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!