Has anyone ever accused you of being frugal? For most of us being called frugal is far from a compliment. In fact, we’d argue most people think of those who are frugal as being cheap or stingy with their money. However, the research on millionaires suggest one of the key characteristics to becoming a millionaire is being frugal, and most are neither cheap nor stingy with their money, but are instead wise about how they manage their finances. In this week’s blog we explore the idea of being or becoming frugal, and how it can help you in your journey to debt freedom and building wealth.
Six behavioral patterns of millionaires.
We’re big fans of the Millionaire Next Door series of books, and in the latest offering entitled The Next Millionaire Next Door the authors discuss six behavioral patterns of millionaires in their study. We can really appreciate their focus on behaviors because we truly believe becoming wealthy is more about behaviors rather than the math. Sure, math (i.e. income, investment returns, etc.) is important, but nothing adds up if you don’t behave with your money!
The researchers study of millionaires uncovered six key behaviors that were the most predictive of wealth. The behaviors were:
In future blog posts we’ll dig into the other five behaviors, but in this post we’ll center on frugality. So, what does it mean to be frugal? Here’s what Google defines frugal as:
Frugal is someone who is sparing or economical with regard to money. It’s also interesting to note the use of the word frugal has declined in the last 200 years, but seems to have a slight uptick in the last decade.
We like the way the Millionaire Next Door researchers define frugal for their study participants.
Financial behaviors associated with consistent saving, dedicated commitment to lower spending, and rigorous adherence to a budget.
Some keywords that jump out of this definition are consistent savings, lower spending, and budget adherence. Let’s dig deeper into each of these and look at some ways to apply them in your debt-free journey.
Consistency is a key to success.
Many of you are working to get out of debt, and saving is not something you are our should be doing at this point so we would replace, temporarily, consistent savings with consistent pay down of debt. To be consistent means to constantly be doing something over-and-over again. In your case what you should be doing consistently is attacking your debt every single month with every available dollar you have above and beyond covering your basic living needs. Remember, you can wander into debt, but you can’t wander into wealth!
Building wealth takes time even when you’re earning six-figures. Developing the habit of consistently paying down debt can quickly be converted to consistently saving and investing the second you’re debt-free. One month you’ll be making your last payment and the next month instead of paying someone else you’ll be paying yourself and starting the wealth building phase of you financial life.
Consistency breeds more consistency!
However, to be consistent is easier said than done. You have, we would argue, consistency in your DNA as a doctor. You consistently attended college. You consistently attended medical school. You consistently worked your way through residency. Unfortunately, most you also consistently borrowed to do so, but now is the time to take your consistent behavior and shift it into high gear to pay off your debt.
One simple way to be consistent with your debt is to setup an automatic payment(s) for your debts. A great way to become more consistent with your finances is to leverage technology to automate your finances. This works especially well if you are a W-2 employee earning the same salary each pay period. Once you’ve determined how much extra you can attack your debt with each pay period you can automate the additional payments each month to come directly out of your checking account.
Another consistent behavior is tracking your balances on a routine basis. Staying tuned into your current debt level and seeing the decreasing balances can help fuel your emotions in a positive way as you get closer to debt freedom.
Lower spending to put more toward debt.
The second component of becoming frugal is lowering your spending level. This is kind of a no-brainer that if you can lower your spending you can use the added cash to kill your debt faster. Check out our free Debt Shovel tool to determine how much extra cash you might have each month to put against your debt if you reduce spending on wants and just stick to your needs.
What you may also find as you lower spending is that your level of happiness and contentment may go up, and when you do finally become debt-free you’ll be less likely to dramatically increase your spending because you may discover, as we did, spending more doesn’t always make you happier.
One simple illustration of this is that when we paid our house off we didn’t go crazy and run off on a spending spree. We left the bank and bought two new pairs of shoes:-) We did spend a little in addition to the shoes to celebrate being totally debt-free by purchasing a really big TV, but the point is we didn’t go out and buy two new luxury vehicles. We would have loved to do that, but when you start paying cash for everything something shifts in your mind before making big purchases – you actually start to think more about how the purchase will make you feel and whether you really need what you are thinking about buying. In most cases the answer is “no”.
Have a plan (aka the budget).
If we had to identify the most impactful behavior to becoming debt-free millionaires it would be the monthly budget. As the old adage goes, “Failing to plan is planning to fail.” No one just ends up a millionaire, well, unless you hit the lotteryJ Maybe a better way of saying this is, no one just ends up and stays a millionaire without a plan for their money.
The challenge most people have with sticking to a budget is that it feels constricting. However, over time you will begin to see the budget as a tool that gives you freedom to spend. When we say “freedom” we don’t mean spending as you will on whatever you want, but instead spending on what you have already agreed to spend on.
Have you ever made a big purchase you’ve felt really guilty about? As you were in line about to make a big purchase or about to hit the submit button on your online shopping cart have you ever heard a little voice saying, “You shouldn’t be doing this!”? Chances are what you were about to buy wasn’t in your budget for the month, and more likely you probably didn’t even have a budget for the month!
Well, we can tell you this little voice rarely comes into our minds when we make any purchases because we’ve already given ourselves permission to spend the money before it’s spent, and there is no guilt when we hit that submit button or swipe our debit card. If you want to experience this kind of freedom the budget is your key to success.
The simple truth is most millionaires create a monthly budget and stick to it each month. In fact, the millionaire research states 70% of millionaires know how much they spend each year on food, clothing, and housing. How about you? Do you know how much you spent on groceries last month? When you start paying attention to your money a funny thing happens – you get to keep more of it! This all begins with creating a budget each month, and it never ends even after you achieve millionaire status.
Building wealth is hard work!
There is no question building anything worth building is going to be hard work. You already know this having worked hard for over a decade or more just to get to where you are today. This is one of the things we love about doctors – you already know how to persevere in order to win.
When it comes to your money you have all you need in your DNA to succeed. Take a step forward today in becoming a debt-free millionaire doctor by developing a frugal mindset. Consistently pay extra on your debt each month and then shift to paying yourself extra once you become debt-free.
Trim your spending to speed up the debt payoff process and it’s likely you will experience a contentment that will carry on into your wealth building phase of your life that will keep you from spending more than you should even when you have the money to do so.
Finally, make a plan and stick to it! Trying to wing-it into wealth has a near zero probability of success. Use your budget to experience guilt-free buying knowing it is not a restriction tool, but a tool for financial freedom. You can do this! We’re here to help so reach out to us on social media or email us for some words of encouragement and wisdom we’ve uncovered in our journey to financial freedom!