The three words that describe the financially successful.
Frugal. Frugal. Frugal. Many people believe that this means cheap or stingy, but that is not the case. What it really means is that you are careful in the spending of your money or use of your resources. Being frugal with your money actually means your are financially responsible. You will choose what purchases matter to you because of their utility, and you will be able to not make wasteful purchases or consume unreasonably. Coffee is a perfect example: you do not need to spend $7 dollars everyday for a cup of coffee when you can make a cup of coffee at home. It costs me less than a $1 a day to make my morning coffee. This means the average Starbucks guy or girl is spending around $2,555 per year for coffee while I am spending $365. Being frugal is choosing to be wise and consume less.
It is easier to appear to be financially superior than actually be superior financially.
Many people today have the mindset that they need the newest iPhone, a fancy car, and a new outfit to wear each day. They love to hear their friends exclaim how cool their new possessions are. But their appearance usually comes with the heavy price of slowing their financial success by absorbing that unnecessary expense – or worse using credit to make those purchases and paying the minimum payments for an eternity. The average millionaire buys an American made vehicle that will last them a long time, they don’t overspend on clothes and instead remain practical in what they wear, and you can bet they would rather invest in Apple than own the newest iPhone.
Being frugal is the foundation for building wealth.
A high consumption lifestyle ruins your chances of becoming wealthy. You can have an earning figure that is $100,000 or more, and still not be able to build wealth if you cannot manage your funds. Imagine you make $100,000 but you have an expensive and wasteful lifestyle that cost you $80,000 per year. That means you only have the ability to save and invest $20,000 per year. Now imagine your friend makes $80,000 per year but his frugal lifestyle that focuses more on experiences than consuming goods costs him $40,000 per year. This mean he is saving and investing $40,000 per year, all the while making less money than you.
Financial independence equals peace of mind.
Let’s imagine that you went to college and took out $50,000 in loans. Now, after graduation you bought a new car when you landed your first job, and that cost you $30,000. Then, after a year of working you decide to buy a house that costs you $200,000. In such a time your net worth is negative (-$280,000) and you have to find a way to crawl out of that to reach financial independence. The best way to do this is to set a budget and stick to it! Read this POST about budgeting to help set you up for financial success. If you are able to avoid all of this debt at such a young age, you will be able to reach financial independence very quickly by following a few simple steps:
- Have an emergency fund or sometimes called a rainy day fund of 3-months worth of expenses.
- Pay cash for everything and do not take out a loan for cars or use credit cards for normal purchase.
- Save and invest as much, ideally 15-20% of your take home pay should go into a retirement account.
Make the choice today to get on a budget and stop buying things that are negatively impacting your financial independence. So get on a budget, stop using credit and loans, save money for emergencies, and open up a retirement account where you invest 15% of your income. If you start this now, then you will be lightyears ahead of your peers.
Disclaimer: I do not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.