Conventional personal financial wisdom often touts the benefits of extreme frugality as the path to wealth. The advice goes that by cutting expenses to the bone and living as cheaply as possible, you can save and invest your way to riches. While there are certainly merits to being judicious with spending, frugality alone is not enough to propel you to true wealth.
To supercharge your wealth-building, you need to focus on the other side of the equation – increasing your income. When combined with reasonable frugality, growing your income gives you the fuel to save and invest at much higher levels and reach financial independence much faster. Let’s explore why frugality is limited and what you should focus on instead to maximize your wealth.
The Limitations of Frugality
The core issue with relying solely on frugality to build wealth is that you can only cut your expenses so much. Every budget has a lower limit. For example, let’s say you make $50,000 per year. If you slash your spending by an aggressive 20%, you’ll save $10,000 annually. That’s undoubtedly significant and commendable. But you’re still left with the same $50,000 income.
Additionally, there are limits to how much you can save without making life miserable. Extreme frugality comes with downsides. Constant deprivation can reduce your quality of life. Missing out on hobbies, activities, and social events to save every penny can leave you drained and unhappy. Financially, it doesn’t make sense to make yourself miserable to retire a few years earlier. Frugality is essential, but only up to the point of diminishing returns.
The Importance of Increasing Income
The antidote to frugality’s limitations is increasing your income. With a higher income, you can save and invest considerable sums without reducing your quality of life. Let’s return to the example of the $50,000 salary. If you can increase your earnings by just 20%, that’s an extra $10,000 per year, the same amount you’d get from saving 20%. But here, you can invest the entire $10,000 since it’s money you didn’t have before. You haven’t had to cut anything out of your life.
Even better, you gain more options as you advance in your career. Higher salaries allow you to change jobs, start a business, or take time off for training or personal growth. You can afford things that improve your quality of life. This can mean hiring a house cleaner to free up time, purchasing better work equipment, or taking classes to learn new skills. Increasing income gives you more fuel to build wealth without the pain of cutting discretionary purchases.
How to Focus on Increasing Income
If you’ve learned the importance of increasing income, the next question is how to go about it. The key is building valuable skills. In-demand, high-income skills like programming, digital marketing, data analysis, and sales are great targets. Gaining proficiency in these areas makes you more valuable in the job market.
With better skills, you can seek out promotions and higher-paying job opportunities. Don’t be afraid to change companies or industries for a bump in pay. Even if you like your current job, interviewing elsewhere can give you leverage to negotiate a raise. And if you’re feeling adventurous, starting a side hustle or small business can be a great way to diversify your income streams and turbocharge your earnings.
Also, don’t underestimate the power of investing in yourself. Using some of your income to purchase courses, attend conferences, and attain certifications can pay huge dividends in your earning power. The more you know and can do, the more valuable you become. Treat your skills and knowledge like the valuable assets they are.
The Power of Investing for Wealth-Building
Of course, earning more money is only part of the equation. To build lasting wealth, you must invest a significant portion of your increased earnings. Investing allows your money to work for you and grow on its own.
Let’s look at a hypothetical. Imagine saving and investing an additional $10,000 annually because of your increased earnings. If you invest that $10,000 annually over a 30-year career at an 8% average annual return, you’ll end up with nearly $1.2 million, even without any additional contributions. That’s the power of compound growth.
The key is to start investing as early as possible, even starting with small sums. The earlier you begin, the more time your money has to grow. Opting for tax-advantaged accounts like 401(k)s, IRAs, and HSAs can help your investments grow even faster. Look into low-cost index funds that track the broad market for a simple, practical approach. Real estate investing through vehicles like rental properties or REITs can also be a powerful wealth-building tool if you educate yourself and do it wisely.
Combining Frugality with a Focus on Income and Investing
To be clear, frugality still has an important role, even if it’s not the sole focus. Being prudent and selective with your spending frees up more money to invest in the future. You don’t have to live a spartan lifestyle, but avoiding frivolous expenses will only help you build wealth.
The key is balance and moderation. By all means, cut out the expenses that don’t bring you joy or add value to your life. Reducing spending in innovative ways is always a good move. Just don’t make frugality the endgame. Focus the bulk of your time and effort on increasing your income and investing your surplus earnings intelligently.
As your income and investment portfolio grows, frugality becomes less critical anyway. Building up your earning power provides a margin of safety. When you develop the ability to make money on demand, you don’t have to stress about saving every penny. And as your investment income increases, your original frugality-driven savings will become a more minor part of your net worth. At that point, your energy is better spent optimizing your investments and generating more income.
Case Study: Lauren’s Story
Lauren was a diligent budgeter and saver. She carefully considered every purchase and always chose the cheapest option. Her friends teased her about her frugal tendencies, but she took pride in her careful expenditure control. Every month, she invested her surplus in an index fund, happy to see her net worth slowly ticking upwards.
However, after a few years, Lauren realized that her wealth wasn’t growing as fast as she would have liked. Despite her best efforts to trim her spending, there wasn’t enough left over to invest at the level she needed to reach her goals. She was saving $500 per month on a $50,000 salary, but it would take decades to build up a substantial nest egg at this rate.
Determined to accelerate her progress, Lauren focused on her earning power instead. She used some of her free time to take online courses in digital marketing, a field she’d always been curious about. After earning a few certifications, she began freelancing, handling small projects for local businesses. At first, the extra income was only a couple hundred dollars monthly. However, her side income grew substantially as she built her skills and client base.
Eighteen months later, Lauren landed a full-time digital marketing job that paid nearly double her previous salary. She could now invest several thousand dollars monthly while still living comfortably and enjoying occasional luxuries. By combining her newfound high income with her existing saving and investing habits, Lauren accelerated her wealth-building drastically. She was no longer stressed about every minor purchase, knowing she had the safety margin of a high income. Instead of worrying about saving pennies, she was focused on optimizing her investments and advancing her new career.
Key Takeaways
- Frugality is beneficial but not sufficient on its own for building substantial wealth.
- Extreme frugality has limitations and can lead to a diminished quality of life.
- Focusing on increasing your income provides more fuel for wealth building.
- Gaining high-income skills makes you more valuable in the job market.
- Seeking promotions, changing jobs, and starting side hustles can boost earnings.
- Investing in yourself through education and skill-building pays dividends.
- Investing your increased earnings is key to long-term wealth building.
- Compound growth is robust, so start investing as early as possible.
- Balance frugality with a focus on income and investing for the best results.
- As your income and investments grow, frugality becomes less critical.
Conclusion
Building wealth is a multi-faceted endeavor. While frugality and saving money are essential, they’re not the whole picture. Focusing intently on increasing your income is a powerful wealth accelerator. By developing valuable skills, seeking higher-paying opportunities, and perhaps even starting your own ventures, you can dramatically improve your earnings and ability to save and invest.
This doesn’t mean you should abandon budgeting and saving. Keeping expenses under control will always be an essential part of financial management. The key is not to let frugality be the endgame. Combine it with a dedication to increasing your earning power. The real magic happens when you earn more, save more, and invest intelligently over the long term. That’s the actual formula for building lasting, substantial wealth.