Over the past year I became an avid follower of a number of financial independence and early retirement blogs where a commonly recurring topic is frugal living, keeping spending to a minimum and saving and investing as much as possible. I have been advocating this approach to spending and saving for years with friends and family, often without getting very far, so it was really encouraging to find out that I was unknowingly part of a growing tribe of frugal spenders and maxi savers!
I have been an avid saver since I was 10 years old. My favourite “toy” was an elephant piggy bank and every Sunday my grandfather used to give me some coins which I eagerly inserted through the slot on the elephant’s back. I also had a little scam going. I would count 90 cents and ask my mum to change it into a pound. She never checked the small change I gave her, just putting the 90c in her purse and giving me a nice shiny pound coin. I used to open the piggy bank every couple of weeks and count the coins over and over, hoping to discover that they had magically multiplied while I was not looking. It was something of a precursor to how I feel today when I go check my investment portfolio when the going is good.
My saving habit informed my spending habits. My friends at school used to blow their pocket-money on sweets and magazines, while I used to salt it away. As I got older I realised that as my friends’ income increased, so did their spending. I really did not get the thrill they got when buying new makeup, clothes, shoes or bags. That’s not to say that I did not buy stuff, but that I bought less or I bought it cheaper. Did I really need 15 lipsticks? Did the brand matter? My bank account told me that I did not and it did not.
I remember an argument I had with some university mates when I was around twenty years old. We were discussing saving and I had made the statement that it was possible to save one hundred thousand euro by age thirty. My calculation was based on us getting a job once we finished our degrees aged around twenty-two and saving ten thousand euro a year. They kept insisting that it was impossible to save that amount of money and that even if possible, the result would be eighty thousand euro not a hundred. I tried to explain to them, somewhat unsuccessfully, that ten thousand was half our expected salary upon graduation (which would have gone up in subsequent years) and it was totally possible to save that much. I also tried to explain the power of compound interest, but did not get very far. It was quite an eye-opener to me about the dysfunctional way many people view money and their ability (or rather inability) to engineer their own financial future. And yes, I did make it to a net worth of EUR100K by the time I was thirty.
There’s no doubt in my mind. The only way to build your wealth is to spend less than what you earn and invest the money wisely. However my frugality has limits. I can see that for some bloggers frugality has become something of an obsession and they are taking it to extremes that I am not willing to go to. As I get older I have come to appreciate my creature comforts and the value of new experiences, so while I think it is critical to save, I also believe that money is there to better my life and I do not hesitate to spend in areas which are important to me. At the end of the day it all boils down to a personal cost-benefit analysis, the results of which are totally dependent on my values and what I give importance to: my personal return on investment. If the benefit to me personally is higher than the potential income derived from the forfeited money, then I will go ahead.
Let me take some examples:
Example 1: I love bags and was browsing the Mulberry site checking out their collection. I really like the Mulberry Bayswater which retails for around EUR1200. A quick calculation based on the 4% safe withdrawal rule tells me that if I buy the bag I would be giving up EUR48 per year for the rest of my life. Thanks, but no thanks. The ultimate function of a bag is to carry stuff and I can easily get one that looks great without damaging my long-term financial independence. The only benefit to be had from buying a Bayswater is related to the perceived social status of owning a luxury item and as far as I am concerned the personal return on investment is not high enough to justify the cost.
Example 2: I have always enjoyed travelling and I believe that seeing the world is vital for personal growth, not only for me but also for my children. I am currently looking at booking a trip to Berlin this summer. The total cost is likely to be in the region of EUR5000, which means that the impact on my lifetime revenue stream will be around EUR200 per annum. This is considerably more than the bag but in the famous words of Rhett Butler “Frankly, my dear, I do not give a damn”. Travelling is not something that I am willing to substitute with a cheaper alternative, and although some of you might disagree, it is also not something that I will happily make do without or put off to a later date for two reasons. (1) My children are growing up fast and I want to enjoy as many holidays with them as possible while they are still too young to tell me that they would rather be with their friends instead of with me. (2) I do not have a crystal ball and cannot tell the future. It is currently possible for me to travel but this might change in the years to come. In conclusion, I put a very high value on spending quality time with my family and although I can do that without needing to get on a plane, the memories and fun we have when going someplace new are priceless to me. So the personal return on investment is well worth the money.
I am sure that you will agree that it is totally possible for a different person to end up with a different personal ROI for the two examples above, resulting in different decisions. People who put a much higher value on social status might come to the conclusion that the buzz they get showing off their luxury goods is well worth the money spent. Luckily for me I am not one of them and so I have been able to stay away from conspicuous consumption that would have wreaked havoc on my savings, leading to me building a nice nest egg over the years.
The message, at the end of the day, is that yes, it is important to be frugal and save money. However it is also important to live. We only have one life and we never know how much time we have left, so if there is something that you really want to do, go ahead and do it. Life is too short.