What is extreme frugality | Fortune
There are plenty of personal finance tips that focus on budgeting, not overspending. The value of this advice is pretty clear: Living beyond your means can have costly financial consequences, especially when you find yourself without the savings you need to pay for an unexpected expense.
While there is value and peace of mind in saving and investing for the future and preparing for possible emergencies, it is also possible to go too far. At the opposite end of the financial spectrum is the issue of extreme frugality. Advice for overly frugal people who don’t know how to spend money, sometimes at their own expense, is harder to come by.
The American Psychiatric Association defines frugality as a symptom of obsessive-compulsive personality disorder (OCPD) when a person “adopts a stingy style of spending on self and others.” Extreme frugality is an amplified version of this, and it often involves viewing spending as a bad thing, no matter how much money you have. Examples of extreme frugality include always choosing the cheapest option even when you can afford and benefit from the higher quality option or focusing on saving money at all costs no matter how long you have to sacrifice.
The problem of extreme frugality
There is a difference between saving and investing money for the future and hoarding money aimlessly.
People struggling with extreme frugality see money as a finite resource that they must cling to at all costs. But when you’re overly frugal, you’re missing out on one of the most important things money can do for you: simplifying aspects of your life and giving you access to things and experiences you care about.
Bill Perkins, hedge fund manager and author of die with zero, found himself in extreme frugality after reading your money or your life by Vicki Robin and Joe Dominguez. The book, which describes money as a resource for which we exchange our life energy, helped him better understand the things he valued and how he wanted to spend his time.
But Perkins became so concerned about wasting his money that he stopped spending altogether. Then, one day, while proudly sharing the part of his expenses he had cut to maximize his savings, his boss made him understand that the purpose of life was not to save as much as possible to survive but also to live.
How do you stop wasting money without going to extremes and start saving too much? You don’t have to live at either end of these extremes. If you find yourself hoarding money, afraid to spend on things and experiences you care about, consider the following tips that can help encourage even the most extreme savers to find ways to spend for a living. more agreable.
Know your survival number
Understanding how much you need to cover your living expenses is essential. Your survival number includes rent, bills, food, transportation, childcare, and everything you need for your daily life. You can calculate this number by adding all your necessary monthly and annual expenses into a spreadsheet.
Once you know your monthly survival number, you can use an online calculator or work with a financial planner to determine how much you need to have in retirement and how much you need to save and invest each month to reach that goal. The money you have left is disposable income.
Take the time to ask yourself the right questions
Once you’ve figured out your survival number and how much you need to set aside for retirement or other financial goals like buying a home or paying for college, you’re left with disposable income.
Ask yourself questions to help you decide how to use your money to improve your life.
What do I want to do? Do I want to travel? Do I want to renovate my house? Do I want to be able to support my parents in their old age? Do I want to send my child to a private school? Is there anything I would like to do in five years? And in 10 or 20 years?
“A lot of people have discretionary income, but they have a scarcity mentality that they won’t be able to survive,” says Perkins. “So they stay on autopilot, thinking I will keep working and saving more just in case. But now you become an insurance agent.
Get off the autopilot
Most financial advisors will recommend that you automate your money to make it easier to manage. Setting up automatic transfers can make it easier to save and pay down your debt. But extreme savers can go too far.
Perkins emphasizes the importance of “getting off autopilot” and knowing why you’re saving. “Saving has its purpose. This is for future consumption.
Once you know your survival number and have taken the time to understand what you value, it’s important to focus on optimizing your life for increased satisfaction.
“Some people live too much in their present life and spoil their future life.” said Perkins. But if you want to get the most out of your life, you need to be clear about what you’re saving for and consider the most appropriate age to enjoy some of the things you want to consume. Then develop a savings plan that takes all of this into account.
“Our lives have seasons,” he says. “We go through different stages of life; whether it’s college, marriage or having children, certain experiences are better in certain seasons. So you need to allocate your money to your lifetime net fulfillment and maximize your experience and memory dividends.
In other words, take the time to lay out a clear plan for all of your goals, whether they’re short-term (taking a family vacation this summer) or medium-term (moving to a bigger house in five years). ) or long-term (retiring somewhere warm). Then go about executing a plan to achieve them. But be very careful to make sure you have some in the bucket in the short term so that you don’t always have fun and spend money on the next stage of life.
make it happen
Now that you have a game plan, you need to carry it out. This may be the most difficult step. Breaking the habit of extreme savings can be difficult. Take baby steps and keep your goals in mind.
Think about what you gain by spending money on things you care about. Think of the time you’ll come back to, the fond memories – or memory dividends as Perkins calls them – that you can cherish forever when you spend money on the things you care about. Focus on what you’re going to gain, and if you’re still struggling with guilt, remember your plan.
what you leave behind
Perkins’ book focuses on maximizing your life experiences. It doesn’t mean you spend everything you have before you die and don’t worry about your children or other dependents. The emphasis is on not delaying gratification so much into the future that you can’t enjoy it as much as you should because the best time to do so has passed. It also allows you to be more intentional in passing assets to your heirs.
“You don’t want to give a random amount of money to random people when you pass,” says Perkins. “You don’t know which of your siblings, heirs or people you want to give money to will be alive after you die. You want to be deliberate about this. If you’re trying to have the maximum impact on the lives of the people you really care about, think about the perfect time to give them the money you want to give them.
“It’s about being intentional and optimizing along the curve. You’re trying to maximize the net flourishing of your children, yourself, your charity, or whatever. There is a way to think about those things that bring you closer to maximum optimization and maximum impact, and get in touch with what you want from the arc of your life.
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