The Importance of Frugality in Building Wealth

Many often think of wealthy individuals as those who freely spend money as they please, with little worry or care for where much of it goes, due to their loads of dispensable income. However, what many don’t see, is that most of those who are wealthy today didn’t start out there, and likely had a very frugal mindset in the beginning to get them where they are now.

Related: Rules to Wealth Creation

The Difference between a Rich vs. Poor Mindset

Building wealth up from very little to nothing requires a different kind of mentality than most people possess, which can often be discerned as a rich vs. poor mindset. There are distinct differences between these two ways of thinking that allow two people starting with the same amount of money or income to end up in two completely different positions after a period of time.

These differences are outlined below:

Short vs. Long Term Thinking

Those who employ a rich mindset view money in the long term: looking for ways to best save or invest it for the achievement of future financial goals, rather than for short term enjoyment or immediate gratification. This also often means putting a focus on living frugally wherever possible, in order to maximize savings.

People with this mindset make sure to buy assets that will generate wealth over time, such as stocks, real estate, and other businesses, as opposed to spending too much money on liabilities, which will only depreciate over time and reduce one’s capital.

Financial Education

Individuals with a rich mindset focus time and energy on learning everything they possibly can on money and finances, to help them find the best ways to save and invest, as opposed to accepting whatever little knowledge may have stuck with them growing up.

While we learn many subjects in school, finances often don’t find a place in our education system, which is why it’s so crucial to do our own research and learn as much as possible about credit cards, budgeting, smart spending, and investments.

Financial Dependence vs. Independence

Another big difference between those who employ a rich mindset versus those who have a poor mentality is that they focus on achieving financial independence. Namely, they look for ways to remove any amount of dependence on government assistance or reliance on income gained by being employed by others.

Debt

Debt is one of the biggest things that hold people back from building wealth. Those with a rich mindset pay close attention to making sure they avoid debt as much as possible, unless it’s a very low interest type that can be leveraged and used for an investment to generate more profit in the long run.

Related: Why Student Debt Could be Stunting Your Financial Growth

Multiple Streams of Income

Building multiple streams of income is an amazing way to diversify earnings and minimize financial risks. The more sources of income you have, the more stable your overall yearly earnings. If one source fails, you still have a few others that can hold you over and keep you afloat.

Those who employ a rich mindset see the value in this fact, as well as the potential opportunity to significantly increase earnings, more than what would be easily achievable with a traditional, single source of income coming from a typical job.

Financial Goals

The ability to achieve such goals as financial independence, overcoming debt, and building new streams of income requires one to be very diligent with their spending, to really reevaluate where their money is going and to have enough self-control to spend frugally when and where it is needed.

Those with a rich mindset are good at setting and achieving financial goals, due to their developed knowledge on what is possible and realistic, as well as their ability to have self-control and prioritize their spending in a way that focuses on what matters.

Why Frugality is so important

In each point above, there is a key role that frugality plays in order to make each area possible. Living below your means is the only real way to give yourself the opportunity to put enough money aside for investments and to truly build wealth, regardless of your current level of income.

You could be making over half a million a year and still never achieve true wealth, if you’re living paycheck to paycheck, and not putting in the effort to minimize your spending and live below your means.

1. Increased Savings → More Investment Capital

As mentioned above, the more frugal you are, the more money you will then have to invest in assets, which will generate you, more income and thus build you greater wealth. The larger the amount you’re able to initially invest, the higher your return.

Now clearly, having a larger income will make putting money aside easier, but so will cut costs and finding ways to decrease your expenses, which leads to the next point…

2. Reduced Debt

For many people, much of their debt is unnecessary: credit card debt, car loan payments, personal loans, and in some cases, even student loan debt. While certain debt can be necessary and unavoidable, such as a mortgage on a house, or even helpful, such as a business loan being put toward a high-return investment, the less debt you have to work with, the lower your overall expenses, and the easier it’ll be to acquire wealth.

3. Mitigated Risks

During any point in life, you may come across a time when you’ll need to rely on personal savings to pay for an emergency or unexpected crisis. When you already live frugally and have less expenses and more savings, this makes it much easier for you to manage upcoming troubles and stay afloat during uncertain times with little stress.

4. Easier Budgeting

Living frugally allows you to have more control over your budget, and to better anticipate where each dollar needs to go. If you’re spending money on a lot of unnecessary purchases, even smaller transactions, it’ll add up over time, make it much harder to keep track of how much you have left, and to then allocate enough to savings, investments, and other important areas.

5. Promotes Discipline

Being disciplined is one of the key traits that will help with building wealth over time, as it’s often a slow process that requires sacrifice up front. It’s important to be able to forego many luxuries and costly indulgences for the sake of putting that money towards assets that will serve you better in the long term.

Developing the habit of frugality will allow this whole process to be much easier, and begin to build that self-discipline required to achieve wealth, even before enough has been put aside or saved to make an investment.

Frugality is one of the key components of building wealth, which can be evidently seen in those with a rich mindset. Living frugally makes it possible to save enough money for future investments, budget easier, reduce expenses, and develop better discipline in the long run. 

Author Bio: 

Emilia is the author of A Dreamy Fantasy, a lifestyle blog focused on personal development, organization, home decor, DIYs, and bullet journaling. You can visit her blog over at adreamyfantasy.com.