Many of us who blog on personal finance tend to write a lot about frugality. It’s been a salient topic over the last few years, with the economic pressures that have disrupted the financial lives of millions of people. Frugality, as such, has gone from being socially unacceptable to almost de rigueur. Being frugal has become cool in some circles. Cut expenses to the bone, live on less, and save your way to financial bliss!
I do agree with the idea that cutting expenses to live within one’s means is very important. Additionally, the world is chock full of examples of average wage earners who have been very disciplined with saving a healthy percentage of income, leading to a very comfortable retirement and in many cases, financial freedom.
That said, I also think that it’s important to take a holistic view of personal finance and look beyond the realm of saving money. While frugality is a great thing, we also need to earn money in order to have any to save. And more important than that, what is the role of money in our lives, taken in the broader context of other important aspects of our existence?
Starting with the broad view, I like to look at money as being a part of the HWR framework - health, wealth, and relationships. Each one is an important part of our lives, and each one impacts the other. For example, if you improve your health by getting in great shape and improving physical endurance and mental alertness, you’ll put yourself in position to earn more. So money, while not an end goal (at least for me), is a part of the whole quality of life equation. Financial freedom, while not panacea for all our problems, would likely improve quality of life, all other things being equal.
Now, diving further into the topic of money, let’s examine how we can get closer to the point of achieving financial freedom. Again, given the attention many people (including me, admittedly) devote to frugality, one would almost think that it’s the concept that can most drive our wellbeing, as long as we adhere to the principles of living within our means.
There is some truth to that, to be sure. But there are two things at play here:
- Bringing in revenue
- Managing expenses
I can relate it to marketing and finance in the corporate environment. Without the innovative, hard work of those in marketing, there wouldn’t be revenue coming in the door. Without the folks in finance, expenditures would be too high, and money couldn’t be reinvested in the business or paid to shareholders.
In our lives, it’s our career that is the engine that drives our personal finances. You could pinch every penny possible, but if your career goes down the drain and disappears, you’ll be left scrambling. You might have to dive into that emergency fund – which, ironically, might have been funded by your career to begin with! Ultimately, what we want to do is maximize the income to expense gap.
To that end, in addition to managing expenses, I recommend investing time, energy, and focus in your career. Aside from an inheritance or other source of outside income, it’s the best place for people starting from scratch to begin to build their financial future and grow income. If you don’t invest in your career, you’ll have little stability and irregular financial income. If you do invest in your career, that could still be the case due to circumstances, but at a higher level of income. If you do it well, and get some good luck and fortune along the way, you have the means to build a nest egg.
That brings me to the next part – saving. By minimizing expenses, you can put yourself in a position to live within your means. Living within your means requires discipline, and the ability to distinguish between wants and needs. Actively managing expenses will allow for one to maintain a given level of expenses, with annual inflation adjustments.
By actively managing both career (cash inflow) and spending (cash outflow), we can increase the income minus expense gap. This gap equals savings. Once we have money saved, we can start investing and earning an after-tax rate of return that exceeds savings. Doing this early enough, with a good asset allocation, will allow us to grow our wealth.
The key concept: it’s all a system, with money just one part of quality of life – and with regard to money, it takes focus on both cash inflow and cash outflow to put us in position to drive toward financial freedom.
What are your thoughts? Do you follow a similar framework when it comes to your approach toward money in your life?
This article was included in Carnival of Personal Finance #263 at Suburban Dollar.
email
Twitter
Facebook
Digg
StumbleUpon
del.icio.us
Reddit
Tipd
Yahoo! Buzz
Google Buzz
Google Bookmarks
Technorati
Subscribe by email to get my latest posts directly to your inbox!
Yep, spend less, earn more, and save the difference – the key philosophy of our budget. Our biggest monetary goal is early retirement, so we have to save more than “normal”.
I wonder if part of the reason many focus on frugality right now is because it seems harder to increase your income. The stock market is a bummer, as is the housing market. Many people haven’t had raises in ages, nor bonuses. So, maybe the only way they see to increase their net worth is by reducing expenses?
Plus, I think it is easier to see expense reduction on paper. You can say ‘I cut my cable bill’, but it is harder to say ‘I worked really hard on my project today and hopefully it will increase my salary next year’. But I definitely agree, increasing your income is a huge part of the puzzle, probably even more so than cutting expenses. You can only cut so much, but your income potential is limitless.
Everyday Tips recently posted..Purchasing A Car For A Teen – Help!
Everyday Tips – great points. I think you have some really good observations on why frugality is such a focus now. And in your last line, when you say you can only cut so much – very true, I agree. Two sides of the equation here.
