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.