People don't always talk about the less-than-obvious benefits of living frugally. Sure you end up with more money by spending less, but then what? The most common reasons cited for frugality are better peace of mind and the ability to retire sooner, often significantly sooner than the normal retirement age of 65.
However, in our case at least, frugality has and will pay off handsomely by providing other not-so-obvious benefits as well. Let's explore some of them here. But first, let's start with the 2 most commonly cited reasons, in the interest of completeness.
Shorter time to retirement due to higher savings rate
As we explained in an earlier post in October, the more frugal you are, the higher your savings rate. And your savings rate is the single biggest factor that determines when you'll be able to quit your job permanently (i.e. retire). For instance, whereas someone who saves 25% of their after-tax income can retire at age 56, someone who saves 50% can retire at just 40. All the while someone like us who saves 72-74% of our after-tax income can retire in just 8-10 years of working, even before our 32nd birthday!
Another big reason frugal people can retire earlier is because in addition to spending less on things they don't need, they don't waste their money over the years in credit card interest, student loan interest, auto loan interest, and car depreciation. That money is smartly invested instead and allowed to compound over the decades.
Smaller Emergency Fund
Your emergency fund is usually 3-6 months worth of expenses in case you lose your job. Therefore people who are frugal and keep their monthly expenses small need a smaller emergency fund. A smaller emergency fund is not only easier and quicker to build, it also means less cash sitting around in an interest-free account, uninvested. And perhaps through your own frugality, you might inspire your parents and close family to also grow frugal, which in turn reduces the size of your emergency fund since a lot of people amass money in their emergency funds to pay for at least part of the emergencies of their close and loving ones as well.
Better Health
Being frugal tends to make you more active and healthy, without you even trying. For example, you might decide to walk or bike to work rather than drive. Taking public transit may also require you to walk a little bit on both ends of the commute, or potentially stand for a bit in the bus/train/station. All of this daily exercise adds up in the form of better strength, stamina, and step count. Bad health usually arises from too much convenience, which usually costs money.
Greater Peace of mind
Frugality's ultimate win is the larger peace of mind and lower stress that comes from it. Your house isn't filled to the brim with stuff you don't need or want. You're not trying to keep up with anyone. You can pick up and move houses/cities/countries whenever you want since you live a pretty lean life. You may also be happier knowing that you live life in a manner that is more sustainable for this planet.
Better for the Planet
Speaking of the planet, a frugal life is usually better for the planet since your consumption levels are significantly less than the average American. This is great news because you can rest easy knowing you're doing your part to ensure this planet will still have enough resources to abundantly support your grandkids and your grandkids' grandkids.
Able to take bigger breaks in between jobs
This benefit is often overlooked but has come handy for me a few times already. Because your burn rate is lower than most others, for the same amount of cash, you can take a bigger break between jobs. These bigger breaks can be used to either brush up on new skills, or to take some time off and travel. It also reduces the pressure to say yes to the first job offer you receive which may not always be the strongest one.
From my personal experience, brushing up on skills and spending a few months educating yourself shows your future employer you're committed to your trade, and also opens up opportunities to new careers and fields that you might not have thought of applying to at first. Traveling can very easily open your eyes to seeing the world from a different perspective which is often deeply appreciated during job interviews. And who knows, you might even come across your future retirement city during your extended travels which could enjoy a cost of living that is a fraction of what it is in North America. This in turn will allow you to retire even sooner!
Some people have even gone as far as to take bigger risks and start their own companies in the 4-6 months they have in between jobs before running out of money. During these months, these people practice extreme frugality by crashing on friends' couches and eating cereal and cup ramen as food. If they're lucky, these companies show traction quickly and allow them to raise money to help them build their long-term business. The founder of the company I work for has a very similar story, and without some creative frugality, he would've run out of money (forcing him to take up another job) long before he could've proven traction with his startup idea/product.
