On being frugal

There are several disciplines that must be mastered in order to become wealthy.  Aside from inheriting money or winning the lottery, these steps are crucial and failure to master them most assuredly makes wealth growth nearly impossible.  In order to grow your wealth you must increase your income, manage and grow your investments, manage your expenses, and manage or eliminate your debt.  We’ll talk about income, investments and debt at a later time but for now, let us focus on managing expenses.  There is no more direct way to managing expenses than to just be plain frugal.

I get grief from my friends all the time about being a “tightwad,” being “cheap,” and they even nicknamed me “Jew.”  Now before I get a rash of hate-mail for being anti-semetic, let me just say that I take the Jew nickname as a compliment.  Let’s face it, per capita, Jews are the most wealthy people on the planet.  Why is this?  It is because they respect money and they teach that respect to their children.  All of my Jewish friends have told me the stories of being scolded by their parents for leaving $.35 cents in change on their dresser drawer at the end of the day.  “Respect that money, that isn’t how I raised you, put that money away.”  Quite to the contrary, most Gentile families criticize you if you don’t spend outside of your means, calling you cheap.

Well, lets just look at the results.  Being frugal with your $ = long term wealth creation as demonstrated by, not only Jewish families but also many in the Asian community, Armenians and even the American Scottish.  It may not seem like much, $.35, but added each day, over 10 years, when invested wisely, those pennies add up to dollars and then to thousands of dollars.

Now, I’m not talking about being “cheap,” wherein you sacrifice quality to save money.  I’m talking about getting good bargains, buying things on sale, spending within your financial situation and not overspending on silly things like tipping at restaurants.  My brother is notorious for tipping the wait-staff 25% for every meal.  He is an owner of a large corporation that does millions in business and I’d be surprised if he has $1,000 in the bank.  He also spends lavishly going out to dinner and to bars, on expensive cars and on gifts for his children.  I’m all for buying a nice Rolex watch or a Mercedes sedan, but only if you can afford it.  If you don’t already have a million bucks in the bank, if you have to borrow to afford it, guess what, you can’t afford it!

There is no way you will ever grow a million dollars if you are extravagantly spending money on things like this…

There is a lot of social pressure to “not act cheap” so much that people feel obliged to tip 20% or more at restaurants.  Didn’t tipping used to be 10%?  Then it went to 15% and now people are tipping 20-25% or more!  On a hundred dollar bill (not uncommon for a diner for two), you’re looking at an additional $25 for the tip!  Multiply that times twice a week and at the end of the year you’ve spent an extra thousand dollars!  Put that thousand dollars in a stock mutual fund and after ten years, you could have as much as $20,000!  Every time I tip 10% and sometimes 15% and I get that “look,” I just smile and think about that $20k in my bank account.

If you want to become wealthy, you have to be strong enough to ignore social convention and do what is right for you!  

Sometimes thinking of yourself first instead of other people (the waiter) is the difference between financial mediocrity and serious wealth generation.  Suppose you do cut back on tips and you do save $20k in the next decade.  You later hear that a house is up for sale because of some financial problems and you are able to step in and buy it at a discount.  Later, you sell the home and make an additional $50k profit.  This is how and why rich people get rich and stay rich – they have the financial means to take advantage of opportunities when they arise.  I bet deals pass you all the time and you don’t have the $ to take advantage of them.

Cut back on your extravagant spending now to have $ available for those “once in a lifetime” bargains that occur more often than you realize.

I have a colleague here at work, young, maybe in his 20′s.  He has a six-figure salary and he has no idea how to manage his money.  Last year he bought a Cadillac Escalade for $70k and put on $15k worth of rims and then bought two Breitling watches and a Rolex for an additional $25k.  Despite his six-figure salary, he is close to bankruptcy now.  Heaven forbid he should ever get laid off from work, he surely will be in bankruptcy court.  Meanwhile, banks are almost giving houses away to anyone with a serious down payment.  With the money that he spent on these luxury items, he could have easily bought four houses in the Texas area netting two thousand dollars a month in rent.

I made a deal with myself – when my account hit $750,000, I would buy an Omega watch to reward myself.  I told myself that when I hit a million, I’d buy a Rolex.  The photo at the top of this post is the watch that I’m going to buy.  But why haven’t I bought it yet?  Because I haven’t found the right deal.  Why do I want to spend $8-12k on a watch when I can find someone who spent outside of their paycheck, ran into financial trouble and now they’re selling theirs at a discount.  I’ve seen watches like this sell for as low as $3,800.  I’ll be patient and get a good deal.

When you go to buy ANYTHING, shop for the best price.  Most people say, “Oh, its not worth the trouble.”  Isn’t it?  If you save $50 here, $100 there, over time, those bits add up (just like the Jewish kid’s $.35 cents) and eventually, you’ll see a once in a lifetime deal and you’ll have the means to capitalize on it.

In my case, I worked and saved hard and when the 2008 stock market crash happened, I had a few hundred thousand in the bank.  I loaded up on stocks and in 2009/2010 I realized about $400,000 in stock gains.  If I hadn’t been frugal, hadn’t saved that money, I would have missed out on the best stock-buying opportunity of our generation.

When someone looks “down” at you for leaving a moderate tip, turn it around on them and tell them that to do otherwise is foolish and fiscally irresponsible.

Your bank account will thank you in the long run!

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