Saturday, September 18, 2010

Rich and Frugal?

I was asked a very thought provoking question by a reader in response to my post on what to do with extra money you get. She asked "Is frugality only for poor people? What about those who actually make a lot of money?"
In a nutshell, no. I think everyone should be frugal, even rich people. Frugality for rich people, though, is different than my brand of frugality.
Why should rich people be frugal, and what is frugality for rich folk? To answer that, we first need to define frugality.


Rich and Frugal
Frugality- What Is It?
When looking to define a word, the dictionary is often the best place to start.
Frugality in the dictionary pulls up two definitions, the first one being "economical in use or expenditure; prudently saving or sparing; not wasteful" and the second one being "entailing little expense; requiring few resources; meager; scanty".
While the second definition of frugality isn't required of a rich person, and may instead be indicative of miserliness (though not necessarily- it could just be that a person doesn't have expensive tastes or is earth friendly), prudently saving and not wasting is a wise decision for all.

While the dictionary's definition is a helpful starting point, I'd define frugality in a slightly different way.
Frugality is being a conscious spender. It means not shopping on impulse, but rather, making sure that you will appreciate and not regret your purchases. Whether that purchase be a sushi platter, name brand bag, or private jet, it's smart to contemplate and do necessary legwork before spending so you don't end up feeling stupid over your purchase. That doesn't mean not spending any money on frivolities ever, because if you have extra cash, making your life enjoyable and creating memories is a positive thing, not negative.

Frugality also means living beneath your means so you can save up money for the future. Unless you want to work full time to support yourself until your dying day, even the richest person should put aside enough money that they can live comfortably until they die. Once you've done that, you needn't have any qualms about spending your money.

Dare I say it? Frugality also means not buying the best of the best, just "because you can". If you can find beautiful off the rack dresses that flatter your figure and suit your taste perfectly, there is no need to have custom made designer dresses at 30,000 dollars (pulling numbers from thin air here) a pop. Because that is just pure wastefulness, and wastefulness is a sin, in my books. This doesn't mean sacrificing taste or not getting what you love; it simply means that you don't need to spend money for the sake of spending money. You spend it because you want something, and not just because you have so much money that you don't know what to do with it.

What is Rich?
To fully answer whether rich people should be frugal, it is also important to know who we are talking about. What do you mean when you refer to someone rich?
Is a rich person someone who brings in a lot of cash?
Someone who has a lot of assets?
Or is it something else entirely?

In my mind, you can't be rich if you're living paycheck to paycheck. If you make a million dollars a month and spend a million dollars every month, then you're not rich. You're just making lots of money and spending lots, but rich you are not. On a more realistic note (who am I kidding? I have no clue what is a realistic amount for a rich person to be making), if you make $30,000 a month and spend $30,000, you're definitely not rich.
Living from paycheck to paycheck is a bad idea financially; as long as you're relying on your next paycheck coming in to continue living your life, in my book, you can't possibly be rich.
The problem with spending all your income every month and not building up a savings is that you're gambling with the future and banking on the knowledge that you'll keep on getting that much money every month, but such isn't always the case. Illnesses happen, sudden large expenses crop up, recessions occur, and businesses close, and employees get pay cuts or fired.
I know too many people that were living it up, spending all they were earning, and now that their businesses closed down, they're completely lost.

One of my friends (a commenter here) had a husband out of a job for an entire year. Without unemployment benefits, with needing to pay large amounts of rent and for schooling (even the public school system here isn't free), without wic, food stamps, etc... this family was able to rough it out for the entire year that they were without any income, lived frugally off their savings and didn't need to accept charity, all because they wisely had saved up money each month and did not live paycheck to paycheck. What would have happened to them if they hadn't had that savings account, but instead lived paycheck to paycheck like much of the world does? I don't know, and its too scary for me to even think about.

So for me, someone is rich if they a) don't owe anyone or any company or any bank money, and that includes  car payments, bank loans, credit cards b) have enough money to buy whatever they want in cash and not need to borrow for it c) spend less money than they earn d) have enough money in the bank saved up that they can manage for a long while even not earning any income whatsoever.
Actual net worth matters less than what someone does with their money and if they're foolishly using their money. Making lots of money doesn't make you rich. Being able to put away lots of money is rich. Living opulently is not indicative of wealth- it just means that you have expensive tastes, and that glitz and glamor can be hiding millions of dollars of debt.

What Is Frugality For Rich?
Frugality for the rich is definitely not the same breed as my frugality. I wouldn't expect someone who fits the above criteria of rich to be dumpster diving and making everything from scratch and constantly looking for freebies, though some do chose to do that because of environmental or health reasons.
Frugality just means spending less money than you're taking in and making wise purchases.

Frugality for rich people would be things like putting away money every month instead of spending it all.
It would mean spending a few seconds to look for the better price for what you're getting (even if it is a Rolls Royce, just finding out who the cheaper dealers are).
It means not going recreational shopping, but just shopping when you need or want something.
It means never, ever, using a credit card (or if you do, using it like you would a debit card and only spend money that you already have in your account).
It means deciding before you get something if you'll be happy with your purchase, and not just buying on a whim.

Some billionaires, surprisingly, are frugal. Here's an article I read about how even some billionaires choose to be thrifty.

Why Should Rich People Be Frugal?

Because they should prepare for the eventuality that they may not always make the same type of income that they're making now. If people always buy everything they want without ever withholding anything from themselves, if there comes a point where they can no longer afford what they desire, they won't be able to hold back and will just end up thousands if not millions in debt.

Because if their income level drops, they'd suddenly be at a loss as to how to even start living more frugally if frugal and budgeting was ever even a part of their vocabulary. Again, I know another family that does not make the same type of money that they used to bring in, but they live such a life of luxury now because they don't know any other way. I feel bad for them because they got used to such a high standard of living that their lack of frugality when they were rich is screwing them now they they no longer are. I do not want to know how much debt they've accumulated, but can only assume that it is significant. If they had been frugal when they didn't have to be, they'd know how to be frugal now that they need to.

Because if they're not, they might end up like many, many, many millionaires who filed bankruptcy. No need to use family cloth to be rich and frugal (though if I'm ever rich, even billionaire rich, I'd probably still use family cloth because I like it that much!), but you don't want all your money to bleed away because of stupid purchases and unwise investments.

Because being wasteful is just bad and ungrateful.

So yes, absolutely, even rich people should be frugal. Especially "rich" people who aren't really rich because they spend as much as the large sums they're making, or even spending more than their enormous income. Frugal for me and frugal for rich are two separate ballgames, but they both have the same underlying theme- use your money wisely and plan for the future, whatever your income level may be.

What do you think? Do you think rich people should be frugal? How do you define rich people, and how would you define frugality for the rich? 
Do you think middle class people should be frugal, or is frugality just for the poor?

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