22 October 2007 145 views 4 Comments Print This Post  Email This Post

There are two ways to increase your ability to invest money, which ultimately makes you very rich and wealthy. The first way is to make more money. You can do that by getting a promotion, starting a second or third job, or build additional streams of income such as starting an online business on the side. The second way is a bit more simple. It involves saving more money, or being frugal. There is no standard of frugality. What someone finds frugal may sound silly to others. I read somewhere about a lady who collects ketchup packets at restaurants to refill her ketchup bottle. I think thats kind of odd and actually wasteful. The idea behind frugality is to save money now so you can enjoy more of it later. It’s harder than it sounds, especially in the world we live in today. So what if you come across a situation where you have to decide on immediate happiness or being financially responsible? How can you make sure you’re doing the right thing?

Is it worth spending on now?
You have to decide whether or not a particular expenditure is worth it. Basically, for every dollar that you spend today, you are taking away five to ten dollars from your future self, who is probably twenty or thirty years away. This is because there is opportunity cost involved. If you save and then invest $3000 today instead of spending it on a trip to Europe, twenty years from now it will be worth 13,982.87 at an 8% return on investment. At that time, even if you factor in taxes and inflation, you would likely be able to take the same vacation with money left over. That is the idea behind frugality.

Frugality is the smarter thing to do on paper, but then there is a question of happiness and enjoying life. I’ve noticed on Yahoo Finance, sometimes users get upset at articles promoting frugal lifestyles. I’ve read comments stating that frugal people are sacrificing their happiness and they are not living life. I’ve also read “you’re only young once” and “that [spending money] is what young people do.” Although those comments sound silly, there is a bit of validity in them. Maybe there are things in life that truly make you happy and it happens to cost a bit money. Personally, I love cars and I’m always going to drive sporty, well built automobiles. I’m always going to love exotic cars. I’m a car enthusiast and when I’m behind the wheel of the cars I customized myself, I feel a rush that nothing else can provide. For me, that is worth the opportunity cost. Do you have a passion for music? Instruments are expensive and so are lessons. However, music is therapy for the soul and it provides a release from daily life and I think its fine to give up that opportunity cost. It’s up to you to make the decision or whether or not a certain expense is worth it. No one, including me, Yahoo finance writers, or anyone else can tell you otherwise.

Be smart about it
I’m not against spending money now on things I love, but I do it in an intelligent way. When it comes to cars, I can get an auto loan and leverage myself to my eyeballs and buy a $200,000 Ferrari, but I won’t. Instead, I buy used sports cars without a loan. I look for cars that still have a nice modern look, but at the end of the depreciation curve. What this allows me to do is drive a nice car and resell it for close to what I paid for it. I’m currently driving a clean and well maintained 1999 5 series BMW, which looks like a $50,000 car. I bought it for $13,000 and will likely be able to sell it down the line for $9,000. If you’re one that loves to travel, how can you minimize expenses? How can you get the best deal on airfare? What hotels are the cheapest? If you are an avid golfer, can you share clubs with a friend and split the cost? If a pet dog makes you happy and you decide its worth the money, adopt one instead of shelling out $1000 at a pet store. You see, even when you do pay more for things you love, you can do it in a financially responsible way.