Financial sacrifice is the key to financial freedom.

Piggy Bank with Coins

There is a consistent and positive relationship between frugality and building wealth. 

The data shows an overwhelmingly correlation between financial discipline and financial freedom. It is an important message to teach and instill into the mind of savers. As charterholders, we realize the need to use the security markets to build wealth, but we need to make savers understand that the critical task is optimizing the amount of capital for investment.

Financial self-discipline is a learned skill.

An essential saving skill that will help maximize the money that can be saved and invested is learning to keep spending constant and then financing a saving and investing plan by saving any windfalls or increases in income. Although our culture values spending, there aren’t any regulations that force people to increase their level of consumption in step with financial windfalls or gains in income. 

Keeping expenditures relatively constant relative to income is considered an essential talent impacting the ability to save and create wealth. It is also a recommendation that carries the least weight with most savers.

Young people’s most significant financial asset is their human capital or future earning power. Over time, a person’s income is expected to continue to grow from its present level. At the end of a professional career, earning potential will likely stabilize or diminish, forcing savers to convert funds into financial assets until a job ends. Earned income is swapped into savings or investment capital because it is not important how much is made but how much is kept.

The wealthy are often thrifty

Many people have amassed great wealth, not because of their entrepreneurial skills or by finding undervalued companies but by being frugal and maximizing the capital available to grow. The bestselling book, The Millionaire Next Door, demonstrates that frugality is a common characteristic of many wealthy people. Many of these inconspicuous millionaires, who may be neighbors, have rejected the trappings of wealth and keeping up with the Joneses. This self-discipline ensures financial freedom and the tranquility that comes with a lack of money issues. These millionaires accumulate their wealth by investing in the market and earning market returns over the long term. 

For some people, it may be asking too much that they hold their household expenses constant while their earnings increase. However, it may be more appealing if it is done on a relative basis where people are trained to curtail their rise in expenditures at a lower rate than their income. If one’s regular income covers the household budget, including the amount people pay themselves to finance medium and long-term financial goals, then any additional income should be invested. This income includes pay increases, bonuses, tax refunds, lottery winnings, or other unexpected windfalls that can put a saving and investing plan into overdrive.

As part of the saving and investing discipline, two actions significantly impact the ability to reach long-term financial goals. One is the accumulation of capital, or over time increasing the amount available for investment, and the utilization of capital, or putting investment capital to work generating investment returns. Although the new investment product or strategy usually gets the most press, continually saving significant amounts and putting it to work in the market can have as much impact on the ability to reach financial goals as the return the market provides.

He who will not economize will have to agonize

― Confucius

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