The Art of Frugality
People who successfully build wealth have one trait in common: They understand the art of frugality.
These unassuming millionaires know how to live on much less than they make, and they know how to save money. But those behaviors alone aren't enough. Not spending money today does not always result in having more money tomorrow.
Frugality for its own sake can result in doing without things that matter to you, failing to take care of basic needs like your health and living with a sense of deprivation. It can also lead to spending more money, not less, in the long run.
Frugality for the sake of enhancing your life, on the other hand, features an eye for value. Most people who build wealth are masters at the art of getting value.
There are many ways we might think we are saving money, but actually the opposite is true. Here are a few of the ways we can fail to get value:
1. Not spending the money to have legal documents drawn. A poorly worded agreement – or even worse, no written agreement at all – can cost you a bundle in future legal fees or even result in your losing a business or other asset.
2. Doing your own taxes. Unless your finances are so simple you can file the 1040-EZ, you're better off to pay a professional who will find deductions you're likely to miss.
3. Buying a new car to save money on repairs. An occasional repair bill for a few hundred dollars on an older, paid-off auto is still a lot cheaper than a monthly payment.
4. "Saving" money by spending on bargains you don’t need or want. This includes settling for what's cheapest instead of looking for the best price on what you really want.
5. Going without insurance. At a minimum, you should have homeowner's or renter's insurance, car insurance with maximum liability amounts, and a high-deductible health insurance policy. A loss or liability that isn't covered can cost you everything you have.
6. Not getting regular medical checkups. "An ounce of prevention is worth a pound of cure" is a cliché because it's so true.
7. Looking only at the initial price tag without comparing long-term costs. A more expensive but higher-quality item, whether a car or a pair of shoes, might last much longer and be a better value than something cheaper.
8. Not focusing on value for services when purchasing investments. A discount broker, for example, isn't always a better deal than a full-service broker. For "A" shares of mutual funds, you may pay the same in commissions without getting any personalized help. If you use a discount broker, be sure to purchase "no-load" funds, which don't have commissions.
9. Paying hidden costs for financial advice. Writing a check to a fee-only planner may seem too expensive. Yet Bob Veres, editor of Inside Information website, says that investors who don’t pay directly for the financial advice they get often pay two times more in hidden costs. If you buy investments products from a financial salesperson, keep asking questions until you know exactly what you pay in commissions and fees.
10. Paying off a low-interest loan instead of putting the money into a retirement account. If you can earn more than you pay in interest, it may be wiser to keep making loan payments.
Frugality that focuses on value is an essential wealth-building tool. Those who use it well do more than just save money. They know how to get the most value for the money they do spend.
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Rick Kahler, CFP, is president of Kahler Financial Group in Rapid City, S.D.
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