I love this brilliant SNL video (link). If I could improve upon this brilliant video at all, I’d say the path to wealth accumulation not only to “not buy stuff you can’t afford” but also to “not buy stuff you CAN afford.”
Frugality is the most important factor in accumulating wealth, not income. No matter how much you earn, you can always spend more of it. However, if you’re frugal you can save on pretty much any level of income.
When my family of 7 was making $25-$30k during graduate school, we still managed so save well over $10k per year. Now that we make substantially more, we continue to live like we’re poor college students.
Why do we do this? Because we’re happy living on nothing. This, by far, is our most valuable asset. If I could give anyone any advice it would be to learn to be happy with less. Resources like The Minimalists and this Anti-Clutter Book make a compelling point that we’ll actually be happier with less stuff.
I think that most of us underestimate what goes into generating $1 of consumption – let’s say a candy bar. In order to buy the candy bar, I need to have $1.08 in cash if the sales tax is 8% in my state. In order to have $1.08 in cash, I need to have earned well more than $1.08 due to federal, state, and payroll taxes. If my federal income tax rate is 20%, my state income tax rate is 5%, and my payroll tax rate is 7.6%, my combined tax rate is 32.6%. Thus, in order to buy a $1 candy bar, I need to generate $1.60 in pre-tax income (1*(1+8%) / (1-(20%+5%+7.6%))).
Reducing your expenditures by $1 will increase your net worth by $1, which is the same increase in net worth generated by earning an extra $1.60 in income. Likewise, if you can decrease your expenditures by $10,000, you will be just as rich as if you had earned an extra $16,000.
Frugality is multiplicative. Reducing your expenditures has substantially more effect on your net worth than changing your income the equivalent amount.
Permanently reducing recurring expenditures is the best way to generate lasting wealth. Recurring expenses include rent/mortgage, car expenses, insurance, cell phones, TV service, groceries, etc. If you can optimize these recurring expenses, you will be well on your path to wealth accumulation.
Most people unsuccessfully chase wealth by aspiring to higher paying jobs. Unfortunately, high taxes, lifestyle creep, and high stress accompany higher paying jobs leaving the individual with an ulcer and no increase in wealth.
Here’s a brief summary of what our family does to save money (and thus accumulate wealth), in a roughly decreasing order of importance:
- Live in a low cost of living area
- Avoid debt like the plague
- Be tax savvy (more on that in Step 2: Minimize your tax burden)
- Shop at Costco/Sams/Amazon almost exclusively
- Live close to work
- Bike to work
- Eat at home for pretty much every meal (Very rarely do we go to restaurants)
- Avoid cell phone plans (We do free cell phones + google voice + OBI for free VOIP home phones. More info: https://frugalprofessor.com/phones/)
- Go without cable TV
- Self-insure with high deductible plans for car, health, and home
- Get 2% cash back on every credit card purchase
- Use $15/month 2mbps internet through TWC
- Stash unused cash in money market funds
Here’s a related post if you want more ideas on how to save money: https://frugalprofessor.com/frugal-analogs/
Most people find budgeting to be a useful tool. Since I don’t like to spend money, budgeting has never been necessary for me. Nonetheless, we’ll be sharing our monthly expenditures to show how dumb-simple this is.
Links to other steps in series:
- Step 2: Minimize your tax burden
- Step 3: Invest the savings wisely
- Monthly updates where we follow our own advice
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