Spend less than you earn is a common piece of financial advice to come across.
Unfortunately, it’s just one side of the story.
Of course you should spend less than you earn so you can save money, but imagine doing that and nothing else for the rest of your life.
What if you can’t save much? You end up being 70 and far away from being able to retire.
What if you save and save, and it’s still not enough? 40 years into the future, your savings won’t be worth nearly as much as it is today thanks to inflation.
You probably see where I’m going with this. Frugality, in most cases, is simply not enough to achieve most of your financial goals.
So…what is? And how does frugality fit into the picture?
Why (and How) Frugality Isn’t Enough
If you read a lot of blogs focused on financial freedom, you might know that many ambitious savers put away around 70% of their income.
They’re frugal, conscious of their spending, and typically, they spend only on what they value.
But that’s not all they do.
They also invest. Heavily. Because saving – spending less than you earn – only gets you so far.
They create multiple income streams, because if one dries up, that could spell disaster for financial freedom.
They might also do side work that’s meaningful to them to bring in a little extra.
Saving money by being frugal is the first step, but you don’t stop there.
It’s great to have a nice stash of cash, but unless you make a really nice income, you’re probably not going to amass enough money (say, a million dollars) to eventually retire on.
You need to grow that money through various vehicles.
Let’s go through the strategies I mentioned before, so you get a big picture of how all of these things fit together.
Amplifying Your Wealth
Chances are, as a young adult, you’re not thinking too much about retirement. You have 40+ years to go, and the thought of trying to save that much money is intimidating.
It doesn’t have to be. When people think or hear that they have to save $X of money for retirement, they literally think they need to make all of that money themselves.
If you make a lot, then maybe you could, but most of us don’t have that luxury. Instead, we need to amplify our wealth through investments to lessen our savings burden.
That doesn’t mean you should invest in individual stocks. Many people think “investing” means playing the market. Not true! Especially in this case.
You want to think long term, and investing in index funds and mutual funds (baskets of different funds, instead of individual ones) is likely your best bet.
We’ve covered multiple ways millennials can begin investing, but I’ll summarize here.
If your employer offers a 401(k) with matching contributions, you definitely want to take advantage of that. Contribute up to the match if you can’t max it out.
IRAs are great tools for those who don’t have access to a 401(k). You can open an IRA (Traditional or Roth) on your own with a number of financial institutions.
It doesn’t matter if you can only contribute $10 or $100 a month. Just start now. It’s more important to get into the habit and start as soon as possible due to the crazy awesome power of compound interest. Every day you delay costs you.
Building Your Wealth
All right, so where do multiple streams of income come into play?
Besides being valuable so you’re not left high and dry if one stops, you might want to look into alternatives to traditional investing.
Creating a business or investing in real estate are two of the most popular ways to take the savings you have and grow and diversify it.
While you should invest in paper assets like we just talked about, the growth you’ll experience is limited to market return and time.
Businesses and real estate have much higher potential for return on investment (while also being riskier), and if you want to find financial freedom earlier than not, these routes will be valuable to you.
Boosting Your Earnings
It stands to reason that increasing the amount of money you can grow via investing, business, or real estate is a smart move. Frugality allows you to do that – to a fault.
You can figure out what expenses you want to cut, look for cheaper alternatives, and save money where you can, but at some point, you’re bound to hit a wall.
The more resources you have to work with, the better. That’s why we’re such big advocates of having some way to make side income, whether it’s from a business or something you do in your spare time.
I’ve seen quite a few people reach financial freedom early in their life, and most are still doing some sort of work. When you’re younger, the idea of lounging around in a hammock forever seems, well, kind of boring. Financial freedom is about fulfillment, and when you have the resources to make it happen, you might as well experiment, right?
So why not start now? If you want to take it easy with building streams of income, side hustles are the best way to get your feet wet. Most don’t require a ton of overhead, and as a bonus, you’ll probably acquire useful skills that apply to your day job and can net you more income there as well.
So, is Frugality Useful?
Being frugal will allow you to save enough to begin these ventures, but you need to supercharge your savings to reach your goals.
As I mentioned in the beginning, frugality has its place in all of this. You won’t get anywhere if you’re spending every last penny you have, and then some.
However, frugality alone isn’t enough, and I’m speaking from personal experience. I’ve mentioned before that I used to think spending less was better than earning more, simply because being frugal comes naturally to me.
But over the past year, I’ve realized that it’s best to do both. If you earn more and keep your spending high, then you’re not really making progress. And if you’re saving more, it likely won’t be long before you feel the pinch of cutting back further and further.
As with everything in personal finance, you need to find a balance that works for you and your goals. The main thing to focus on is having enough resources to reach those goals.
