“For most folks, the pursuit of early financial freedom comes from the ability to preserve earned income. The hard truth is that the first step in the process to escape the rat race is and always has been to begin preserving capital— frugality, savings, penny pinching, living on less” Scott Trench, Set For Life
Frugality is the holy grail of wealth building. Frugality opens you up to opportunities you might never be exposed to, it allows you to take risk and it speeds up the wealth building process. We have all heard the phrase living below your means, but frugality is about living at the bottom of your means. The space between your means and your lifestyle is where wealth comes from because you need capital to create wealth. The bigger that space, the faster and further you can go.
BKF Advice Worked
The most financial margin that I ever had at one point in time was when I lived in an efficiency apartment in downtown LA. It was terrible. Small square footage, little to no amenities and worst of all, the shared shower. I was taking the advice from BKF in his book This is Why You Are Broke where he instructs people to get their rent below 30% of their gross income. The strategy worked and I was able to position myself to become debt free and I made a good amount of money in Tesla stock with the money I wasn’t wasting in rent.
Prior to that I lived in an ultra lavish apartment complex in the same area. I was living above my means, but I looked fly though. That complex had carpet walk ways, a door man, 24 hour security, etc etc. I was working at JP Morgan at the time so I felt as though I needed to live like JP Morgan, I guess. After looking back on my life I realize that when I was living large and looking like money I tended to have the least amount of discretionary funds to save or invest. When I was bumming it I was balling.
You likely aren’t a trust fund baby
Frugality is key because I am not sitting on a trust fund and you likely aren’t either. If you are sitting on a trust fund you can look good and build at the same time. However for most of us, you have to get that capital from somewhere. It’s amazing that when we go to the gym and work out we don’t expect to grow and look good at the same time but when it comes to wealth we expect to look good and grow. It doesn’t work like that.
There are some sacrifices that you can and should make to pull more out of your working income that will hurt, be hard and make you look ugly while doing it. Being broke and with negative net worth will make you look ugly as well and is also hard. Pick your ugly and pick your hard. You aren’t a trust fund baby so you have to create your own trust fund via short term, hard hitting, frugality.
Run to what is hard
We have to stop seeing things that are hard as being bad for us. Just because it isn’t easy doesn’t mean that its not a noble pursuit. Every time I propose a solution some smart person tells me “well its not that easy to do x”. I think its time we abandon going after what is easy and start stretching ourselves into what is hard.
When the body builder sees big weight he doesn’t talk about how heavy it is, he lifts it, knowing that after he breaks himself down he will be stronger and able to lift that heavy weight again and again and again. If we focus on running to what is hard we can conquer what is hard and not be limited by it. Frugality is hard but it opens doors. Frugality will make you stronger and more powerful to take on the new opportunities that are only exposed to the frugal.
Frugality gives you opportunities
That business you wanted to start or the stock you wanted to buy or the property you wanted to invest in all require money. When you are frugal you tend to have excess cash to take advantage of opportunities, especially opportunities lost by those who aren’t frugal. When you are frugal and have cash there are a lot more opportunities. You can both do what those who need financing can do, get a loan, and you can do what they cant do, pay in cash. Double the pleasure, double the fun and double the wealth creating opportunities.
I was talking with one of my mentors about how he was picking up tax lien properties during the recession for pennies on the dollar. This man is worth $200 million plus but he wears the same suits and carries the same old brief case. He lives in the same home he bought for $50,000 in the 1970s and this is what allows him to scoop up deals for the low.
When you are frugal and you are competing in a world with people who aren’t, you have an unfair advantage. You can buy debt for pennies you can negotiate better deals and you can take advantage of people’s missteps. There are opportunities for those that have cash and opportunities for those that need financing and usually the better opportunities go to people with cash, usually the people with cash are, you guessed it, frugal.
Frugality lets you take risk
When you are frugal you can take risks because you know that your lifestyle isn’t dependent on large sums of cash. For example, if you can get by on a frugal budget, because you have positioned your lifestyle in that way, you can afford to throw a chunk of money into a stock or a deal knowing that even if it blows up you don’t have to worry about seeing a dip in your lifestyle. You can afford to throw big cash at multiple opportunities because you know that by the time your next check comes around you will have more excess funds to throw down.
When you have tremendous amounts of free cash flow in your life you can invest in ways that the people who NEED that money can’t. This gives you an advantage over those people. Risk means reward and sometimes that one risky stock can make up for the 9 other losses. If you cant afford to take that loss because you live at or above your means you will miss out on the Uber’s of this world and be stuck with that baby money that you couldn’t afford to let go.
Frugality speeds you up
Frugality is an ongoing thing. One thing that I love about it is that it is subjective. One person’s frugal might be another persons balling. So as you level up, as long as you still go at the bottom of the next rung’s means you are still free to acquire and invest and level up further. Your frugality will be above someone else who is probably maxing out and living above their means.
An example of this is my uncle. Growing up we all thought my uncle was cheap. Well he was cheap, but he was on a mission. When you can set aside the short-term desires for the long-term benefits, you will achieve massive success quickly. My uncle drove a Honda Civic for years while he paid off his home early. THEN after he did all of that, he bought a 3 series BMW. This stands out to me because he could have bought a 7 series in cash. This also stands out to me because I know a lot of people who are living better but will never hold a candle to the wealth he has. Frugality looks like you are losing but it creates silent wealth.
Frugality speeds you up because it takes you out of the rat race of people going to work and financing what they wan’t and puts you in a different world. An example is the story of the man who bought a yacht at half its value because it was seized in a drug ring. Another example are the people who buy buildings and mansions at auction as opposed to buying from the dealer. One thing I learned is that the wealthy and the frugal don’t pay retail, ever. Retail is for the middle class.
Wealth takes you out of the slow laners who can barely save 10% per month and lets you ramp it up to 60%+ per month. That extra discretionary income that you can then take great risks with because its not tied to your lifestyle lets you compound all of the concepts discussed in this article. Your extra income, your extra risk tolerance and the new opportunities you can take because you are using cash not credit can blast you into an atmosphere of wealth others will never see. It all works together for your good. Be frugal, be smart and live wealth. If you want to work with someone on our Todd Consulting team to set up a frugal budget email firstname.lastname@example.org