Able to take riskier jobs at startups with lower pay but more equity
This one's my favorite frugality win, especially since Mrs. FH and I live in Silicon Valley where most of the big money is made through startup equity exits, rather than through high salaries and bonuses. By virtue of being frugal and not reliant on 100% of our market wage, this allows us to take up jobs at smaller, riskier companies with lower pay, in exchange for significantly higher startup equity. Sometimes we've been able to negotiate several extra points (1 point = 0.01% ownership in the company) for just a small $20-30k pay cut in annual salary from the market rate. Smaller employers are sometimes happy to do this as well.
This is all possible because when a potentially successful company is starting out, they are severely limited by cash and will do almost anything to acquire you at a lower wage rate. They will do this to keep their own burn rate down, thereby extending their own runway, at the end of which they are forced to raise more startup capital from venture capitalists. The longer they can wait to raise money, the better it is for the founders.
Early engineers and other company leaders who exploited this concept at Netflix just 6-7 years ago are now multi-millionaires. Think about it. 0.01% doesn't sound like much, but for a company like Netflix whose market cap is currently $80 billion (and rapidly growing), owning just 0.01% of the company when they're young means that you now own $8 million in assets!
Furthermore, some of the employees, owing to their frugality, didn't have a need to sell their shares when it was only worth a million dollars. They instead were able to hold on to them, allowing them to sell those shares at a price several multiples higher in the future.
Whereas a non-frugal person would've seen the $1 million and asked how big a house they can buy for a million, a frugal person would start with the better question of "how big a house do I actually need?" and instead discover they only need a $550k house in a normal non-upscale neighborhood. This allows them to keep the remaining $450k invested and growing.
Able to tolerate higher portfolio risk with equities
All things being equal, I informally advise the more frugal people to take more risk with their retirement investment accounts by opting for a higher asset allocation in equities (decreasing their allocation in bonds and real estate). Why is this? It's because frugal people are less likely to want to or need to tap into their retirement accounts for the next 30-40 years since they already have so much more buffer in their paychecks for emergencies. Because frugal people run such tight ships with their money, their investment accounts will only be used to buy stocks, and never to sell until they actually reach retirement. For people who are relatively young (ages 22-35) and plan to only buy stocks for decades and never sell them until they hit retirement, I recommend at least a 80% allocation in stocks since they have decades upon decades of compounding to help them build wealth and get through the inevitable temporary market downturns. Generally speaking over the super long term (i.e. multiple decades), people with a higher appetite for risk (i.e. volatility) build greater wealth over time, allowing them to further retire sooner.
Furthermore, frugal people's emergency funds tend to be well funded and will last them a longer time if they were to lose their job by virtue of burning through it slower. Frugal people also tend to be more flexible adjusting their expenses if and when they lose their jobs, so as to not require touching their stocks during a correlated market downturn.
Lower withdrawal rate in retirement resulting in Lower Taxes
Like the title says, the more frugal you are, the less you need to withdraw from your retirement accounts when you're not working post-retirement. This is great because it means your accounts will last far longer, since the lifetime of your retirement accounts is most directly determined by your annual withdrawal rate. The probability of you running out of money in retirement goes down steeply as you reduce your withdrawal rate from 5 to 4 to 3 to 2 percent per year. At a 2 or 3 percent withdrawal rate, your probability of failure essentially becomes zero unless something truly catastrophic happens to the economy for an extended period of time (5+ years).
To boot, you'll even be paying lower taxes to the IRS since your annual taxes are largely determined based on how much income you draw from your pre-tax (IRA, 401k) and taxable (Wealthfront, Betterment, Vanguard) accounts.
Conclusion
So what do you think? Are you ready to be frugal? Given all the above advanced benefits in our lives, if I could choose one superpower in life, I would pick frugality every single time. It's because there isn't a single personality trait in life that provides so many benefits all at once, without having to rely on luck, good fortune, chance, or opportunity. Frugality opens up so many doors in life that it is hard to imagine why everybody in the world aren't automatically frugal.
