Frugality: The Cornerstone of Personal Finance

Frugality or a frugal way of life is often misunderstood as being miserly, devoid of the joy and pleasures of life where one tries to save as much money as possible for the future.
Talk about frugality and personal finance and you are often met with criticism, especially by guys in their early 20s : “We are all going to die anyway so why not live it up? Why spend so much effort on saving for an uncertain future at the expense of enjoying today?”. Such misconceptions are a sure shot way of making the future uncertain and short lived.

What is frugality ?

Frugality is a personal concept (so is personal finance for that matter!), and I would like to define it as waste management : wastage of health, time, effort and therefore money. Controlling spending is not a goal but a desirable by-product.
If you do insist on a money-based definition : frugality is preventing tomorrow’s expenses today. Since it is a personal concept what works for me will not work for you and vice-versa but we can find some general common ground.

Physical health is probably the only investment a financial planner cannot help you with. If you ask me no one can, not even a doctor, except you. It is impossible to ignore increasing instances of diabetes, heart problems, obesity, muscular pain, stress, tension, cancer … the list is endless. It is also impossible to ignore the fact that these diseases are affecting people in their 30s.
You may earn enough, will little or no debt, your finances may be taken care of by a planner but if you ignore your health, smoke and drink excessively etc. chances are you won’t be able to witness the magic of compounding the way you dream.

A live example

Before this starts looking like a sermon (comes easy to me, I am a prteacher!) let me talk about one specific instance in my life which will show how frugality and personal finance are related. A few years ago I was 25 kilos over weight, had high BP, cholesterol, neck pain, back pain and knee pain on top of general cluelessness about life.
Today the cluelessness remains, but the rest of the ailments are under good control thanks to a frugal approach.
I am not sure how I started, but one of the first things I did was to replace sunflower oil (~ 100 INR per kilo) with olive oil (~ 700 INR per kilo)! This is certainly not a miserly step, but it was frugal. Not in terms of money but in terms of oil! From about 2-3 kgs of sunflower oil a month my family was consuming 1 kg of olive oil.
Every time my mom used it she would crib about how I was a spendthrift not knowing the value of money and she drastically cut down oil in her cooking fearing that I would get another kilo of olive oil! The high cost proved a natural deterrent.

So did the high cost burn a hole in my pocket ? No. For two reasons, firstly olive oil helps reduce bad cholesterol and increase good cholesterol. So in the long run I consider it a good investment (supplemented with exercise). Secondly when we switched to olive oil, we made a decision to cut down on processed foods (namkeen, biscuits etc.).
I recently realized that our grocery expenses have been the same for the past 5 years despite the inclusion of olive oil because of cutting down other bad food choices. Although inflation was nearly double digit during this time, frugality helped us balance things out.
The real return is long term benefits and an overall improvement in health. This thought process where you evaluate each decision on how it will affect the present and future and take action is frugality. Saving money is a by-product. It is not the motive.
Question each action and choose the best option with sound reasoning. Here are some questions in relation to frugality and personal finance :
1. If you need to lose weight do you get a gym membership or realize that for weight loss to occur you need to spend more than you eat (as against spend less than you earn money!). Exercise can sometimes make you want to eat more!
2. Would you say that the purpose of a mobile is to communicate on the move. Or do you really need to browse, click and tweet too?
3. Would you rather celebrate your child’s birthday lavishly or ask your child to save the money each month until it is enough to buy his/her favourite toy/want?
4. Would you invest in a full HD LED/LCD television when half the channels you get are not HD and you hardly have time to watch tv?
5. Would you do something because your friends or relatives do it or would you do something only because it is necessary? Irrational peer pressure is the biggest enemy of contentment.
The list is endless.

The message is clear:

  • Identify your needs (retirement, child needs, holiday, car, house etc.).
  • Separate them from wants.
  • Invest wisely and as much as you can for your needs.
  • This doesn’t mean you live like a monk/nun. Treat yourself from time to time on your wants. Guys in their 20s do have a point. You get only one shot at life. You must live it up … from time to time.
  • An understanding partner/spouse is crucial for frugality to work. I am blessed with one.

To me this approach is the best form of meditation: a path to inner peace. Today I am able to save up to 60% of my gross monthly pay. The savings if invested is enough for my retirement, my son’s education and wedding. I do dream of a bigger house. But I don’t think I will be able to buy it. Separating your goals from your dreams is also part of frugality.
To me frugality itself is a need. If I am not frugal I will not be able to save enough. How about you?

Both are tightly coupled

Why is a frugal approach the cornerstone of personal finance?
Investing should always be done with a goal (if you don’t have goals, which is rare, spend the money!). Assuming you know how much to save, are you earning enough money to fund all your goals ?
The predominant answer is likely to be ‘just about’ or ‘no’. So if your earning abilities are limited you would need to cut back on your spending (by making healthy lifestyle choices for a start). Even if you did earn enough now you need to be careful and not expand your lifestyle in the coming years. If you did this the corpus you accumulate upon retirement may fall short.
People in their late 20s and early 30s must be careful about this since lifestyle is likely to change for most in coming years. Doesn’t mean you put off investing for later. Just means that you should reevaluate your retirement needs until your lifestyle stabilizes. Understanding basic principle of frugality and financial planning would help in a big way in doing this.

This article appeared in the Wealth Wisher Blog on Mar. 12th 2012.

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