Frugal Not Cheap: 3 Important Differences
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There are many differences between being cheap and being frugal. Someone who is cheap does not want to spend money on anything, regardless of its value. Someone who is frugal understands the value of things but wants to cut costs when possible. It is important to understand these differences in the following situations.
Short-Term Versus Long-Term Savings
Initially, it might seem like a good idea to brew your own coffee at home to cut costs. Cutting short-term costs such as coffee, fast food, or groceries is always a good start. It can save you a few dollars here and there, of which can add up if sustained. But it’s unlikely to affect your financial situation significantly on its own. Much of these kinds of costs are a great target for disciplined reduction. But since they can play a role in your social life, may cause reason for the cheap label. That’s why the frugal minded will also consider long-term savings.
Many people focus on cutting short-term costs but fail to price-shop for things like auto loans, mortgage rates, and all of the different insurance policies that we need. Price-shopping can be a hassle. But being frugal means considering the long-term and finding ways to reduce their insurance premiums, interest payments, and repayment fees.
Another long-term savings target are the services you use. Phone, internet, and cable or satellite TV are areas where price shopping can provide long-term savings. Also consider only buying the service level you really need. Frugal thinking asks why pay for unlimited when it’s not needed or is it even needed at all.
The amount of money you will save by price-shopping on larger purchases and other monthly services is incomparable to what you will save when just cutting a few dollars here and there.
Risk Versus Reward
Financial risk is sometimes necessary to see a profitable gain. People who are cheap might hold onto their dollars so tightly that they fail to take any necessary risks. Frugality is about considering the bigger financial picture. Consider your plan for retirement. One of the most common ways to increase your retirement account funds is to place them into well-researched low-risk investment accounts that follow the market. There are different degrees of risk, but someone who is cheap is likely to avoid these types of investments altogether.
Although having ready cash available in an emergency fund and for short-term needs, investing the savings generated from disciplined cost cutting is a hallmark of frugal living. Frugality has a strategic mindset where you aren’t just holding onto your money, it is put to work for you.
It includes investing for a better future. It requires having an open mind and learning about all of the ways to add value to your life and savings. There’s a lot to learn, from passive low-fee ETF investing and dividend investing, to active real estate investing and using technical analysis to make informed trade decisions with swing trading. But if you are being cheap with a closed mind and never advancing your knowledge about what’s available, how would you even know about them? Being frugal means doing the research and making informed investment decisions.
Frugality has you looking for ways to not only cut spending costs, but also how to best leverage your savings for the highest returns within your investment risk tolerance. Being cheap and avoiding taking risks entirely will make it difficult or impossible to increase your profits or to save the funds you require to retire comfortably.
Quality Over Quantity
Someone who is cheap will only consider price whereas someone who is frugal will also consider value. Someone who is cheap might choose to purchase clothing items from a discounted retailer. While your initial purchase might cost less, keep in mind that quantity usually does not indicate quality. The clothing items you purchase from a low-end retailer are going to fall apart much faster than something made with better materials.
Frugality, in this case, would mean finding ways to save on higher-quality items instead. This might mean buying secondhand goods or using discount cards. Otherwise, when you add up the cost of purchased items, you might find you’re paying more over the long-term for the items of lower quality.
Cheap and frugal are often used synonymously to describe the same type of person when they are actually very different things.
While cheap people tend to focus on the price of something, frugal people look at the bigger picture and cut costs to afford more important things. Important things that include becoming debt free, having financial freedom, and saving for retirement. Understanding the difference between the two is key when preparing for your financial future.
Note: This article originally appeared at Leisure Freak.
Category: Personal Finance
