I recently wrote a post about how to be a contented investor which suggested that it wasn’t just the total return you accumulated that was important, but also the manner in which it was done. If someone experiences sleepless nights with their investments , then arguably settling for a slightly lower return may be worthwhile considering.
Similarly, the manner in which you save and build up your savings is probably just as important as how much you save. In my case, we like to aggressively save our money, but we can’t do without some of “our basics” such as the occasional nice dinner out, bottles of wine, laptops, tablets etc.
In my view, there are a few different types of frugality
The frugal lifestyle – This is the person who is focussed around eliminating any and all cost out of their budget. No expense escapes review, whether it is transportation, food, clothing. With limited affiliation to brand name, frugal lifestyle is able to aggressively review and eliminate any and all expenses at a far higher rate than the rest of the population. These are the types of people with the highest savings rate to disposable income, and who are likely best positioned for investing success by virtue of the sheer amount of available income they have. Saving rates to disposable income can be as high as 80% for this group.
The frugal minded - These people actively look for opportunities to reduce costs around non core items. There may be certain types of expenses that they are just unwilling to compromise on (“core expenses) but these items likely form a minority, rather than a majority of their expenses. They may look to pay their credit card expenses in full, and exercise some diligence in what goes onto those cards in the first instance. Outside of their core expenses the frugal minded are actively focussed on eliminating cost and substituting cheaper items. Saving rates for this group can be as high as 40-50% of disposable income. While reasonably well positioned for investment success, this group could do more to save, if they really wanted to.
I would say that we probably fall into this category. In our case, while we are prepared to punt on cable tv, while we find that we cant find it in us to forego that occasional bottle of wine, or dinner out, and even that nice set of new clothes ( probably more in my wifes case i think!).
The “Frugal-No thanks”. This group have an intense desire to consume. Spend today and worry later probably typifies their attitude to life. Rather than having an aggressive savings plan, its quite possible that they may be looking at additional debt to fund purchases. It’s fairly important that if you think you may be in this group that you take steps to work out where they may be areas to start cutting out excessive spending in your life. Savings rates in this group could be anywhere across the spectrum, potentially even negative. The good news for this group is that they have the largest upside potential to see significant increases in their savings rate and investments if they choose to make the effort.
Of course, the reality is that people may find themselves somewhere across a blend of all these stereotypes, and we can’t always neatly stereotype spending and attitudes to spending into a nice package.
But back to my central question, is it possible to be happy being frugal?
In my view, this comes down to whether you have accurately matched your attitude to frugality to your lifestyle. If you have done so, I would argue that you can in fact be extremely happy being frugal. As you start to see exactly how much you are able to save up each month, there exists almost a hidden drive to outdo yourself in terms of how much you can save the next month, and the next month. Provided you aren’t being frugal to the degree that you are eliminating things that are core to your happiness (and who knows, that morning cup of coffee cold be one of those things!) you are likely to find a strong and stronger desire to save more and more money each week.
And one of the very interesting things as a dividend investor is that you start to see the direct linkage with what you save and the amount of dividend income that you earn. Eventually, you begin to draw the correlation that any excess consumption that you can cut directly contributes to the amount of annual passive dividend income that you earn.
That’s probably enough to bring a smile to anyone’s face. I think if you can match your frugality with your lifestyle and you can see the efforts of your frugality in your investment success, then yes, being frugal can indeed make you very happy.
What do you think. Can being frugal make you happy?