build real wealth, you need to keep buying. The more you buy, the smarter you get. The more ways you can understand how to then extract the greatest value.
Thanks again for the reply.
I’ll take the info and apply it!!!
Having cycled half of the RTW distance over the past months – you don’t need much to be happy but a minimum is needed agreed and experiences happinessre key to hapiness
Written like a true finance person on the go 🙂
We spend on things that matter to us. We are frugal in areas that don’t bring happiness. We would always want to earn more than limit happiness especially experiences with the kids. Building lasting memories is important to us and one of the areas we spend. No doubt, kids are more expensive than we planned.
I think that is a great compromise – spend in areas that matter and cut back on areas that don’t bring happiness.
Isn’t another word for “extreme frugality” = CHEAP?!
It encapsulates many similar but ugly characteristics. Being cheap is very visible and when practiced frequently, one will find they will start losing friends and can’t make new friends.
Being cheap – one actually have to go out of their way to find any and every opportunity to benefit even at the expense of others. Its selfish. Its self-serving. Its just plain ugly.