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Frugality is definitely useful – there’s no doubt that having the skills to save more money is handy. But it shouldn’t be your only focus. Look for ways to earn more and get a better return on your savings so you can amplify your wealth and stay ahead.
Do you lead a super frugal life? Is that the only thing you focus on? Do you think frugality alone allows you to reach your goals, or is it a combination of factors?
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Completely agreed Erin. I think frugality is important for a variety of factors – helping you save money, helping you spend towards your goals, etc. but you reach a point where it can be limiting as you can only save so much. Like you said, it’s that ability to bring in extra income and finding ways to grow your money that can really catapult your finances.
Exactly! It’s a good step in the right direction – almost everyone can benefit from being frugal – but you can’t focus on that exclusively unless you already make enough.
Great info, Erin! I’m frugal in some areas, but I’ve never wanted to spend my life just hoarding money, cutting expenses and not enjoying the fruits of my labors. It’s like dieting; Hard to stay motivated when never enjoying the foods you love. Nope, we’ve focused on investing and spending, but we don’t overspend. That’s the key.
Now, retiring at 54 has only been possible by being a bit frugal. We can’t take expensive trips, or buy shiny new cars, and such when we want to.
Boosting earnings is a great way to ramp things up. Since our income is lower now, I’m looking at getting back into Side Hustles, with a focus on Freelance Writing. Hoping to eventually get to the level of yours and David’s quality in writing.
Thanks again, for some great stuff!
Keith, it sounds like you’ve found the perfect balance! Being frugal is definitely essential, but you have to be smart about it. It’s interesting that you say it’s hard to stay motivated when you’re not enjoying the money you’ve managed to save. Learning *not* to hoard my money has been an experience for me; I’m a natural saver, but you’re right that life isn’t much fun that way!
And thank you for the compliment – I’m sure you’ll get there, and good luck with the side hustling!
Awesome suggestions. The idea of setting up a passive income stream via real estate is something that really resonates with me, and I think everyone should look into some sort of potential passive income stream while they work their regular job.
Being frugal and keeping your expenses low will allow you to keep things “lean and mean” and be able to actually pursue another income stream.
I think so, too, Syed. It at least gives you the peace of mind that there’s something to fall back on.
Yes – it’s one of the pieces to the overall puzzle!
This is so true. Frugality is great and I feel like I’ll always be frugal no matter what. But after I cut my expenses and changed my lifestyle, I knew I couldn’t go any further and needed to earn more income if I want to save more and start building wealth.
I had the same experience. When I graduated from college, I didn’t think my earning potential would amount to much because of my degree and lack of experience. Thankfully, reading about side hustling turned that around! I wouldn’t have gotten very far continuing on that path.
frugality is good when you are saving but if you are on debt repayment is better to be frugal and earn more!
A combination of frugality and earning more can help you save or pay off debt faster. Either way you have more income freed up to dedicate to your goals.
I completely agree with you that being frugal is only the first step. When I first started “investing” I was afraid to put any money into the market, and just kept saving into my savings account. Once I learned more about compound interest and inflation, I did a quick 180. Knowing that I was losing money to inflation in my savings account was a big motivator!
The combination of growing your money and saving money is what leads to the big gains.
That’s awesome! So many people don’t realize how much money they’re going to lose to inflation in the future. There are a lot of layers to investing to understand, but at least you educated yourself!
Great advice Erin. I 100% agree with creating multiple income streams. I feel like this generation has a better understanding of how crucial it is than past generations. There was a time when the norm was to work one job for 40+ years, put money in a retirement account and retire in your 60’s to live off social security plus retirement. But those days are over.
Now most people go through a ton of jobs and rarely will stay at one place for more than 5 years. But now I’m going on a bit of a tangent haha! The point is there’s a bigger focus on building wealth rather than just trying to get by on a salary from a job.
The people who save 70% of their income probably have a large income to begin with. In my opinion it’s a bit disingenuous to proclaim the power of frugality without acknowledging your high income. Both are important, to be sure, and what’s “more important” depends on the person and their situation.
I agree, Kalie. While it’s great to see people save that much by being mindful of their spending, they likely wouldn’t be able to do it without their earning power.
Frugality is good, but I realized that I could only do so much. Creating more income has done more for me that cutting certain costs. The income potential doesn’t have a ceiling.
Some people (like me) had to start with frugality. Just a basic consciousness of spending habits was a step in the right direction for me. When someone is in the thick of raising a family, it can be hard to take on side-hustles, but frugality can always be learned – even by those who are very busy with young children. Once frugality is in place – once you’ve got “living below your means” mastered – you’ve established a platform for effectively managing streams of income to whatever extent that’s possible. How great that you’ve got both sides of the frugality/additional income streams strategy going at this point in your life!