I think if you work from both sides of the equation (make more, spend less..) easier said than done huh?…but every little bit helps and it all adds up in the end. It can add up to more, or it can add up to less, you have to make that decision.
Great site, I just found you and I am going to look around. Thanks!
Finallygettingtoeven – Thanks! Glad you found Squirrelers. Hope to see you back.
I have written about this subject a number of times. And, I believe it is critical to steadily increase your income. In fact, I think it’ more important than ever, because prices are going up steadily, while wages adjusted for inflation are stagnant. For the first time in a long time in America, the quality of life is dropping for average working folks and the middle class is geting squeezed.
As Everyday Tips said, it’s getting harder to increase your income. It’s more important than ever to get an education and pick a solid career path or to start a business with income potential.
Hope to Prosper – I agree that the quality of life has been decreasing. It’s harder to make a living and save than it was in a prior generation, from what I can see. I see this trend continuing.
[...] wants you to remember that saving money is good, but you can increase your income as [...]
I was just thinking about this today! I used to be non-exempt so I would work myself to the bone and have OT money to show for it. Now, I don’t so it’s definitely harder to find “extra” savings and I have much less time to spend on other moneymaking ventures. But I’ve got to find a way! As Everyday Tips points out, you can only cut so much! And I’m a big believer in finding the big and small wins, saving AND making more money.
Yes, you can only cut so much. It’s not necessarily getting easier to save and invest these days, and savings rates have really dropped over the last few decades. That’s why I agree with you that you take the small wins when you get them!
It’s definitely a good point. I don’t know why being frugal is so cool. It’s cool to make tons of money and not let anybody know!
Financial Samurai recently posted..Only The Poor or Super Rich Say, “Money Can’t Buy Happiness”
Financial Samurai – Thanks for the comment. Making money and not flaunting it is the way to go, no doubt. I like a combination of both that and being frugal. That’s a very cool combination.
[...] some discussion of using money to work for you instead of just paying down debt, head on over to [...]
[...] a conflict of interest because when they tell you to buy one policy over the other, they stand to make money from commissions. They make money by selling policies, so their interest (to make money) may be in [...]
[...] money when it comes to budgeting but of course one of the ways to make life a little easier is to make money too. You should always balance ways of making a little more if life really is finding it hard to [...]
[...] I can’t automatically generate these savings with the snap of my fingers, frugal living or make money by diversifying our income is really the way to go. Sometimes, it can be as simple as participating [...]
[...] the basics of their family’s personal finances. While it may be true that one spouse may make money, while the other is at home with the kids or one spouse is better at managing the family money [...]
Good point here! Making money and accumulating wealth brings great satisfaction to me! It’s the security that money brings that makes me happy. I feel like I am powerful and I can sleep tightly, without worries and stress.
Get Happy Life recently posted..Reaching Financial Happiness
Get Happy Life – I see it the same way too, about security with money. It helps reduce/prevent some stress, which helps with overall quality of life.
[...] Saving is Great, but Don’t Forget to Make Money Too! (Forget) – Managing expenses and cash outflow is an important part of a sound approach to personal finance. That said, we also need to EARN money in order to have any to save. By actively managing both career (cash inflow) and spending cash outflow), we can successfully increase our savings, and work toward financial freedom. [...]
[...] Saving is Great, but Don’t Forget to Make Money Too! (Forget) – Managing expenses and cash outflow is an important part of a sound approach to personal finance. That said, we also need to EARN money in order to have any to save. By actively managing both career (cash inflow) and spending cash outflow), we can successfully increase our savings, and work toward financial freedom. [...]
[...] Saving is Great, but Don’t Forget to Make Money Too! (Forget) – Managing expenses and cash outflow is an important part of a sound approach to personal finance. That said, we also need to EARN money in order to have any to save. By actively managing both career (cash inflow) and spending cash outflow), we can successfully increase our savings, and work toward financial freedom. [...]
[...] 2. Squirrelers – Saving is Great, But Don’t Forget to Make Money Too! [...]
Amen. You can’t save money you haven’t made in the first place. The reason people write about frugality all the time is that it’s very straightforward. We know exactly how to cancel a gym membership (which I’d argue is shortsighted from a health perspective, but anyway…) Earning more is a more complicated matter. But I just saw the other day on the blog of a biotech executive (who blogs anonymously) that she has a Zazzle store. Even though she’s highly paid, she’s still looking at sidelines! I like that mindset. Within a range, you can choose your income. Which means you don’t always need to scrimp more. You can try to make more too.