Is Bill Gates being frugal just because he doesn’t buy as many cars as he can afford? Not really: if he wanted another car, I’m sure he would buy one.
The key here is perspective: if you can step outside the expectation and entitlement that we feel in the modern west, you can put things in context.
What we now consider frugal was normal life for everyone in The West until about 50 years ago. And it’s still normal for most people in the world. I don’t think anyone should feel guilty about having more, but it should be a source of wonder and gratitude, not entitlement.
Frugality is contextual: it depends where you are in life. I don’t buy household goods because once you have set up house, what do you really need to buy? I don’t need any more plates / glasses / bottle openers. Shopping as entertainment or as a hobby is just lame.
Take food as an example. When I was young, I used to eat Pot Noodle because it was basically the cheapest way to fuel the machine and avoid starving to death (I exaggerate but you get the idea). Now I no longer try to spend less on food to save money. I prioritise simple home cooked food (side benefit: fruit and veg are super-cheap) but that’s for my health not for money.
The same goes for transport. I started off riding a bike because it was free. Now I realise it’s better than driving, not just cheaper. In the west, health and body composition are now the most honest status symbols: you can’t fake them and you can’t buy them; you have to do the work. Abundance is harder for us to handle than scarcity.
There is also an environmental benefit to frugality but, let’s be honest, there is only so much difference that one person can make in the world. It would be lovely if everyone acted in ways that were more environmentally friendly but I won’t hold my breath on that.
America is different. In the USA the outsized cars, houses and sheer amount of stuff bought by the middle class are so wasteful that frugality can get you a long way towards financial independence. In the UK (and rest of the world) we need more focus on the income side of things. Frugality is necessary but not sufficient.
It’s true that every £1 you cut from your recurring spending brings the amount needed for financial freedom down by £25. So in this sense, frugality has a multiplier effect.
I think of frugality as a means to an end. It’s a way of getting your stake money together when you are starting out. Here’s how Charlie Munger put it:
“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”
Please note the absence of whineyness here. We live in a world where the media promotes consumerism and victimhood and, let’s be honest, we humans don’t need much encouragement to feel sorry for ourselves. Everybody got problems.
The way compounding works and the shape of the J curve means that you have to do some penny pinching in the early years to be rich later on. Like The Terminator, this law of the universe can not be bargained with, it can not be reasoned with. It must be accepted and internalised.
To be stacking in those early years, you need to have a compelling reason for frugality. Investing gave me this reason. If you get excited about an investment then you want to scrape together as much money as possible to take advantage of the opportunity. I call this “backing up the truck and loading up”.
When I was in my 20s stockpicking was so exciting that it made me look down the back of the sofa for any spare pennies to invest (I exaggerate but only slightly). A few years later I felt the same way about clearing the mortgage… why would I buy more shite when I could
say fuck you to the bank own my house outright AND get a guaranteed return equivalent to 10% pre-tax?
Things change and now there is no reward for being a sensible saver. Bank accounts and bonds pay nothing. The balance of risks has changed and many people have not yet realised the implications. As the world changes, so the appropriate asset allocation changes.
You need to be in wealth producing assets over the long term. This means equities, property, your own business. These involve taking intelligent risks where the odds are stacked in your favour. I’m not a religious believer in any single asset class. The Bogleheads are right that buying & holding a global equities index fund remains a great strategy but its not the only way.
The best investments are those that are so financially and emotionally compelling that they spur you on to save more. For many young people, saving hard for a deposit on a house / flat provides excellent motivation.
I can also see that for younger people, the excitement of buying crypto could provide this motivation. If you think it will lead to mad gainz, then maybe you’ll stop wasting money on car loans, theme parks and other such nonsense? If I was in my teens or twenties, I’d live off rice & beans to get more stacking money. I’ve been there, done that.
The difference between gambling in Vegas and buying some ETH is that in Vegas the odds are stacked against you. For every £100 you put into a fruit machine, it pays out say £70 in prizes. The £30 covers the cost and the profit of the operator. I don’t like those odds.
If Frankie had instead bought ETH one year ago, with say 1% of his portfolio (unleveraged obvs) it would have been a gamble but at least the odds were in his favour. As it turned out, he would have made 9x his money in one year…and that’s after a ~50% crash. There were no guarantees that it wouldn’t go to zero so he would have needed a high tolerance for volatility and risk.
Again, frugality is an important part of this. Frugality can make you braver and improving your risk tolerance is a super-important part of the journey.
Here’s how Kevin Kelly frames it:
“When you are young spend at least 6 months living as poor as you can, owning as little as you possibly can, eating beans and rice in a tiny room or tent, to experience what your “worst” lifestyle might be….that way any time you have to risk something in the future, you won’t be afraid of the worst case scenario.”
A low cost lifestyle frees up money to invest for equity returns. It makes you braver and takes the sting out of the fear of poverty. And it gives you the chance to win big.
Take care, stay lucky!