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Finance Highlight: The Frugal





Yesterday we discussed the reliable and consistent ways to acquire a significant amount of wealth. Let's examine the one of the three potential career paths today in great detail: What does the career path of the Frugal look like?


Defining frugality


The Frugal is a person who works a job with a very average earning potential, with only mediocre career development (pay raises) in the long term. This could be a low-level corporate job, a management-level retail job or a public sector job, assuming that those roughly match the average income of the country the person is located in. The key to prosperity with such average earning potential is ruthlessly minimizing all expenses while saving as much as possible to eventually compound your wealth.


Income linearity


As the income level of the Frugal earner is very average and does not experience significant upward development, the earning curve remains very linear for a long time. In other words, the received income from employment remains the same for a very long time, which is why expenses have to be driven as low as possible.


Expense reduction


The key to achieving success with this path is understanding that as your income remains relatively small and constant, you need to figure out every single way to keep your expenses in check.


The first thing to aim for is to acquire housing that you personally own, like a small apartment. This means that all the money allocated towards paying rent will transfer into paying housing fees, but paying for your living space will be extremely worth it as its worth will most likely increase annually (or at least remain the same value if in an average neighborhood), contributing to your net worth increase. Let's suppose that you've paid 100,000 US dollars for your first apartment, in which you now get to live if you pay roughly the same rent. In a few years, your apartment's value will probably have increased passively, such as by 10,000. If you had been paying rent all that time that passive apartment value increase wouldn't exist.


I've illustrated it with the graph displaying linear growth: once a significant positive financial event happens like acquiring an apartment that decreases your expenses or starts building your net worth happens, your linear growth will slowly increase.


Directing your income towards a target


Since your salary remains relatively stable, you should look for an investment opportunity as soon as one becomes feasible, after having bought housing for you to live in so that you don't pay rent. Investing in the stock market might be worth it but if you're looking for a stable and relatively safe investment, becoming a landlord is your safest bet: you get both the monthly rent paid by the tenant as income in addition to the annual increase in property value. It's also a valid option to take out a mortgage once you own enough capital for an apartment down payment and then take in a tenant and use the monthly rent income to pay off the loan. This way you benefit massively from the increase of the property value during the lending period since you already own the apartment while having someone pay off your mortgage instead of waiting to save up 100% of the apartment value, as illustrated below.




Sample progression: What happens long term?


Other than keeping your income saved up for an investment and minimizing expenses, there is not much of anything intricate to the Frugal lifestyle. As you achieve more and more milestones the easier it becomes, however, so you get a little more leeway with expenses if you so desire. Here is a sample progression of the fundamental financial events in this relevant career path as a graph


As you can see, after becoming a landlord there is no further defined goal. You could spend time acquiring more apartments and more tenants, then perhaps selling smaller apartments to buy a bigger apartment with a larger monthly rent if you desire less tenant management and so forth. The principle is keeping your living costs low through first acquiring your own housing and then finding an optimally stable income source to further increase your earning potential.


 

The Rational Society is committed to presenting ideas related to the rational school of thought, focused on improving personal issues, overcoming challenges and fulfilling ambitions. It is not a dogmatic ideology but an established mode of thought with the explicit goal of guiding the person to the most logical, healthy and beneficial choice.