Written By: Randy Langenderfer
Wealthy people have something in common, aside from having multi-figure net worths. They’re frugal.
Frugality is one of the characteristics that has helped them become wealthy in the first place. Frugality is a commitment to saving, spending less, and sticking to a budget. Some of the world’s wealthiest people are incredibly frugal; Warren Buffet is notoriously frugal, and Richard Branson considers displays of wealth embarrassing.
Why the wealthy save much of their income
Millionaires have multiple streams of income. But that is not enough to make them wealthy. They must save it – which then allows investments.
In his book One Million in the Bank, Jacob points out that many people focus on tiny expenses. For example you can choose a cheaper brand of paper towels and save some money.
But there is a problem.
Hundreds of thousands of little decisions could lead to decision fatigue. You might get burned out from making hundreds of small frugal small decisions everyday.
Use the Pareto principle as the fastest route to real estate investing
The Italian economist called Vilfredo Pareto had a better way and described it at the 80/20 rule. Figure out your biggest expenses, go after them in a big way and save tens of thousands of dollars – just with a few choices.
This way, you’ll be able to save more – enough to kickstart your real estate investing journey sooner than later.
Real estate is so much better than the stock market because it provides favorable tax treatment, cash flow and appreciation.
We’ll discuss your biggest expenses and how to save money later in the article, but first…
What is a high net worth frugality?
The uber-wealthy people don’t always live the high life we expect them to live, which helps them stay wealthy. Most frugal billionaires came from modest means, where they learned frugality and their families practiced frugality.
They carried these lessons with them in business and hopefully lived to pass them onto their kids.
Frugality is being aware of what you need versus what you don’t need and choosing to live a life that supports that awareness. Saving, thrifty purchases, and living within your means is part of that frugality.
Here’s a look inside how the wealthy save money.
How to save like the wealthy
According to the U.S. Bureau of Labor Statistics, most Americans spend most of their income on food, housing, and transportation.
In this post, you’ll learn exciting tips on how the wealthy save and spend their money compared to everyone else in the same categories. You can apply the same hack in your daily life to save money as the wealthy people do.
Let’s dive in.
1. Reduce your groceries bill
The National Study of Millionaires conducted a study on 10,000 US millionaires and their spending habits. The survey revealed that 36% of millionaires spend less than $300 every month on groceries. 64% of them spend less than $450, and only 19% spend more than $600 per month on groceries.
Now, non-millionaires spend more than 57% of their income on groceries than millionaires, besides restaurants and dining out.
Here is the problem with dining out…
Restaurants change close to 300% markup on the items they serve. Every time you eat out, you pay for the service, atmosphere, and convenience.
Indeed, you eat out once in a while, but eating out frequently will dent your financial goals. A meal costing $15 at a restaurant could cost you $5 to make it at home.
So, how do you eat cheap and healthy despite the rising cost of groceries?
- Plan, plan, plan – take stock of what you have, so you don’t overspend. Create a shopping list based on your needs, weekly menu plan, and leftovers. Take advantage of sales and money-saving coupons from your favorite stores.
- Healthy choices are cheaper– Reducing food portions translates to buying fewer high-calorie foods. High-calorie foods include sodas, chips, or bakery items. For example, you can easily replace sodas and flavored drinks with less expensive 100% fruit juice.
- Prepare multiple meals in advance, then freeze to enjoy later.
- Use apps to track your spending for a few weeks to get an estimate of your monthly expenses. Then set yourself a reasonable, achievable budget and try to stick to it each month.
2. Reduce your major housing cost
How much does an average American spend on housing as a percentage of household income?
The U.S. Bureau of Labor Statistics data also revealed that 30% of household income goes towards housing costs.
Tim Cook, the CEO of Apple, estimated net worth is $650 million and bought his California residence for $1.9 million. His home purchase represents less than 3% of his net worth.
Interestingly, such wealthy people can buy nearly any house they desire, but they chose to embrace a reasonable frugality on housing.
Most homeowners max out their debt leverage to buy the most expensive house they can afford.
How much of your income should you spend on housing?
As a general rule, don’t spend more than 30% of your monthly gross income on housing. If you are a renter, then 30% includes utilities; if you’re the owner, the 30% comprises other homeownership costs such as property taxes, mortgage interest, and maintenance.
How do you reduce your major housing costs?
- Consider renting a home – Homeowners increase net worth faster than renters during the first three years of ownership. However, renting a home may be a better option, especially in areas where rental rates do not reflect higher home prices; you are likely to relocate within several years.
- Occupy smaller living spaces – bigger homes come with a higher price tag and an array of increased costs, including insurance, property taxes, utility bills, and maintenance. You also get the psychological pressure to fill the space with stuff. Always determine how much space you need to be comfortable rather than automatically opting for a larger home.
- Consider semi-detached housing and townhouses – Semi-detached or townhouses allow owners to offset costs such as taxes, utilities, and maintenance from the rental income. While they are less private than detached homes due to shared walls or garage space, they can be a cheaper option to consider.
3. Lower your transport costs
Researchers at Experian Automotive discovered that 61% of wealthy people drive less expensive cars such as Toyotas, Hondas, and Fords – valued under $30,000.
On the contrary, the AAA Research Agency revealed that an average American spends over $9,000 every year (about $770 a month) on their vehicle.
The U.S. median household income was $68,703 in 2019 and dedicated more than 15% of the household income to a vehicle.
How can we reduce transportation costs?
According to the American Automobile Association (AAA), even owning a small car could cost you about $6000 annually after adding up insurance, gas, maintenance, and other associated costs.
Here are some ways to save.
- Use a bike or walk – Leave your guzzler in the garage and hope on your two-wheeler (bike or your two feet). Biking or walking are not only good for your wallet but also your health.
- Use public transport – Public transport saves you money on car maintenance, gas, and parking.
- Carpool – Do you have neighbors working in the same city? Consider carpooling and split the cost of gas. Even one or two additional passengers can save you up to $600 per year.
- Take care of your car – keep your tires full, get regular oil checks and other essential car maintenance helps your car run more efficiently and affordably. A well-maintained car also attracts a better resale value.
- Wash your car– Every time you leave a carwash, you part with at least $20 or more. Wash your car by hand twice or thrice a month, and you’ll save enough to buy a full tank of gas.
High net worth frugality tips you can start doing today.
There you have it—three main categories to start with when you want to get out of the bondage of financial struggles.
Remember, the main thing you do is to save money. If you spend it all on unnecessary things, you’ll only delay your goal all the longer.
Always keep in mind that your sacrifices are only temporary. You may feel like your financial goals are too far, but remember, every saving gets you closer to your goal.
What are you doing to live frugally and save more? Let us know in the comments below.
At InvestArk Properties we can help you figure out everything you need to know about investing in multifamily syndications as a passive investor. Schedule a 30 minute call with us so we can get you started on your journey towards financial freedom!
Looking for more information about real estate syndication? Check out more blog articles here!
Sign up for InvestArk Properties Newsletter (enrollment at bottom of page link to left) so that you have access to our future syndication deals.