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9 Nov 2014

FRUGALITY VERSUS EARNING MORE

A lot of personal finance fans choose between the two paths to financial independence viz. frugality versus earning more income. Those who have been following this blog for some time will remember that I wrote about reaching financial independence and how I am doing it here...  The two methods can be used together.
One of my rental properties: on Frugality versus Earning More
Frugality
Frugality is about using resources sparingly and economically. Frugal people may for instance buy used goods, grow their own food  to save money and generally live at a far lower cost than the income they earn. R500 in the hands of a frugal individual may last a month whilst two days may be too long in the hands of a lavish person.

The frugal hate any kind of waste and usually reuse resources. they embrace low cost and cost-free options like cycling instead of driving, jogging instead of the gym, searching for discounts, etc. This group focuses on cutting costs and expenditure. Many frugal people live on a small fraction of their income.

You will be surprised to know that I am not a frugal person. Just the past week I guzzled on restaurant cafe latte almost daily and ordered lunch from different restaurants everyday. I did this because I was just too busy and preoccupied the whole week. I would never do this everyday but if I have to choose between writing emails to my property manager and preparing the next day's lunch in the evenings, I am inclined to choosing the emails. This is because that email to my property manager is probably going to grow my income or guard against me losing money whilst the lunch may cost me R50 for that day. Before you judge me for being too lavish, we really try to live on a fraction of our income with 50% being the norm.

Earning More
"Passive Income is earnings an individual derives from a rental property, limited partnership or other enterprise in which he or she is not actively involved." that is according to the IRS.

Passive income is usually regular (daily or monthly) once it has been built. Main sources of passive income are rental activity, stock trading and business partnerships. When it comes to making a choice between the two (frugality versus earning more income), I definitely go with higher income. Reasons being that when money is made and invested, it goes on making babies and grandbabies for the rest of one's life. That's where I put 100 percent of my focus. If I have to buy lunch everyday because I am writing for income, so be it. 

Just a few years ago, we fought for our property income to replace one of our salaries and we managed to do that. I doubt if frugality alone would have helped us achieve that. We have tried to grow our dividends to give us a small stream of passive income, which proves to be very tough in South Africa. Our money market account gives us a few cents which, given the inflation rate, is technically a negative growth. But this is still better than an ordinary bank account. My writing earns me more than enough to cover my son's school fees and all school related costs. The excess from that is for me to do whatever I wish like the shopping spree I went on in my recent trip to the UK. The beauty with this is that I love writing and I can do it for the rest of my life. Everyone has their own passion they can practice on a part time basis. I would not have achieved much without extra income.

Frugality has a good role to play, but growing your income is the most effective strategy. However, even that only adds value when the income earned is invested. The aim is to have your money grow to earn you income every day of your life.

Which one would you choose for yourself: frugality versus earning more income?
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