Frugality can only get you so far

Posted on September 30, 2008
Filed Under Attitude | 1 Comment

Last week there was a post at Shark Investor on saving more vs. earning more. I agree with him. If you want to build wealth, you can’t do it just by being frugal. For example, my wife and I spend about $3500 per month. If we eliminate all unnecessary spending, we could probably cut that by $500 per month. Assuming we could invest the entire $500 consistently over 15 years at 8%, we would have about $173,000. While this isn’t exactly pocket change, it doesn’t put us into the category of “wealthy,” either. Also, it would require that we cut all discretionary spending, and doesn’t take into account that our necessary spending will rise with inflation over time.

Building wealth faster will require not just being frugal, but also increasing our income levels. In fact, earning more not only helps us build wealth faster, it also provides us with more financial security should one of us lose our job. If our whole strategy was based on saving as much as we can, the loss of one of our jobs would mean we would instantly have to start digging into our savings to make up the lost income.

On the other hand, by pursuing a strategy of increasing our incomes, we could weather a job loss without touching our savings. In fact, depending on the streams of income we can create over time, we could continue adding to our savings, even if one of us lost our job. My goal is to build enough income streams to replace the income from my wife’s job. That way, we will be well positioned if one of us were to lose our job.

Cheers,

Ken

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