Does Frugality Matter If You’re Rich?

in Financial Planning by

KEY POINTS
  • Don’t waste your potential as a high income earner by spending more than you earn.
  • Build wealth that will be there for you in the long run.
  • Saving more now will ensure you don’t have to work forever.

In 2014, the American workforce was 135 million strong, and workers brought in an annual mean wage of around $47,230. While an average salary of almost $50K doesn’t sound bad, the fact is, that figure is highly skewed by those of us who earn a little more than average wages – you know, the country’s doctors, CEOs, financial managers, and surgeons. According to BLS data, in 2014, many of these top professions reported average wages of $200,000 per year or more.

With wages in that range, you might think high earners have the golden ticket. They’re set for life, you’ll say. They’ll never have to worry about money again.

But you would be wrong.

We’ve talked about how America’s rich are wasting their potential before, and the story hasn’t changed any since. The unfortunate truth is that, despite outward appearances, many high earners have a net worth that is nil to zero.

Spending It All… And Then Some

This lesson was driven home for me earlier this summer. In an extremely affluent neighborhood near my own home in Hamilton County, Indiana, I spent a morning garage-sale shopping in random strangers’ driveways. This was a neighborhood with homes in the 5,000 – 10,000 sq. ft. range, mind you, yet nearly 20 of the houses in the small neighborhood were for sale, while some were noticeably empty.

After chatting up a seller, I learned that 15 of the homes in the small neighborhood were in foreclosure.

“Nobody learned anything after the housing bust, did they?” I asked. She simply shook her head. One neighbor of hers who was in foreclosure, she said, was an extremely successful plastic surgeon.

“What’s up with that?” she asked. “He charges $12,000 for breast implants and can’t pay his mortgage?”

I nodded in agreement.

Of course, we don’t know the whole story. When a house goes into foreclosure, there could be dozens of different factors at play.

But a trend has definitely emerged over the years. Study after study has shown that many with average and even high incomes continue to spend it all… and then some. Consider these statistics:

A 2015 study showed that one-third of American households with an income of $75,000 or more live paycheck-to-paycheck.

In the same study, 44 percent of those households claimed that lifestyle purchases were to blame for their lack of financial progress.

According to a 2015 poll, which surveyed 1,044 investors, one in five respondents with investible assets of $100,000 to $1 million dollars agreed they carried too much debt and said they live paycheck to paycheck. Worse, 1 in 10 respondents with assets of $1 million to $10 million were in the same boat.

In the same poll, 45 percent of respondents with investible assets of more than $100,000 worried
they wouldn’t have enough money to last through retirement.

Yes, Frugality Matters

Here’s the truth: A high income isn’t the golden ticket that it is made out to be. And a six-figure income no longer means you’re rich, either – especially if you manage to spend it all.

To truly get ahead in life – to build wealth that will be there years, and even decades, from now – you have to sock some of that money away. And for many of the smartest and money-savvy among us, that means tightening the belt a little and not splurging for every luxury money can buy.

To see what I mean, take a look at how everyone’s favorite billionaire, Warren Buffet, lives. After earning billions over his lifetime, he still lives in the same modest home he purchased in 1958. Meanwhile, he steers clear of expensive toys and displays of wealth like yachts because, as he told Business Insider, “most toys are just a pain in the neck.”

Of course, we all know that Buffett doesn’t have to be frugal to get ahead. Still, much like his investment strategy, his outlook on frugality and judicious spending are worth emulating.

And we would all be better off if we cut back and took a closer look at our spending. Here’s why you should think about adopting a more frugal lifestyle:

1. You may not want to work forever.

A decent income is something to cherish during your working years, but do you really want to work forever? Saving more now – and investing it wisely – is the best way to ensure you won’t have to work forever. Maybe you plan to work until you’re 70, and that’s okay. But with enough money stashed away, you’ll have options, especially if your priorities change.

2. Cutting expenses may not hurt as much as you think.

Frugality doesn’t have to be painful. In fact, some of the biggest money-savers may not require much effort at all. Think about how much more you could save if you drove each car you owned a little longer, ate meals at home a little more often, or just stepped away from the mall more often than not. A lot of times, these small changes can have a huge impact over time.

3. The gravy train may not last forever.

Think your high income job will last forever? Think again. You might be one unexpected illness, one layoff, or one bad decision away from losing your job – and the income that goes with it. When you live a frugal lifestyle that is well below your means, you’ll be in a better position to weather any financial storm.

4. It makes life simpler.

Like Buffett said, most toys are just a pain in the neck. And a lot of times, the “stuff” we want just causes us problems. That in-ground pool we all want, for example, will need to be cleaned and serviced. And that huge house will need bigger and more expensive repairs over time. Avoiding all of that can do a lot more than save us money; it can make our lives easier and less stressful as well.

Adopting a Frugal Lifestyle That Lasts

In a lot of ways, frugality has gotten a bad rap. Many take a look at the extreme lifestyles espoused on personal finance blogs and think that being frugal means a) commuting 12 miles to work on your bike each day in the sleet and snow (and pulling your kids behind in a tiny wagon), b) living in a tiny house, c) avoiding all social interactions that involve spending money, and d) huddling up next to a space heater to stay warm all winter.

But that isn’t what frugality is all about – not even close. In fact, even extreme frugality sites admit that frugality doesn’t really have to be extreme. In reality, it’s not about cutting everything out of your life you enjoy. For most people who live this lifestyle, it’s more about figuring out what really matters in life and making those things your focus.

So if you don’t value cable television anymore, cut the cord. And if you’re sick of the upkeep that comes with a new car, keep the one you have a few years longer. If you’re spending too much money at restaurants, take a cooking class and learn to make your favorite dishes instead. Any of these moves – or a handful of them combined – could lead to hundreds or even thousands of dollars in savings in the years ahead.

The Bottom Line

Here’s the cold, hard truth no one wants to admit: It doesn’t matter how much money you make at the end of the day. It’s what you spend that matters. And if every penny you earn is going right back out the door, you’ll have nothing left.

Adding some frugality into your life can make stashing some money away a whole lot easier – and that’s true no matter how much you earn. Frugality matters, and for more reasons that many people think.

The bottom line: If you want to adopt a frugal lifestyle, you need to stop wasting your dollars on things that don’t matter – and start saving them for things that do.

Do you live a frugal lifestyle? Do you think frugality is less important when you earn more?

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Holly Johnson

Holly Johnson is a financial expert and award-winning writer whose obsession with frugality, budgeting, and travel plays a central role in her work. In addition to serving as Contributing Editor for The Simple Dollar, Holly writes for inspiring publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree, and Frugal Travel Guy. Holly also owns two websites of her own - Club Thrifty and Travel Blue Book. You can follow her on Twitter or Pinterest @ClubThrifty.

One Response

  1. Matt

    Great article Holly. As Pete at Mr. Money Moustache says, living a not-quite-so-ridiculous lifestyle can lead to hundreds of thousands of dollars saved. This article describes that very well. I think one of the best articles written about this is Pete’s “A Millionaire is Made 10 Bucks at a Time”. If you haven’t read that, please, please do. It is very inspirational.

    Reply

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