The term frugalism has its roots in the Latin language, namely in the Latin verb frugalis, which in German means something like "economical or frugal". In the DUDEN, the adjective "frugal" can be found in its current meaning as "unpretentious, modest, simple, frugal, plain or spartan". And that pretty well describes the idea behind frugalism.
Because people who live frugally try to avoid unnecessary consumption and really only buy those things that are absolutely necessary. In this way, they try to save as much of their monthly income as possible.
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Money should work
But frugalism also means that the income you save doesn’t just sit in your bank account. Most frugalists are concerned with finances and investment opportunities in order to be able to invest their money as profitably as possible. Ideally, the return on investment is so high that they no longer need to work at 40 or 45 in order to earn a living.
Frugalists therefore try to build up sufficient reserves as quickly as possible in order to become financially independent and only work when they want to.
Frugalism originates from the USA, where it is also known as FIRE. The acronym FIRE stands for: F = Financial, I = Independence, R = Retire, E = Early.
In German: Financial independence, early retirement. And also one of the well-known frugalists comes from the USA: Peter Adeney, who writes on his blog mrmoneymustache.com lets interested people in on his life and shares tips on frugal living with them.
Frugalism: Difference to minimalism
Minimalists also try to acquire as few material things as possible. In this point frugalism and minimalism are similar. The difference, however, lies in the theoretical superstructure: For minimalists, the declared goal is to consume as little as possible and to limit oneself to the essentials. The fact that they save money with this attitude to life is a nice side effect.
Frugalists, on the other hand, focus on saving money. Wanting to achieve financial freedom by saving as much of their monthly income as possible. This goes hand in hand with limiting purchases to the essentials.
The result (less consumption) is similar for minimalists and frugalists, but the motives are different.
How does frugalism work?
How do people live who have set themselves the goal of retiring at the age of 40 or 45 – or at least only doing the jobs they really enjoy??
First of all, these people adhere to the basic principles of frugalism, namely:
As much of the monthly income as possible is saved. Those who want to build up enough assets to achieve financial freedom should save at least 30 percent of their income each month. Some frugalists even manage to accumulate 50 or even 70 percent.
To optimize the monthly savings rate, expenses are minimized. Frugalists do not afford restaurant meals or expensive clothes. Instead, they cook for themselves and buy second hand.
The reduction in expenses also applies to leisure activities. Frugalists travel only rarely and limit theater and concert visits as completely as possible.
The 25-percent method / 4-percent rule
For frugalists, the magic threshold is reached when they have saved 25 times what they usually spend per year. This is because they expect the interest, dividends and other returns on their investments to be sufficient to cover their current monthly expenses from this amount onwards.
This method is also known as the 4-percent rule. And the following example explains why this is so:
Frugalists who save 30.If a person spends € 000 per year, he or she must spend 25 times this amount, i.e. € 750.000 euros in savings. This sum makes it possible for them to save four percent annually, that is, those 30.000 euros from the assets to be able to cover their living expenses.
Provided the money is well invested, an annual return of four percent should be quite possible. By way of comparison, anyone who invested in the Dax at the end of 1980 would achieve an average annual return of 8.9 percent by the end of 2021, which is more than double what is required according to the 4-percent rule to cover running costs without the saved assets shrinking.
When can frugalists retire?
Not everyone who lives frugally actually manages to retire by age 40 or 45. Because the point in time when 25 times the annual expenditure is saved depends on very individual factors.
However, as a rule of thumb, if you save 50 percent of your income each month, you will reach your goal after 17 years. Frugalists who can save as much as 75 percent of their monthly income have already built up enough reserves to retire after seven years.
By the way: Most frugalists completely exclude the statutory pension from this calculation. This also makes sense. Frugalists who actually retire at the age of 44 do not contribute to the pension scheme for 24 years. Whether and to what extent frugalists will receive a pension after reaching the standard retirement age is questionable and should definitely be clarified in advance.
How do frugalists live? Tips for financial independence
Admittedly, the frugalist lifestyle is not for everyone. If only because there are fewer and fewer people these days who can save 50 percent of their monthly income. According to a recent study by the Hans Bockler Foundation, almost every second household in large cities has to spend more than 30 percent of its available net income on warm rent plus utilities. This makes it difficult to achieve the targeted savings rate of 50 percent of monthly income.
Despite this, or precisely because of it, you can get to grips with the tricks of the frugal lifestyle in order to set aside as much money as possible:
Get an overview of expenses: First of all, you should keep a record of how much money you spend per month and, above all, on what. Only if you have an overview of your consumption, you have the chance to optimize your spending in some places. The classic budget book is still a good choice to correlate monthly income and expenses – nowadays the Excel version is a good choice.
Eliminate unnecessary fixed costs: Maybe you are one of those people who have too many insurance policies or you have an expensive cell phone contract that you don’t need. You can also save a few euros now and then on electricity and heating costs if you regularly switch providers. Review the items you have listed in your budget book to see if you can cancel some contracts or switch providers and have money available to invest.
Set small goals: If you don’t want to immediately save 50 percent of your monthly income and live frugally from now on, set small sub-goals. For example, that you want to invest 50 euros per month in an ETF savings plan in the future. This is a sum that students can often do without, he says, and thus provide for their retirement.
Moving yourself instead of driving: Especially in cities, the bicycle is a good and above all cheap alternative to the car or even to public transport. Not only will you save money by pedaling instead of being driven, but you’ll also be doing something good for the environment – and your health.