Rajesh Kumar

Optimizing life, one day after the next

Finance vs. Frugality

15 Apr 2017

Finance vs. frugality, what's the difference? Sounds like the same thing, doesn't it? The 4 F's suggest investing in your finances and then frugality right after you've taken a good look at your food (i.e. diet) and fitness. That post confused a few people. What exactly is the difference between finance and frugality, and why can't they be combined into one? Do they really deserve top positions in the quest for simple, yet happy living?

Seems like a reasonable question to ask as they both seem to relate to money. Certainly the two go hand-in-hand, but they are their own distinct entities, meaning one can be optimized independent of the other. But if you could only pick one, pick finances. Finances without frugality is better than the other way around. Furthermore, getting your finances in order tends to automatically motivate you to focus on frugality. Finally, finance is a prerequisite to achieving high levels of frugality.

So, what exactly is the difference between the last 2 F's?


Personal finance is about having a deep understanding of all cash flows in your life. Just like companies have accountants, budgets and financial reports, you too need to be your own life's accountant. It is imperative that you run your life's finances like a business and know where each dollar goes/went. All the way from the $2 bagel you buy everyday on your way into work, to the hundreds of thousands of dollars you've spent on your college degree.

But why is this so important?

It's fairly obvious to almost all of us that money plays a central role in our society these days. Squander your money carelessly and you end up a pauper on the streets. Money owns you, and you're the slave in this situation. Conversely, conserve your money with even the most basic techniques of financial prudence and instead now you make money your slave. How do you know which bucket you're in unless you've taken a hard look at your personal (or family) finances and can answer questions surrounding all aspects of your financial position? The messier your finances, the more important it is to look into them to avoid falling off a cliff one day. Even if you choose not to do anything about them today, knowing that things are bad is step number 1.

Chances are high that if you've ignored (or procrastinated) your personal finances thus far, your finances are probably a mess. Most of the "normal" people I know, and sometimes even the theoretically "smarter" people have no clue about their personal finances and are getting ready to wake up to a surprise one day when their credit card gets declined at a store because it's maxed out. Or their ATM craps out with an "insufficient funds" error. Do you really want that to be your wake-up call? It'd be far too late at this point, and you'd be putting yourself in a precarious situation of having to live with financial impotency for the rest of your life.

Take a gander at this Atlantic Article to catch a glimpse of the grim plight of many middle-class North Americans across the continent. It's not pretty. And it's primarily because of not understanding or not implementing the basic money principles associated with healthy financial living. Philosophical question: what would the divorce rate in North America drop down by if every couple in the continent had a sound grasp of their finances, and applied basic financial prudence to their everyday expenditures?

Over the last few years, Sowmya and I have deliberately tried to fall on the other (better) side of the financial spectrum. We try to keep our finances air-tight, and we practice financial prudence religiously. Each and every expense over $10 is debated, negotiated, agreed, and then tracked. For each expense, we weigh out both the short-term gains against the long-term losses, and vice versa. We even keep our finances separate to align our incentives and maintain our individual financial freedom.

Good finance is this: at any given point in time, without exception, you need to have definite and accurate answers to the following finance-related questions about your life. This list isn't exhaustive, but it gives you a taste of what good accounting looks like.

  1. How much money do you make per year, per month, per week, per paycheck, and per hour? You'd be surprised how many people don't know how much they make exactly. This is a problem and is the antithesis of financial prudence. If you don't know how much you're making, nothing else matters, since it's the main and often the only top-line number.

  2. How much do you pay in total taxes each year? What % of your gross income is that? What is your marginal tax bracket? What are your qualifying tax deductions (if any)?

  3. How much do you pay for housing? If you're renting, how much is your rent per month and per year? How much money is stuck as a security deposit with your landlord? If you own your place, how much is your mortgage/loan amount? What was your down payment dollar amount + percentage? What interest rate are you being charged each month? When will you be done paying off your house? How much are your property taxes, both in absolute amounts plus in percentage points of your home value?

  4. What do your day-to-day expenses look like? Which of them are fixed vs. recurring? Which of them are necessary vs. optional? Which of the optional ones are frivolous and which of them are luxury? Do you have a budget? Do you know how much you're spending each year? Each month? Each week? If I gave you only 10 minutes, could you tell me exactly how much you spent this past week? How much do you spend on frivolous luxuries like lattes, bubble tea (boba), beers, wines, and movie tickets? How much is that car costing you, all put together? Heck, how much is your pet dog costing you over the duration of its life? If you don't know the answers, you should find out sooner rather than later even if it won't change anything.

