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3 Reasons Why I Choose to Live Frugally

The battle against financial stress by living frugally.

After graduating and preparing to enter the workforce, I’ve encountered several financial obstacles that had me in a bind. This included 2 minor car accidents amounting to A$2,000, Medical Checkups – A$315, and an expensive graduation gown hire – $A80.

Despite working casually as a web developer, I had depleted all my money to the point that I had to borrow from friends and family. And trust me, that is not something to be proud nor happy of.

Due to that, like the financial idiot I was, I picked up a book called Barefoot Investor. You probably would have heard of it as it was all over bookstores around Australia.

Through the book, I’ve learned why I should live frugally and how to maximise my money. While the book’s advice was general and basic, it taught me a lot more than I’ve expected, from simple money saving techniques to basic investing.

After following the advice from the book and living frugally for half a year, I can safely say that I’m still alive, comfortable, and worry-free about my finances. With that, here are 3 reasons why I live frugally.

1. Shit Happens

Almost one in three (31.6%) adults had no savings or were just two pay packets (<1 month of savings) away from serious financial stress if they were to lose their jobs.

Financial Resilience in Australia 2016 – Centre of Social Impact & NAB

Honestly, anything could happen, being laid off, getting into a car accident (twice like me), or needing to fly back your home country for an emergency.

No one can predict the future, not you, not me, not even that fortune teller lady you visited 2 weeks ago. And that’s why having savings and an emergency fund is so important. Without one, you’re just inviting for trouble and debt to come your way.

It’s because of this that I save 35% of my salary into savings and my emergency fund. There’s no better feeling than knowing there’s a cushion to fall on when shit hits the fan.

2. Financial Independence

My ultimate goal is to reach financial independence, where I am able to live off “passive income”. I want to choose what I do with my time, be it working, chasing my passions, or travelling.

However, many people believe that financial independence is a concept near impossible to achieve but I’ll like to think otherwise.

For me, there are two important things to consider when working towards financial independence and that is:

  1. The amount of money I need to live
  2. The power of compound interests

The less money you need to spend on your daily life, the faster and more likely you’ll be able to reach financial Independence.

For example, if you earn A$5,000 a month salary and you save just 30% of that, your living expenses is A$3,500 a month. If you wanted to save up till A$30,000, it’ll take you 20 months.

However, if you save 60% of your money, making your living expenses A$2,000 a month, it’ll take 10 months to reach your goal, that’s half the time!

Right, after lowering your living expenses, the money you need to earn your living expenses also lowers.

So if your living expenses are A$2,000 a month (without considering inflation), and assuming interests rates are 2.8%, you would need A$857,145 in a savings account to generate that.

Well uh… shit. That’s a lot huh.

But hold up! That’s why we have compound interests, if we actually saved A$3,500 a month, we’ll actually reach A$857,145 by 16 years+ of consistent saving. (That’s not as far off as you think!)

Compounding Interests at 2.8% - MoneySmart for the Graph
Compounding Interests at 2.8% – MoneySmart for the graph

This happens because the interests that you’ve earned over the years are also earning interests, resulting in a snowball effect.

This isn’t the only way to make your money to make more money. There are also government bonds, shares, and term deposits which provide better returns. Though those are topics for another time.

3. I Want a House

Photo by Scott Webb on Unsplash
Photo by Scott Webb on Unsplash

It comes to no surprise that most people want to own and live in a house (or an apartment). For me, owning a house is my dream but it’ll take a long time before one can even afford one.

However, by living more frugally, I am able to save more, and be able to deposit more when I get a home loan (which can result in a lower interest rate).

I’m not sure whether I’ll settle here in Perth, Brisbane or back home in Malaysia. But it’ll be great if I could buy a house in Lancelin as the natural scenery there is stunningly beautiful.

Living Frugally Is Not Living Cheaply

Despite what I’ve said about living frugally by saving more, that does not mean that I’m sacrificing my sanity just to save even a little bit more.

You don’t have to take all the tissues at McDonald’s just to save money, that’s just being cheap. Frugality means just cutting out what you don’t need in your life, and doing the small things that could help you save money.

Hopefully, you’ll understand why I’m living frugally and maybe give you an idea if you want to as well.

In my next post, I’ll be writing about how I live frugally so that you determine whether I’m cheap or not.

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