Can frugality really be the cornerstone of investing successfully? To many people, investment success is due to the making of astute investment decisions (think Warren Buffet). Most believe that some luck also plays a part. These are important, but few people realize that frugality is a crucial foundation for investment success. What is investing? Investing means putting money “into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit” (Lexico.com) Why Invest? Do you want more money to afford a more comfortable life? Do you wish to travel around the world? Do you wish to retire earlier? Do you want to grow a substantial nest egg to retire in comfort?
Do You Desire Financial Freedom?Financial freedom “means having enough savings, investments, and cash on hand to afford the lifestyle we want for ourselves and our families—and a growing nest egg that will allow us to retire or pursue the career we want without being driven by earning a certain amount each year” (Investopedia). Are you aiming to achieve financial independence? Imagine having the money to enjoy your desired lifestyle without needing to work. Whatever your goals in life, there are very good reasons for you to invest well.
Can You Afford to Invest?You may be thinking: “I would love having more money and a better life, but I can’t afford to invest!” Many years ago, I used to assume that only high-income people have the money to invest, become rich and reach financial freedom or financial independence. But I was wrong. There are many high-income people who hardly invest, or are investing very little. Stanley and Danko, authors of the famous book The Millionaire Next Door, talk about high-income earners who spend most of their money on pricey purchases such as luxury homes, prestige cars and exotic holidays. There are many image-conscious persons I know who dress in the latest fashion, use the latest smartphone, and cruise about in a flash car. But the real situation is that they are often living paycheck to paycheck, with substantial borrowings and credit card debt. They lack the frugal foundation to invest. Stanley and Danko also talk about people with relatively modest incomes who are frugal and invest their savings wisely and successfully to become the millionaires next door. They lead a modest lifestyle, and have developed a strong habit of saving and investing compulsively. The result – they have more and more money to invest successfully and to grow their wealth. I am talking about this to assure you that even without making more money or taking on a second job, you can start where you are financially, to invest.
How To Have Money to InvestHere is how it works – when you become frugal, you’ll have more savings to invest. When you make careful and consistent investments that are diversified, you will become richer over time. But what does being frugal really mean? Frugality involves your being careful with your money and other resources. To come up with the money to invest, you need to develop a frugal habit.
- Frugality involves:
- Developing self-discipline
- Delaying gratification
- Prioritizing important goals
- Following your money plans through.
- S: Specific
- M: Measurable
- A: Achievable
- R: Relevant
- T: Time-bound
How You Can Invest to Grow Your WealthYou can start with buying $50 of stocks in week 1, in a company paying out a total of 5% dividend annually (which you reinvest). You regularly keep buying $50 more stocks every week. At the end of the Year 1, you will have saved and invested $2,600 ($50 x 12 = $2,600). After 10 years, your stock account will be worth $33,272.81. ($25,750.00 is the total of your stock purchases, and 7,522.81 is the total dividends compounded through dividend reinvestment). The quality stocks you accumulate will likely rise in value over time. Therefore, you will likely have a total of $40,000 or more in 10 years’ time. Amazing! – Growing a $40,000 stock account from a few frugal habits and investing only $50 each week. It also helps if you can also increase your income through work e.g. getting promotions or working more hours. This gives you even more money to invest for even more income, to reach financial freedom, and financial independence.
How You Can Invest WellRemember that these same qualities of self-discipline, delaying gratification, prioritizing goals, and following plans through are essential to successful investing too. Having a clear focus and taking consistent positive actions over time lead to more savings and growing investments. When you become consistently frugal, you lay the foundation of growing your savings. This money can be invested in, for instance, a portfolio of carefully chosen dividend stocks. By investing the dividends you make, you compound the amount of passive income you generate. This income will grow steadily and substantially over time. There are naturally other important foundations of investment success, such as:
- Constantly educating yourself on your investments
- Diversifying investments wisely
- Investing for the long term
- Not chasing the latest fads or hot tips (following the crowd)