Best Route to Wealth: Savings or Earnings, a Debate

by nyljaouadi1
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How to Get Rich? Make a Lot or Save a Lot?
It’s some of both, though the lockdowns make it clear that many of us can easily do with less.
By Nir Kaissar and Barry Ritholtz
Bloomberg, May 21, 2020

Nir Kaissar: Anyone lucky enough to earn a steady, living wage — and there are tragically too few — can attain financial security, and maybe even get rich, by saving and investing their money. It doesn’t require deprivation, contrary to popular perception. But it does require sustained and disciplined frugality, a state of mind anyone can cultivate and I would argue everyone should.

Frugality, as I mean it, is the pursuit of a full life with the minimum consumption necessary to achieve it. It’s a habit of always asking whether less is more, or at least good enough. Is life any worse without a daily $5 latte, or a new car every two to three years or a 6,000 square-foot house? The answers will necessarily be different for different people; the important part is asking the questions.

And many are asking those questions now that coronavirus has stripped life to its bare essentials. I suspect some have discovered that they consume more than they need or even want. The pandemic spending recess is an opportunity to reset.

Perhaps some might even find that a simpler life is also a richer one, both literally and figuratively, as I believe it is.

Barry Ritholtz: I am not, nor have I ever been, a fan of “sustained and disciplined frugality.” With that said, here’s what to keep in mind:

1. Focus on the big things; the little things will take care of themselves

2. We all only have so much internal discipline, a consequence of limited mental bandwidth. Don’t fritter it away on things that don’t matter very much.

3. Spending should always be a function of what you can afford, not a slavish devotion to some puritan ideal.

4. Money can bring security, comfort and happiness, but beyond a certain point returns on having more of it diminish rapidly.

5. Experiences tend to beat material goods in terms of money well spent.

First, the big things: Your education, your career choice, your work ethic, who you marry, who you work with, your skill set, your compensation, your health, your outlook, how you think about the world and the commitment you make to yourself about continually learning and improving.

Get those right, and those $5 lattes become pretty irrelevant.

NK: We agree on what’s important, in your parlance the big things. I would argue, however, that not only do the little things not take care of themselves, they often get in the way of the big ones.

Benjamin Franklin, America’s most famous frugalist, put it this way: “Beware of little expenses; a small leak will sink a great ship.”

Most of us have limited resources. Every dollar thoughtlessly spent means less savings, and in many cases more debt. Having some financial cushion is often the difference between being stuck in an undesirable job and having the freedom to pursue more education or work that is more fulfilling or challenging.

There are also lots of people who can’t afford to leave their job because too much of their paycheck supports a big house or fancy cars or seemingly trivial expenses that quickly add up, even as the job takes a toll on their health or family. The things we own, and more broadly the lifestyle we lead, often end up owning us.

And what happens when the career runs its course or vanishes along the way? People often assume they can spend freely indefinitely, but that’s rarely true. It’s better to seek a full life that is sustainable than to scramble to find one when the money dries up.

It’s true that being thoughtful about spending requires mental effort, but it also creates space to pursue the big things.

BR: We have been under lockdown for more than two months and many of us are not doing the routine things that turn out to cost of lot of money.

I originally published this at Bloomberg, May 21, 2020. All of my Bloomberg columns can be found here and here. 

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