Entrepreneurship and frugality are essentially connected. However, the media portrayal of entrepreneurs often disguises this fact.
No one else is saying it so I will.
That Ferrari your favorite entrepreneur drives on Instagram is a lie. It’s not that they don’t actually own it, they probably do. It’s a lie because 95% of successful entrepreneurs don’t drive Ferrari’s.
They don’t drive Ferrari’s because one of the character traits that propelled them to success in their business was frugality. It’s how they got there.
Unless you’re starting out with a large capital base, frugality is essential to your long term success. It makes you wealthier, happier, mentally tougher, more attractive, and better able to weather tough economic times.
What is frugality?
I define frugality as “reducing your economic demands, and seeking to meet your human needs as efficiently as possible.”
Why should entrepreneurs practice frugality?
There are countless reasons. Here are 6 financial reasons and 5 psychological reasons.
Six Financial Reasons
- You need capital to be a capitalist. If you want to be an entrepreneur, investor, or even just self employed, you need capital to invest in projects and profitable enterprises.
- There are guaranteed to be ups and downs. The business cycle is inevitable. Eventually you will hit hard times. If you’re living frugally, your lifestyle probably won’t even change that much. One of my first business partners told me, “you have to live on 50% or less of what you make in this business.” For 6 years in the trading business, I happily lived on way less than 50% of what I made. When hard times came, it really didn’t affect our lifestyle that much.
- Slow the leak and fill your bucket. Some people make a lot of money, but have no wealth. They are punished heavily by the tax code. Their “wealth bucket” has no bottom. Other people make very normal incomes, but have tremendous wealth. They’ve found ways to plug their “wealth bucket.” These people never worry about bills. Frugality is the difference.
- Do the math. If you live on half of what you make, you are mathematically guaranteed to be able to retire in 17 years or less. This is assuming a 5% return on your investments. Mr Money Mustache wrote an incredible article laying out the math behind the “retirement equation.” Here’s the calculator he references
- You need to reinvest. This is especially true in the beginning or your career. If you ever want to live off your capital, you have to expand your base. There’s no way around it.
- Practice running your business profitably. Ask any successful business owner how important controlling expenses is. They’ll tell you it’s absolutely imperative. You can practice this discipline by running your personal finances like a business.
Five Psychological Reasons
- Needing less is strength. Needing expensive things is a weakness. If you can find happiness, fulfillment, and self worth with less, you are in a position of strength.
- Adopting a frugal mindset can make you happier. They say unhappiness is the gap between your expectations and your reality. Embrassing the pursuit of frugality will shrink or eliminate the space between your expectations and your reality. You’ll be happier with what you already have. Try it.
- Looking for deals is the very essence of investing. A large part of frugality is about finding good deals on the things you do need. Practice! Work your deal-finding muscle!
- It’s easier to give when you have more than you need. Countless studies have shown the mental and emotional benefits of giving away money. This is easier to do when your lifestyle isn’t demanding all your available capital.
- It makes you more attractive. I don’t know if I’m just weird,but my wife’s frugality is huge turn on. It’s hot when she buys wrapping paper 90% off at an after Christmas sale. I always compliment her clothes, but when she tells me she bought her dress for $5 at a thrift store, that takes it to a whole new level!
The necessary connection between entrepreneurship and frugality is something i’m pretty passionate about. Since I left college, I’ve never had a “real job.” Frugality is the main trait that’s allowed me to pull that off, while still providing a comfortable life for my family. In part two of this post, I’ll share some strategies I’ve used.
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