To continue investing we need capital. And to obtain capital we need an income and the ability to save money. I’d like to spend at least one post discussing frugality and the need to minimize expenses. As for myself I drive a 23-year old Buick Riviera. The house I just bought is 700 square feet, is low maintenance, and only cost $53,000. With 20% down the mortgage comes out to about $225/ month in an area where rent runs $8-900/month. All other costs will be roughly 1/3 or less of what most Americans pay. Essentially, I’ll be living way below my means. This will allow me to hit the $2,000/month savings benchmark and continue buying more stocks.
In the past, I paid for all major expenses with cash and only spent money when I really had to. Discretionary expenses of any kind had to provide great value. For instance, I bought a Toshiba computer knowing I’d be able to use it for 10 years or more. Because I never utilized debt, I had to work strategically with my bank to get a modest home loan. As you could imagine I was criticized by others for my lifestyle choices. I apparently needed a nicer car, more clothes, a penchant for drinking, and a more “care free” attitude. I never subscribed to the notion of immediate gratification and probably never will. Investing is only half the formula. If one fails to manage expenses, there will obviously be little to no resources to invest!
We’ve all the heard the so called “latte” factor. Essentially, if one stops buying a latte at Starbucks every day, decades later, one will accrue a small fortune. For example, if one gives up coffee ($150/mo), factors in an average rate of return of 8%, then in 20 years one would have earned an extra $88,353. This is 8% compounded on top of the original $36,000 saved. Now extrapolate this to other aspects of life. Never buy a brand-new car. Go couponing and making infrequent visits when going grocery shopping. Pay cash and avoid credit cards whenever possible. And of course, remember the latte factor! Ask yourself, do I really need that? Living below one’s means not only provides resources to invest; it lowers the threshold where one can retire.
I live in a very low cost of living area. I’m fortunate in the sense I only need $1000 a month to live, putting me just a couple of years away from financial freedom. This is just to illustrate a point. I don’t plan on quitting my job and living off $12k/yr. This just highlights how low living expenses and frugality are equal to that of investing wisely. Remember, one still needs to live! It’s okay to splurge now and again. I certainly do! However, the most important financial factor one has control over in life is how much one spends. One could lose their job or experience a nasty stock market crash. Even so, these events are far less scary to those who are frugal. So yes, continue to invest wisely but remember to keep the expenses in check!
DISCLAIMER: I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.