Frugal might not sound like a front row ticket to a great time, but you might be surprised how quickly spending what you need—and finding ways to need less—goes from being a chore to a game you actually enjoy. And if that's not enough to convince you, here are three ways being frugal today can lead to a future that's a whole lot more fun.
We human beings thrive on variety, and we appreciate a rare occasion all the more for its rarity. When you're frugal with your spending now, you'll enjoy a little bit of luxury all the more a few years down the line.
You'll enjoy the less-frequent luxuries during your most frugal years, too. Cut the number of meals you have at restaurants each month in half, and not only will you save a lot of extra dough, you'll have a greater appreciation for those fewer evenings out.
The more frugally you can live, the more you'll have on hand to save and invest. That means the longer your investments have to grow before you need them to buy a house, help pay for your kids' college, or fund your retirement. The longer your investment lasts, the more you benefit from the wonders of compound interest.
None other than Warren Buffet, one of the richest men on the planet and a master of frugal living, has expounded on the magic of compound interest—in addition to living in America and "some lucky genes," it's the only thing he credits for helping him build his immense fortune. Simply put, compound interest is when the interest you earn on an initial investment starts earning interest itself. The longer this compounding has to take place, the faster your investment grows.
For example, let's say you start investing $10 per month at the age of 25, and that your money earns interest at a very modest 5%, compounded quarterly (four times a year, the interest you've earned gets added to your investment and starts earning interest). If you keep that up until you're 60, you will have saved a total of $4,250, but you will have earned an extra $7,298—a total of $11,548 close to triple your investment!
Now suppose you don't start investing until you're 35. You contribute $20 per month—twice as much as in the first scenario—and again it earns 5% with the interest compounded quarterly. When you reach 60, your money will only have had 25 years to grow, and you'll have a total value of $12,152, half of which—$6,080, to be precise—will be money you actually invested, not interest you earned. You will have set aside almost $2,000 more than in the first scenario, and ended up with only $600 more in your retirement savings.
That's the magic of compound interest at work, and the sooner you can put it to work the more it pays off.
Frugal isn't just about the math. It's also about the craft! When you start looking for alternatives to buying every gadget and wardrobe addition, you start getting more creative in your thinking, and might even find yourself with a new hobby: gardening, making and designing your own clothes, or becoming your own mechanic and helping some friends and family on the side—for a little extra green to go toward your investments, of course. :)
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