A Case Against Frugality: Why Pinching Pennies is Not the Best Path to Wealth

By Markets Fool.com

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After reading articles byBen LeybovichandElizabeth Colegrovewhere they discuss frugality and the mechanics behind it, I figured I'd jump into the mix with my thoughts. As a millennial, the idea of frugal living is constantly being force fed to me via articles, friends, relatives, etc. This is likely a direct result of the economic struggles this nation (and world) have experienced in recent decades. However, I'm an investor and I like to take a contrarian view to the norm and as such, I disagree with the commonly promoted frugal lifestyle.

The commonly promoted frugal lifestyle is all about cutting out anything that isn't a necessity and never (or rarely) splurging. They say doing so will allow you to save, save, save some more, invest and eventually retire early. While there are certainly successful frugalists among us, this advice isn't practical, as so many people spend money onStarbucks(NASDAQ: SBUX)lattes or buying the latest and greatest iPhone. Further, some of these splurgers have still figured out how to retire early. How? They ignore the shadow frugal living advocates cast and instead focus their time and energy on building businesses that pay for their splurging plus some.

Don't get me wrong, I'm all for "living within your means" and not financing your entire lifestyle to simply keep up with the Joneses. I also likethe definition of frugal: "economical in use or expenditure."The ability to make smart or "economical" decisions in managing one's finances is key to generating substantial wealth;however, I disagree that pinching pennies is the best way to live your life and build that substantialwealth.

Scarcity vs. abundance
When you hear the word "frugal," what do you think about? Probably spending and living on less, allowing you to stash more money away each month. But while exhibiting control over your expenditures is important, frugality is the wrong way to think about building wealth.

People who abide by the commonly advertised frugality lifestyle see money as a scarce resource. These people tend to think money is limited and difficult to access. Frugal people spend their time devising methods to stretch their paycheck so they can achieve financial independence and retire early. Rather than learning how to earn an extra dollar, they learn how to save an extra dollar,which is only good up to a certain point, as you can't save more dollars than you earn.Frugality teaches people how to be a miser, not a mogul.

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The fact is: Money is abundant. The rich know this and spend their time developing systems to tap into said abundancy and snag a share for themselves. They don't waste an hour figuring out how to save $10, because they know they can make $100 in that time. They don't stand in a 30-minute line waiting for a free sandwich from Chik-fil-A because 30 minutes of their time is not worth the $5 they'd save.

Ben gave a great example in his article -- his business (clients) and tenants pay for his mortgage and provide him with passive income to pay for his lifestyle. Ben has spent his time developing systems that will earn him money so that he can live a comfortable life and splurge as he wishes. Saving is important, but building additional streams of income should be the primary focus.

Create additional streams of income
Think about this -- if a person makes $50k after taxes, the most that person can ever save in any given year is $50k. They can't save a penny more because they haven't earned a penny more.

On the other hand, a person who is focused on building additional streams of income, whether they be passive or active, has unlimited potential in terms of the amount theycan save. They can invest in their income streams to make them larger and more lucrative. The possibilities are endless for the person focused on developing diverse streams of income.

It really isn't difficult to create additional streams of income. By defining and leveraging your core competencies, you will find there are plenty of business opportunities to take advantage of. The main goal is to create passive income streams. By dedicating yourself to creating quality products up front, you can essentially build businesses that run themselves and require little maintenance once established (e.g., real estate, royalties, software as a service, etc.).

By focusing on creating additional streams of income, you will learn good business habits. You will be able to splurge on that Starbucks coffee without it seeming immoral or feeling depressed at the expenditure.

Best of all, creating additional streams of income diversifies your income risk. People with one income stream (e.g., W-2) are more susceptible to risk than people who have started a business or multiple businesses. If a W-2 employee gets fired, their income is gone. On the other hand, if a business owner has 100 clients, that's 100 streams of income -- talk about diversification. A business owner can also adapt to a slowing economy by moving capital around and reorganizing. This is not a luxury an employee can utilize.

It's all about opportunity cost
I live in an up-and-coming area in D.C. and as such, I pay a hefty $1,200 per month in rent. The building is new, nice, and safe (keyword "safe"). I'm within 100 feet of a metro station, which allows me to get anywhere in the city in under 15 minutes (this also happens to be my average commute time). I'm also within 50 feet of a grocery store entrance and right around the corner from a CVS(NYSE: CVS) and a dry cleaner.

If I bent over backward to live a frugal lifestyle, I may move out to Northern Virginia, where I can rent a similar place for $900 per month and save an additional $300 per month. However, I'd also be burdened withan additional 1.5 hours per day in commuting alone, equating to 30 hours per month simply to save $300.

Instead, I asked myself how I can boost my income to justify the higher city apartment expense and save on the grueling commute time. So I started a side CPA practice (I have a W-2 job), as I know that I can make significantly more than $300 with the 30 extra hours I'd save living in the city apartment.

An example that may hit closer to home for BP members is whether to rehab your propertiesor hire the work out. Doing the work yourself saves money and may make sense toward the beginning of your investment career. However, eventually you will reach a critical point where your time simply isn't worth the cost savings of doing your own work.

I'm in the beginning stages of my investing career, and I invest at a distance. Naturally, I have taken the oversight/manager role rather than getting into the weeds and performing the work myself. Taking this role, even early on in my investing career, provides me with significant experience in developing a business system that is scalable and applicable to many different locations, strategies, and environments. By figuring out how to develop a system that removes me from the core operations, I am able to spend my time souring deals and partners -- and ultimately growing my portfolio.

Conclusion: Find a balance
Unfortunately, many people support the frugal lifestyle, and I think it's because frugality is the path of least resistance. It's easier to spend less money than it is to earn more.

But I firmly believe that everyone reading this article has the ability to generate additional streams of substantial income. It's very important to develop financial competence and live within your means; however, the logic promoted by frugalists is flawed -- they spend too much time and energy figuring out how to save their already limited income. They employ a scarcity mind-set rather than one of abundance. Finding a balance, as Elizabeth stated in her article, between savingand developing additional income streams is what it's all about.

This article originally appeared on biggerpockets.com,

The article A Case Against Frugality: Why Pinching Pennies is Not the Best Path to Wealth originally appeared on Fool.com.

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