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How to use frugality to generate wealth

In the dream of living off your investment income, there are two parts. 

  1. Generate enough investment corpus to get your recurring income without taking too much risk.
  2. Invest that corpus in cash generating investments that potentially grow in the capital value in order to beat inflation

It is the first part that we are going to talk about today. The second part is equally important and I would write another article about the same but for most people, they never get off to a start because they do not know how they would get the investment corpus in the first place. The key to get there is to be frugal and not spend unnecessary money and also to keep on increasing your earning power so that the monthly income increases. This is very obvious in the hindsight because if you want the balance to increase you have to increase the income and decrease the expenses. 

The key expenses for people are home, car, electronic equipments, food, clothes and entertainment. Each of these offer a potential opportunity for one to save money. Oftentimes I hear about people saying that this is not a great way to lead life since you are wasting the prime years of your life in saving money while you could spend that in experiencing things. While it is true that you should experience things at an appropriate age, there is always a middle path between extreme frugality and reckless spending. Everyone has their own limits and you would hear things like “save twenty percent of your post tax salary every month” but you should decide your own limit based on how important is that spending and what you expect from spending it rather than saving it. There are certain rules that I use in achieving a judicious balance between spending and saving:

  1.  You should save a certain percentage of your earning and increase that percentage as years pass.
  2. You should stay away from debt as much as possible and analyse every use of debt with the utmost scrutiny. Credit card debt are especially something that you should avoid at any cost.
  3. You should track every expense and analyse at the end of month how your top ten expenses worked out in terms of your expectation of what they would give you. Do a similar excercise at the end of year about the top twenty expenses and analyse how they worked out.
  4. Look for a trial step between your desire to build an asset and actually buying it. 

The whole purpose behind this excercise is to become more aware of how you spend your money and what it gives you. Best of luck!

Achieving Financial Success Without Extreme Frugality or a Huge Income

Trent Hamm of Simpledollar.com suggests a middle path for people who want to achieve a life of financial freedom in this article. There is a general perception that you have to be either a complete miser or have to strike it big in some startup to achieve early retirement. What Trent points out is that it is possible to seek early retirement with normal income and normal lifestyle. Some interesting tips he gives are
1. Focus Your Frugal Efforts on Things You Don’t Care About (or Barely Care About). Do not deprive yourself of something that you really like.
2. Learn How to Cook Well Enough So That It’s More Convenient to Eat at Home. Do not waste food.
3. Scale Back Treats Until They Become Treats Again.
4. Be Organized in Your Thinking and Planning Every Time You Would Spend Money. Cut down on impulse buying. Always question every purchase.
5. Intentionally Move Your Hobby Time Away from Accumulating and Towards Doing Instead. As an example, read books rather than just buying books.
6. Do not look at your career as drudgery. Look at it as an opportunity to express yourself.

In short, a frugal life is a life driven by common sense that allows you to be more intentional, more active and more creative. Frugality is the bi-product of such a life.

Training kids for a frugal life

A life in frugality starts from childhood and the habits that kids inculcate are small actions they take in their childhood. This article tells you about seven such skills or habits that you can help kids inculcate. 

The article acknowledges that current generation is impatient, needs external prompts for self esteem and is low of social connection. It is interesting the way the article relates these traits to the financial wellbeing of the child. One example is the relationship of self esteem with consumption. If the kid looks for external validation for his or her self esteem, it is more likely that they would fall prey to the lure of advertising that promises you better looks, smarts or social life at a little cost of buying a certain product or service. Parents need to make sure that kids are confident as they are and do not look at external world to validate their value. 

The article talks about other skills such as patience, self confidence, collaboration, creativity, negotiation, contentment and individuality, each contributing to a specific aspect of the kid’s future financial life. 

In a great take of individuality, the author says, “In a world where consumerism and consumer debt is a way of life, choosing a different path takes a steely sense of self. Promoting a spirit of individuality in children helps them cope with — and even celebrate — being different. Point out how your family’s own spending and saving habits go against the grain and don’t be afraid to show the benefits (monetarily and otherwise) of your simpler, saner lifestyle. It will serve them well for the rest of their lives.”

This is important not only in the financial sense but also in the sense of building a great and happy life. Finding your own niche or corner in the world that behaves in a herd-like manner is not only important from a financial perspective but important in the sense of enjoying the life we have.