What is extreme frugality | Fortune

There are many personal finance tips out there that focus on budgeting and not overspending. The value of that advice is clear enough: Living beyond your means can have costly financial consequences, especially when you find yourself without the savings to pay for an unexpected expense.

While there is value and peace of mind in saving and investing for the future and being prepared for potential emergencies, it is also possible to go too far. At the other end of the financial spectrum is the question of extreme frugality. Advice for overly frugal people who don’t know how to spend money, sometimes at their own expense, is harder to find.

The American Psychiatric Association defines frugality as a symptom of obsessive-compulsive personality disorder (OCPD) when someone “adopts a spending style that is stingy with both themselves and others.” Extreme frugality is an amplified version of this and often involves viewing spending as a bad thing, no matter how much money you have. Examples of extreme frugality include always choosing the cheapest option even when you can afford and benefit from the higher quality one or focus on saving money at all costs, no matter how much time you have to sacrifice.

The problem with extreme frugality

There is a difference between saving and investing money for the future and accumulating money without a goal in mind.

People who struggle with extreme frugality see money as a finite resource that they must cling to at all costs. But when you are overly frugal, you lose one of the fundamental things money can do for you: simplify certain aspects of your life and give you access to things and experiences you care about.

Bill Perkins, a hedge fund manager and author of Die with Zero, he found himself falling into extreme frugality after reading Your money or your life by Vicki Robin and Joe Dominguez. The book, which describes money as a resource for which we exchange our life energy, helped him gain more clarity about the things he valued and how he wanted to spend his time.

But Perkins became so aware that he wasn’t wasting his money that he stopped spending altogether. Then, one day, as he proudly shared how much of his spending he had cut to maximize his savings, his boss made it clear that the purpose of his life was not to save as much as possible to survive but also to live.

How to stop wasting money without going to the extreme and start saving too much? You don’t have to live on either end of these extremes. If you find yourself hoarding money, afraid of spending on things and experiences you care about, consider the following tips that can help encourage even the most extreme savers to find ways to spend for a more enjoyable life.

Know your survival number

Understanding how much you need to cover your living expenses is crucial. Your survival number includes rent, utility bills, food, transportation, childcare, and whatever else you need for your daily life. You can calculate this number by adding all your monthly and yearly expenses needed into a spreadsheet.

Once you know your monthly survival number, you can use an online calculator or work with a financial planner to determine how much you need to have at retirement and how much you need to save and invest each month to reach that goal. All the money you have left over is disposable income.

Take the time to ask yourself the right questions

Once you understand your survival number and how much you need to set aside for your retirement or other financial goals like buying a house or paying for college, you are left with disposable income.

Ask yourself questions to help you decide how to use your money to improve your life.

What do I want to do? I want to travel? Do I want to renovate my home? Do I want to be able to support my parents in their old age? Do I want to send my child to a private school? Is there anything I’d like to do in five years? And in 10 or 20 years?

“Many people have discretionary income, but they have a scarcity mindset that they won’t be able to survive,” says Perkins. “So they stay on autopilot, thinking I will continue to work and save more just in case. But now you are becoming an insurance agent.

Get off the autopilot

Most financial advisors will advise you to automate your money to make it easier to manage. Putting automatic transfers in place can make it easier to save and pay off your debt. But people who are extremely thrifty can go too far.

Perkins stresses the importance of “getting off autopilot” and knowing what you’re saving for. “Saving has its purpose. It is for future consumption. ”

Once you know your survival number and have taken the time to figure out what you value, it’s important to focus on optimizing your life for greater fulfillment.

“Some people are living too long in their current life and wasting their future lives.” Perkins says. But if you want to get the best out of your life, you need to be clear about what you are saving and consider the most appropriate age to enjoy some of the things you want to consume. So make a savings plan that takes all of this into account.

“Our lives have seasons,” he says. “We go through different stages of life; whether it’s college, marriage, or having children, it’s best to have some experiences in certain seasons. So you should devote your money to your lifelong net achievement and maximize your experience and memory dividends.

In other words, take the time to make a clear plan for all of your goals, be it short-term (taking a family vacation this summer) or medium-term (moving to a bigger house in five years) or long-term ( retire somewhere warm). Then execute a plan to achieve them. But be very careful to make sure you have some in the bucket in the short term so you don’t always push to have fun and spend money for the next stage of life.

Make it happen

Now that you have a game plan, you need to carry it out. This can be the hardest step. Breaking the habit of extreme savings can be difficult. Take baby steps and keep your goals first.

Think about what you earn by spending money on things you appreciate. Think about the time you will return, the good memories – or the memory dividends as Perkins calls them – that you will be able to cherish forever when you spend money on things you care about. Focus on what you will earn, and if you are still struggling with guilt, remind yourself of your plan.

What you leave behind

Perkins’s book focuses on maximizing life experiences. That doesn’t mean you spend everything you have before you die and don’t worry about your children or other dependents. The goal is not to delay gratification so much into the future that you can’t enjoy it as much as you should because the best time to do it is past. This also allows you to be more intentional in transferring assets to your heirs.

“You don’t want to give a random amount of money to random people when you pass,” Perkins says. “You don’t know which of your brothers, heirs or people you want to give money to will be alive after your death. You want to be deliberate on this. If you are looking to make the most impact on the lives of the people you truly care about, think about when is the perfect time to give them the money you want to give them. ”

“It’s about being intentional and optimizing along the curve. You’re looking to maximize the net fulfillment of your kids, yourself, your charity or whatever it is. There is a way to think about these things that bring you closer to maximum optimization and maximum impact, and get in touch with what you want out of your life span. ”

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