Frugality: A Smart Money Move

What comes to your mind when I say “frugality”? It would possibly be any one of these—miser, cheap, sacrifice, bargain hunter, pinchpenny, scrooge, tightwad, cheapskate, stingy.

Frugality gets a bad rap, which, I must say, is very misplaced. Frugality is not about getting the cheapest deal; it is about maximising the total value. And I hope to convince you about it in this column.

#1: Buying Cheap Can Be Very Expensive In The Long Run

Let me start by paraphrasing an incident in the novel Men At Arms.

The city watch commander, Captain Samuel Vimes, is set to marry an incredibly rich woman, Lady Sybil Ramkin. By contrast, Vimes is not rich. He earns $38 per month and allowances. When he needed a really good pair of leather boots, he narrowed down on one that cost $50. Since it was above his budget, all he could do was buy an “affordable pair of boots” for around $10. It worked for a while but then began to fall apart. In fact, as the soles wore off, Vimes could tell where he was on a foggy night by the feel of the cobbles on his feet. When it developed holes, he had to buy a new pair to keep his feet dry.

The $50 pair of boots kept its owner’s feet dry for a decade. The $10 pair of boots had to be constantly replaced. Consequently, the poor man who could only afford cheap boots would have spent almost $100 on boots over the same decade as he kept replacing the inferior quality boots. Can you spot tragic irony? By buying the lowest-priced options, you could end up spending significantly more.

Socialist Frank Owen in the novel, The Ragged-Trousered Philanthropists, sums it up well. Everybody knows that good quality clothes, boots or furniture are really the cheapest in the end, although they cost more money at first. But the working classes can seldom or never afford to buy good things; they have to buy cheap rubbish; the lowest-priced articles. In the end, this is the most expensive.

I am reminded of a valuable spending lesson an ex-colleague based in Morningstar’s London office, Dan Kemp, once shared. “My mother always focused on buying the best you could afford, without incurring debt. This would save you from the expense of having to replace things often.”

Another equivalent of the $50 boots in the story can be found in an incident narrated by Canadian businessman Kevin O’Leary.

“I was admiring my mother’s Chanel jacket; stylist and beautiful, a black classic box cut. It looked like she’d just pick it up off the rack from that season’s new line. Knowing my mother, she would have saved and thought about this purchase for a long time before actually going through with it. Then she told me that she’d bought it 20 years earlier! She didn’t dry clean her clothes every time she wore them. She steamed them now and then, to maintain their shape and colour. She never flung her clothes on the back of chairs but always hung them up on hangers.”

Frugality is not about buying cheap, but about maximising total value. It is not about looking for the cheapest deal, but getting as much value as possible out of your money.

#2: Efficient Capital Allocation To Get The Most Out Of Money

The trick is to stop viewing your life in silos; every part affects another. So pick the part where you do not want to compromise.

A tech geek may prefer spending money on gadgets and be totally happy not eating out every other day or constantly checking the new restaurants in town. A fitness enthusiast would happily spend a tidy sum on the gym, personal trainer, and on a good pair of sneakers, but curb on designer clothes and accessories.

A study done by researchers from the University of Columbia and Harvard Business School suggested that money used for buying free time is linked to greater life satisfaction. Paying to get someone to clean the house, to cook, to tend to the garden, to take care of the children, even hiring a chartered accountant (CA) to file your tax returns instead of doing it yourself, or giving your clothes to the laundry instead of using the washing machine at home, are some of the examples.

I preferred cutting back on certain lifestyle indulgences that I allowed myself when I was earning a regular income, as long as I could rent a nice apartment in the neighbourhood I chose. So I would be called frugal when I say that I cannot afford to shop in certain places or eat at certain restaurants, but the truth is that I am just efficiently channelising my money to where it matters the most.

Frugality is about channelising your money in the right direction. It doesn’t make you a miser. It makes you think like a business owner, efficiently allocating your capital. Frugality is about prioritising your spending. You can have more of the things that make you happy and bring you pleasure.

#3: Smart Way To Wealth And Living A Satisfying Life

I personally don’t see frugality as a vice or a virtue. As long as you are making financial decisions that you feel comfortable with, why should anyone’s opinion matter? If you are wealthy, why is it reprehensible to be extravagant? But most of us are not rolling in wealth. Hence, we are forced to make choices when it comes to spending our money. These choices are trade-offs that give the appearance of frugality. In actuality, it is an excellent way to figure out what is of consequence to you.

Having said that, the danger lurks when your consumption is driven by competitiveness. When you need to spend to earn the badge of social prestige, and when you are defined by the brands you own. When your lifestyle gets you into debt, that’s where frugality helps by giving you the clarity you need.

Frugality is not about miserly money-saving, penny-pinching behaviour; it is about lifestyle choices and values. It removes the obsession with materialism and competitiveness and makes you focus on what matters to you. That’s because your focus is on getting as much value as possible out of your money; you will buy quality, which works in the long run.

This also results in a complete change in mindset. No longer will you think sacrificially and negatively—I have to spend less and I have to cut corners. Instead, your energy will be directed to prioritising your spending so that you can have more of those things that make you happy and bring you pleasure.

Spend on what matters to you, not on what impresses others. Frugality allows you to focus on getting as much value as possible out of your money, and that is a really good thing.

By Larissa Fernand, Behavioural Finance Expert