Tuesday, August 4, 2015

How Frugality Can Improve Your Net Worth


Lately I've been trying to get back to basics.  Back to my roots.  For a long while I've been focusing on the increasing income side of personal finance.  It's been great.  Our income has gone up, and we've been able to save a higher percentage of it.  But I've also found that as we focused so hard on work, we lost touch with the methods we used to use to live a frugal lifestyle when we made under $20k USD/year.  While this was a short period in our lives, we learned some valuable skills and life hacks to save us money.

In an attempt to slow life down, we've been getting back to those roots that allowed us to function on so little.  We had a massive container full of coins that I rolled.  We cashed them into the bank for several hundred dollars.  We started taking the time to seriously (though not obsessively) coupon again.  While we don't eat out a lot, we have been doing it more since our income has increased, so we've cut that back, too.  

We've reverted to a bunch of small changes that add up to a lower cost of living.  We realized that while we didn't think we had inflated our lifestyle, we had.  We attributed higher monthly costs to healthcare law changes in our country and the need to take out a loan for a car when ours died.  Those things certainly didn't help our monthly budget, but the truth of the matter is that despite the fact that our lifestyle was modest, it had become inflated compared to what it used to be.

How Frugality Can Improve Your Net Worth

Earning more undoubtedly allows you to contribute more to your net worth via savings and investing.  If you're working purely based on percentages, 50% of $100k is larger than 50% of $60k no matter which way you look at it.

But what happens when you add in frugality?  Let's say you increase your income from $60k to $100k, but instead of keeping your percentages static, you continue to live off of that 50% of $60k.  You continue to live off of $30k.  Now, with your increased income,  you're able to contribute $70k, or 70%, of your income towards your net worth and goals every year.  If you can find more ways to cut costs, you can get even crazier with higher percentages.

I've always known that a combination of a frugal lifestyle and increased income is the best way to approach finances.  But living it is a different matter.  Both require some level of work; if you want to coupon to save money, you might have to give up an hour or so of your time every week.  But something about making that concentrated effort to spend less makes every dollar that comes in mean a little bit more.  In the end, the work on both sides of the spectrum is worth it.  As with all things in life, balance between the two is often the healthiest approach.

2 comments :

  1. So true! Its all about balance. As my family is struggling to pay off debt (law school loans) it is so tempting to increase our standard of living to go with the new paychecks. It is so hard to keep living like a college student. Great post.

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    1. Stay strong! It is hard, but think how much you'll have to allocate to the places that matter with that high salary once the loans are gone! I'm rooting for you!

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