The frugal approach to growing wealth focuses on what you spend. The Millionaire Next Door, one of the most popular wealth motivation books, shows how spending wisely is the most important factor in increasing net worth. The book contains anecdote after anecdote about millionaires who live below their means and keep their wealth by maintaining modest spending patterns even when they have the financial capacity to spend more.
This philosophy is a necessity, particularly in the early stages of growing wealth. It’s limited. Whether you’re supporting a family of four or are living on your own, you can only reduce your expenses so far. Expense reduction can be taken very far — you can live off the land if you are willing to forgo the conveniences the modern middle class has come to accept as basic living conditions. If you’re not willing to go that far, you can feed your family a steady diet of ramen noodles.
There’s always further you can take frugality, but everyone has a limit. That limit might be flexible once a family concludes that frugality is the path to long-term wealth.
A frugal-only perspective to building wealth is not going to take anyone very far. Saving money is limited — whether by a soft limit in which a family has living standards below which it would not like to have an enduring experience or the hard limit of zero. You cannot reduce your spending by an amount larger than your total expenses.
If your total expenses consist of only the basics, food and shelter, and they amount to $1,000 a month, you can only reduce your spending or increase your savings by $1,000 a month, and to do that you would need to live rent-free with a kind soul and find free sustenance. And even then, you’ve saved only $1,000 a month and there’s nothing more you can do. This is an extreme example — most people have more they can save without resorting to mooching off others who understand your desires, but mathematics is not as forgiving.
The other side of the equation is just as important, and I would argue that it’s significantly more important. In these ten tips for saving money, half are about earning more money because increasing savings depends on having a healthy income more than it depends on cutting costs. The amount you can save by cutting spending is limited by nature, nurture, or logic.
In contrast to the limited approach of cutting expenses, earning more money is virtually limitless. While there comes a point at which saving more money is not possible or even desirable, there are always opportunities to earn more.
In the short time I was a non-exempt employee in the financial industry — eligible for overtime payments — I took advantage of this as much as possible. Working long hours in this job was expected and there was more than enough to do to keep me busy, so the situation was perfect. When I moved into a different department and received a promotion to exempt status, my first concern was that my new salary would be more than my previous salary plus overtime payments. Without the opportunity to earn more for working overtime, I had less control over my income from that job.
At this time I had already reduced my expenses significantly, and had little more possible without sacrificing some of my basic requirements for quality of living. I was on the quest to build wealth, however, and that included quickly eliminating my remaining student loan debt, so I focused on earning more money. I consulted for several clients who were interested in building their web presences, as this was a skill I had been developing for a long time. I put more focus into my business outside of the workday, and that help me use a variety of skills to increase my income. A few years later, this website began gaining in popularity among readers and high-quality advertisers, and it provided a surprisingly stable source of income above and beyond my salary from a day job.
The point I’m making is that there are always opportunities to grow income if you have the time to spend building something of value. While not everyone is suited to being an entrepreneur, those who build something that other people are interested in can ease the pressure on their expense rollbacks by generating a revenue stream. This is the key to building wealth in a manner that you just can’t imitate by cutting spending.
Getting rich slowly through smart spending and good choices is an important part of the wealth-building picture, but there’s not much use to wealth if it takes a lifetime to accumulate. Putting significant effort into creating something of value — a product customers will buy, something that fills a need previously unfilled or poorly filled, a business with the potential of being sold, or a service other people or businesses require — your day of financial freedom can arrive much sooner.
Published or updated September 28, 2012.