Last Updated on February 25, 2021 at 11:18 am
If there is one word in personal finance that is mostly misunderstood, it has to be frugality. After the 2008 financial crisis, it became popular online when people with uncertain or no jobs had to relearn money management. A frugal person is often misunderstood to be a miserly person who deprives themselves of worldly pleasures in the name of money management, minimalism, financial independence, early retirement etc.
When young people seem to think getting rich is possible only by sacrificing current pleasures, it becomes crucial to appreciate the difference between a frugal person and a miserly person and how it can make a big difference to our outlook on money management and investing.
Much of this confusion about frugality comes from the absence of a single opposite state. What is the opposite of frugality? Is it extravagance? Or is being a spendthrift?
You may have heard the phrase “spending problem”. This is usually assumed to be the same as being a spendthrift. While this is true, there are two types of spending problems.
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Spending for the sake of spending or spending because one can is being extravagant. The opposite of this state is not frugality. The opposite of extravagance is miserly.
Not spending or not spending enough when one should is being miserly. Frugality lies somewhere between extravagance and miserly. Where exactly will depend on the individual? That is why it is hard to understand.
Most of us will be familiar with the difference between needs and wants – if you want a template to discuss this with your child, check out my new book for kids: Chinchu gets a superpower!
Needs are not just everyday needs like groceries, internet and petrol. How we are going to spend after retirement is a future need; a family holiday two years from now is a future need; our child’s college fee is a future need;
Let us leave alone present needs to keep the discussion simple:
- If I spend on wants without thinking about how the expenditure will affect my (present needs and) future needs, I am extravagant.
- If I flatly deny my wants or my family’s wants, I am being miserly and making everyone miserable!
- Frugality (in my opinion) is trying to balance wants with future needs. This balance will mean separating wants into short-term, intermedia-term, and long-term wants, aka delay gratification. Thus frugality is middle-ground somewhere in between being a miser and a spendthrift.
Frugality stems from Latin – frugalis or thrifty. Thrifty sounds like a bad word, but it only means “using money and other resources carefully and not wastefully”. This is very different from miserly, which is not spending enough or not at all.
What is the difference between frugality and minimalism? “Do I really want this or not?” is commonsense and a common baseline for everyone. A minimalist could take this one step further and debate, ” Do I really need this or not?”.
Be it wants or needs, frugality only requires cautiously planned spending. So is distinctly different from minimalist. That said, both minimalism and frugality have nothing to do with self-deprivation (or being miserly), as many on social media are quick to judge.
Is frugality necessary for building wealth? Obviously yes. If we spend without considering future needs, we will have difficulty meeting future needs (what wealth means in this context).
The trouble with us is a tendency to take on extreme positions: “Stop asking me to invest, invest, I want to enjoy today”. Focusing on enjoying today is a guaranteed way to end it soon.
Why should enjoyment stop today? We can continue to enjoy spending money on all our needs and wants throughout our life. For this, a balance is essential.
A first step in finding this balance is to stop judging others without data (she is depriving herself in the name of being a long-term investor) and start understanding our future needs and how we can live a “good life” not just today for as long as we are around.
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