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.
In the 4th installment of Squirreling Gone Wild, I’ll move away from the example of my college buddy from back in the day. To refresh, this guy was quite a character, and his antics with “frugality” provided for some good stories. Anyway, one of the terms he used, which I had previously mentioned in an earlier addition of this series, was “arbitrage opportunity”. He threw this term around when he saw a chance to “get something for nothing”, or game a system to pay less.
Recently I came across one of these arbitrage opportunities, though it was after the fact and I did not intentionally take advantage of it. Here’s the situation: I was traveling back home to the U.S. from Canada, where I was on a short visit. Since I was visiting a few folks who gave some food and a small gift for my daughter to take back home to the U.S., my carry on bag had gone from being fairly full upon arrival to overflowing when departing. Thus, I had to expand the bag as I finished packing. I had carried the bag on the plane on my flight to Canada, but wasn’t sure if I could carry it on when I returned back due it being expanded.
When I arrived at the airport to check in, I did not check my bag and tried to carry it on. I thought I might as well try it, since I saw others with seemingly bigger bags walking through. So, on I went toward customs/security. Before I could even get to customs, I was told that my bag was too big and would I would have to check it in. I asked if I could proceed and then check it at the gate, but the individual who stopped me said no. Ok, I thought – I guess I’ll have to go back and check in. No big deal.
I backtracked and made my way back to the counter, where I told them that I was sent back because my bag was too big and needed to be checked. At that point, it occurred to me that I might have to pay, and thoughts raced through my mind that the food and gift that I brought would end up costing me quite a bit! I mean, the homemade fruitcake was good (very good, I might add), but were those slices of cake worth the checking fee?
Once I checked it in, the said I was all set – but never mentioned what the fee would be. I asked, and to my delight – no fee! I mentioned to the nice lady behind the counter that if I would have known that I would have checked it in the first place. To my surprise, she told me that if I had checked it there would have been a fee, but since I tried to carry on was sent back, there would be no charge.
Therein lies that arbitrage opportunity – if you simply take your bag through as a carry on and get sent back, you could avoid the charge!
Now, to reiterate – I did not game this on purpose, and did not try to do this. I simply found out after the fact purely by accident, and was happy to take advantage. I believe the savings was $29, if I remember correctly. My conscience was clear because I really did try to carry it on, as I saw others with bigger bags walking toward customs/security.
My assessment is that this is a clear loophole for people to avoid the carry on fee that seems to annoy so many people. That said, knowing this loophole for this particular flight (Canada to US), would you try to take advantage of it and go through carry on – even if you thought you would probably have to check in, Or, would you just check in up front and pay the fee? Personally, I would check in up front if I knew that the bags were definitely too big. But I tend to be a rule follower in those cases, and am wondering if there is a grey area here.
What do you think?
I was thinking about past instances of frugality, and I came up up with one example that I found particularly interesting that would be fun to share. It’s an example of extreme “squirreling”, going to micromanaging levels of saving, good in spirit but executed in a way that it’s hard to recommend to any adult. That said, it does reflect a true commitment to actively looking for opportunities to live within one’s means in a creative way, which as I said has something of value to take away.
My example is actually about a friend’s behavior. And yes, it was really a friend, and not meJ This friend, with whom I am still acquainted, had some very frugal habits back in college about 20 years ago. I could go on and on about the interesting things this guy did.
One that I will share now regarded how he purchased gas at the station. He would always pay in cash, but would always make sure that he stopped the pump when he was $0.01 over a whole dollar amount. For example, instead of stopping at $10.00, he would stop at $10.01. Then, he would pay $10.00 in cash and take a penny out of the little dish at the register – you know, the one where you take one if you happen to be short. Well, he planned to be short.
He would stop for gas twice a week, partially fill up, and rotate gas stations so they wouldn’t catch on. The stations were close to each other and on his normal drive, so it didn’t take him out of his way to do this. His thought was that if he filled up 2 times per week, over the course of the year it would give him $1.04 in free gas. At that time, way back when, that would actually buy you a gallon. So, his thought was that for very little effort he could get a free gallon of gas over the course of the year.
As a grown adult, I can’t imagine doing that. Self-respect is infinitely more important to me. Does that cross the line from being frugal to being bit crazy? Maybe! I would say its nuts, but that would not be such a bad thing, as us squirrelers have to be a bit nutsJ!
Interestingly, this guy has done very well for himself since then – financially and otherwise.
This post was featured in the 224th Festival of Frugality at Frugal Upstate.
