How to build wealth and why saving but not frugality belongs in the picture

by admin on 18 August 2007

How does one build wealth?
For the majority of us, at its most fundamental the answer is simple: increase income, decrease outgoings. But there is a little more complexity to the “Earn more and Save more” rule than appears.

Saving money might cost you more than you think
There are lots of ways to save. You can save money by bargain hunting at the supermarket, searching for more optimum interest rates on your savings, better terms on your credit card and even by switching phone operator. The problem is that working out how to save money costs time and often the time invested yields less than what one would have earned had one spent the time working.

Measuring the return on investment of the time spent working versus the time spent saving, an example
For example, a forklift truck driver offered £35 per hour overtime is much better off working than spending an hour at the supermarket saving £5 on discount chickens. However, if he can save £300 on his annual house insurance by spending 5 hours searching for lower quotes he’d be better off skipping the overtime. (I know someone who achieved such a saving.) Of course he could do both but most people would choose not to, such an excessive time cost having negative consequences for their personal lives.

Your savings strategy, the two important lessons
There are two somewhat obvious lessons here:

The first is that a good savings strategy concentrates first where the biggest savings are likely to be made, usually by cutting costs on the big ticket items.

The second is that saving money as a wealth building strategy only makes sense where the savings achieved exceed the amount that would have been earned over the same time period. (Of course, the calculation is complicated by taxes. A more precise calculation would take this into account and compare savings versus net earnings. For example, an hour invested that achieves a return of £10 on a reduced price product or service is far superior to the £11 you might earn for the same hour in a low paid teaching job. This is because the hour spent working is hit with a further tax deduction of anywhere from 20 -40% depending on your tax bracket.)

But the important point is that those who pursue a savings strategy can fail to calculate and notice the poor return on the time they have invested trying to save money. And the problems with the saving strategy do not end here.

So next time, as you feel the primal excitement come on when you see that bargain, and before you conceive a new life for yourself as a bargain hunter, just pause. Let your rational mind take over and make the right decision computing the ROTI (return on time investment) then you can snap up the free food.

how your brain works
(Image from Mike Dewitt’s Spooky Action blog) more on how to make important decisions here

Frugality and Wealth attraction – a warning
As well as not reaping rewards commensurate with the efforts expended, the obsessive saver is in danger of falling into extreme frugality. Much frugal living can be healthy especially if motivated by higher order (spiritual) reasons. But excessive frugality is a disease called “meanness” the result of an unhealthy idolization of money. Its fruits are destroyed relationships and the elimination of the joy of abundance. In fact, such people can become so fixated on downsizing that an altered psychology results with a reduced capacity for perceiving expansion. They urgently need a wealth attraction warning:

Wealth Attraction Warning

Extreme frugality as a savings strategy is not the optimum route to wealth not least because obsessive saving causes your unconscious to become fixated on downsizing instead of wealth creation.

Notwithstanding the above wealth attraction warning, we have to be realistic and there are circumstances in which even excessive frugality is recommended. Anything even excessive saving is preferable to the slavery of being in debt. So, if you are in a tight spot with very low income but you are time rich then frugality is an option for you.

Otherwise you’re better off earning and spending the time more productively building businesses, an entrepreneurial mindset and your earning potential.

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