For many people, when they think of the rich, think of flashy cars, gargantuan homes, and lots of bling. They don’t think about the rich being frugal, but many wealthy people are among the most frugal folks around. When Sam Walton was the richest man in the world, he drove an old pickup truck. Warren Buffet is one of the richest men in the world and he still lives in the same house he bought for $31,000 in 1958.
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In The Millionaire Next Door, Thomas J. Stanley details how the wealthy practice frugal habits, such as living below their means and ignoring conspicuous consumption. Frugality alone was not what made the subjects of his study wealthy, but it was certainly an important process of them becoming wealthy.
There are several ways that being frugal can help you become rich. In order to get rich you need to spend less than you earn and invest the savings. Obviously, being frugal can help you spend less than you earn. Frugality also gives you more money to invest. One reason is because of the time value of money. Money saved now is worth more than money saved in the future. With the help of compounding, a small amount invested today could become a fortune in the future. If someone saves $2,000 a year, between ages 16 and 20, then he would be a millionaire by the time he reaches retirement age (assuming decent returns).
Another way that frugality helps you have more money to invest is due to the fact that a penny saved is more than a penny earned. You have to pay taxes on a penny earned but when you save a penny you have already paid taxes on it. Depending on your tax bracket, this could make your saved money worth 25 percent or more than your earned money.
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If you are frugal, it takes less money to be rich. To paraphrase an old saying, “The richest person is the one who is content with the least.” For example, most people would consider you rich if you were able to retire young and have income for life. If you can live comfortably on $30,000 a year you would be able to retire a lot earlier than if you require a $100,000 a year to live comfortably. Frugality is not all it takes to become rich, you also need to earn money and invest it wisely. In regards to the question, “Can frugality make you rich?” My answer would be, “Frugality can help make you rich.”
Andy Hough writes about frugality and living well on a small income at TightFistedMiser.com
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ricardo of MI 12:41PM June 23, 2010