    What my budget spreadsheet looks like this year (2017)

  5. What are your debts? What is the interest rate on each of them? This includes student loans, car loans, credit cards, and device/appliance monthly installment plans. How much money gets thrown out each month just in interest? What is that as a percentage of your take-home? What does your timeline to go debt-free look like? Do you have a sound action plan?

  6. What is your savings rate per year? Without having answers to the above questions, you won't be able to answer this one accurately. Your finances should be in a sound place where you are, at minimum, comfortably saving (and investing) 20% of your net income every single paycheck. If you're having trouble hitting your savings goals, try these effective savings tips from a younger me.

  7. When will you become financially independent, i.e. when can you quit your job but still earn enough money to cover your current expenses just purely from your investments? Will it be 10 years from now, 20, 30, or never? This number directly depends on your savings rate.

If you're unable to answer even just one of these questions, you have a problem. It means your personal finances aren't in order and you need to square that out ASAP. If you don't know how to use a spreadsheet, learn to use one pronto. There's a really good one online for free called Google Sheets. I learned to use Microsoft Excel when I was in Grade 6 or 7.

Your finances provide you with the framework required to make all future financial decisions. Without it, you're swimming in the dark, with no goggles, floaters, or oxygen tank. After you've perfectly mastered the basics of personal finance, you can then invest more time reading personal finance blogs and articles online that teach you even more about personal finance and the various "hacks" to get ahead faster.


Frugality goes hand-in-hand with finances, but is the next step in simplifying your life drastically. And simplification leads to quick happiness. It's less about accurate accounting of your expenses (i.e. finances), but more of a philosophical concept of reducing your expenses to just the bare minimum. It boils down to one single idea: stop buying expensive shit! It's about consuming less and knowing when to say enough. It's about being happy with what you already have and finding maximal use for it, rather than wanting something you don't have. It's about being content with tap water instead of Starbucks lattes. It's about reducing your carbon and environmental footprint on this planet by outputting more than you consume. Start by implementing some specific actions on being more frugal today, and watch your happiness level soar in just a few months.

If you're the kind of person that replaces their furniture once a year, you're not frugal. It doesn't matter how much money you have in the bank, or how much you make each year. Furniture is not meant to be replaced every year! Even cheap-shit furniture from IKEA lasts me 5+ years, so I'm pretty sure your fancy Crate & Barrel furniture will last you much longer than that. If you drive to avoid a 2-mile walk to work everyday even though you are fully capable of walking 40 mins each way, then you are not frugal. You're just lazy and will pay the price for it in under a decade (or sooner).

If you think you're pretty good with your expenses but unsure if you're truly frugal or not, fret not! I have the most simplistic metric that lets you quickly determine your level of frugality — it's your savings rate! Take your leftover money each year after expenses and divide it by your annual income, net of taxes. This is your savings rate. Your savings rate should be a minimum of 20%. You're definitely not frugal if you're under this. Increase your savings rate to 50% and you're officially frugal. 50% is quite hard to achieve, so those who do ought to walk with an air of supremacy around them. They're definitely happier through their increased confidence in their financial future, and tend to sleep better at night than those who only save 20%.

Now, increase your savings rate to 60%, or even 70% and now we're talking! At 70%, you are a guru of frugality and will be ready to retire permanently within just 8.5 years of working, even less if you save and invest all your future bonuses and raises. That's early retirement by the age of 30 if you start working at 22. Sowmya and I target a 65% savings rate these days and hope to grow that number to 75% over time. But even 65% is quite hard for us since the more money you make, the more challenging it becomes to remain frugal. But if it was easy, everyone would be doing it. But they're not. Therefore the people who are frugal enjoy an insane nuclear weapon over the people who aren't.

So there you have it: A philosophical definition of frugality, and also a mathematical ratio. Keep optimizing the mathematical number every year and the philosophical part will take care of itself. At the end of the day, frugality presents itself with three very big advantages to your life long term: 1) a simpler, easier, modest life with less stuff around you, 2) confidence in your financial security through a large invested emergency fund to dig into for surprise events, and 3) steady attainment towards the holy grail of financial independence, i.e. the ability to not work for money anymore and instead do what you truly love, even if it pays $0. If you'd rather not do anything besides sit on the beach all day, no problem! Financial independence unlocks the only prerequisite to early retirement. Do as you please!

Frugality therefore requires you to get to know your personal finances intimately first. How are you going to calculate your savings rate if you don't know how much you're saving each year after taxes? How are you going to know how much you're saving if you don't know how much you're spending? You can work on the philosophical aspect of frugality any day (i.e. buy less shit + buy cheaper shit), but if you want to get into the major leagues of attaining a 50%+ savings rate, taking command of your finances is a crucial first step.

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