Are You Too Frugal?

Are You Too Frugal_350Frugality is a wonderful thing. Being frugal will help you build wealth faster because you can save and invest more. It is the short cut to financial independence. The less you spend, the earlier you can FIRE! After all, the starting point is 25x your annual expense. That’s a lot easier to achieve with smaller annual spending. That’s how A Purple Life retired early at 30 with $500,000 invested. Her annual expense is quite low so she doesn’t have to work until she’s 65 like most people. There is a downside, though. Frugality is a hard habit to break. When I was young and poor, I was very frugal and the habit stuck. Now that we are comfortable financially, I’m still pretty frugal. Are we taking frugality too far? Why not spend more now that we’re doing better?

Frugal vs. cheap

First off, let’s make a distinction between being frugal and being cheap. To me, being cheap means saving money at all costs. For example, under tipping is being cheap. Eating fast food without fruits and veggies can save money, but it isn’t very healthy. On the other hand, frugality means you look at the overall value. So asking for water instead of paying $3 for a soft drink is being frugal.  It’s a fine line.

Is it possible to be too frugal? I think so. Let’s look at Warren Buffett for example. He’s one of the richest people in the world, but he doesn’t spend much. He still lives in a modest home he purchased in 1958 for $31,500. His day starts off with a breakfast sandwich from McDonald’s. He also drives the same car he’s had for years, a 2014 Cadillac XTS. That’s a nice car, but not extravagant. Lots of struggling middle-class families have more expensive vehicles than that. Anyway, I think Warren Buffett is too frugal. He should spend much more because he’s super-rich. Somebody has to stimulate the economy, right? We’ll see if he’s too frugal a bit later.

Warren Buffett is a fascinating person. I highly recommend The Snowball: Warren Buffett and the Business of Life. It’s a good read.

Too frugal?

Being too frugal isn’t a problem for most people. Regular folks tend to spend too much, not the other way around. Here is one way to objectively look at it. Let’s take personal spending as a percentage of your net worth. This way, it’s all about the numbers and not emotion.

Here is my proposal. First, figure out your burn rate.

Annual Burn Rate = annual spending / net worth

What? You don’t know your annual spending or net worth? Let’s remedy that right now. Your net worth is simply all your assets minus your liabilities (debt). Annual spending is a bit more difficult. You have to track it and tally it up. You can estimate it if you don’t know it down to the penny. These 2 numbers are important if you want to FIRE. Tracking your expenses is actually very helpful. You don’t know where your hard-earned money goes if you don’t track it.

*Here is an easy way to check your net worth – sign up for a free account with Personal Capital. You can aggregate all your accounts there and your net worth will be updated automatically. It’s very convenient.

Frugal table

Now that you’ve got your Burn Rate, let’s see if you’re too frugal or not.

  • 20 to 100+% – You are not frugal enough. You probably should try to save more. Unfortunately, most regular people are in this range.
  • 10 to 20% – This is pretty much normal. I think a lot of people are in this range, too. You spend a reasonable amount and save at a good rate.
  • 5 to 10% – Ahead of most households. You’re frugal.
  • 4 to 5% – You’re FIRE frugal. If you keep this up, you’ll reach financial independence in no time. Or you might be there already.
  • 2 to 4% – Highly frugal. This is a good range to be in. You can retire early without much worry.
  • 1 to 2% – Too frugal. This is okay if you’re trying to build generational wealth. However, you probably can spend a bit more if leaving a legacy isn’t a high priority.
  • Under 1% – Unreasonably frugal. You should spend more to help stimulate the economy. Why so frugal? You can’t take it with you.

Is the RB40 household too frugal?

Last year, we spent about $85,000 (including taxes, insurance, and various deductions). That’s in the highly frugal range, 2-4%. That’s not bad at all. It’s where I like to be while we are still young. Once we’re near normal retirement age, we’ll probably loosen up a bit and spend more. This is all going according to my withdrawal strategy.

Okay, let’s look at Warren Buffett again. Actually, he spent a lot of money last year. He donated $3.6 billion to five charities in 2019! Wow, that’s very generous. Warren Buffett was worth about $80 billion then. So he was in the 4-5% range, FIRE frugal. He’s doing just fine. Whew, I hope you didn’t think I was going to badmouth Warren Buffett. He’s one of the good guys. (I assume his personal spending and income taxes are much less than $3.6 billion so they wouldn’t affect the calculation that much.)

Lastly, let’s look at the average US household. The median net worth of the average US household is about $100,000. They spend about $63,000/year. That’s 63% and not frugal enough.

What do you think of my table? Where do you place on it? Are you too frugal or not enough?

Sign up for a free account with Personal Capital to help track your expenses and net worth. They also have several nice tools to help plan your retirement. Check them out!

Image credit: Kevin McCutcheon

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
Get update via email:
Sign up to receive new articles via email
We hate spam just as much as you

44 thoughts on “Are You Too Frugal?”

  1. Interesting! I like it. For those of us who aren’t retired yet, I guess it gives us a picture of how close we’re could potentially be getting to the 4% rule applying. We’re at a 7% burn rate, but have a savings rate of over 75%. With the denominator growing that quickly, we’ll fall into one of the uber-frugal categories in no time. Thanks for giving a cool new way to look at it though. Creative!

  2. I am facing the same problem now))) Thanks to frugality, I was able to form decent capital, but today I sometimes argue with my wife about being too frugal. I think it’s hard to find a balance. But if it works out – it will be amazing!

  3. We are in the 2-3% burn rate depending on exactly what I include (e.g., include personal residence?, donation of stock to charity? all rental costs or subtract from rent income).

    Anyone interested in Warren Buffett should watch the 2017 documentary Becoming Warren Buffett. One of the good guys for sure. Also pretty, ah, unusual. Today someone would have had him tested for Autism as a child. Not saying that he’s on the spectrum just that in the 21st century it would occur to a teacher or parent to have him tested.

  4. Joe, I love this burn calculation you’ve come up with! As a fellow engineer, I love to analyze everything too. I’m at 11% so looks like I qualify as “normal”. You’ve motivated me to spend even less! Keep up the great work!

  5. The table is basically the 4% rule from a different perspective, correct? I prefer to think about frugality in relation to your spending/income than from the net worth perspective.

    • The 4% rule is the starting point. I’m just thinking about what makes you too frugal.
      Spending less than 1% is it.
      Spending/income is good too. But I don’t think you can be too frugal when you’re trying to achieve financial independence.
      It’s good to focus on your saving rate when you’re young.
      Thanks for your input.

  6. “Eating fast food without fruits and veggies can save money, but it isn’t very healthy”

    What if I eat that because I like it, not because of the money. Is that being cheap or frugal?

  7. Fun post, Joe! I’m in the highly frugal category according to your chart. It’s funny being in early retirement in that our spending was designed this way (between 3.5 and 4% of our net worth). In other words, we basically give ourselves our own yearly “paycheck” of roughly $50k to play with.

    If we wanted to spend more money, we’d either have to eat at more principle (not good) or bring in some more income. So really, we put ourselves in the highly frugal category when I decided to leave my job. 🙂

  8. According to your chart, we’re highly frugal. I think we’re in a good spot. I don’t really think we need to come up with ways to spend more money– we’re in a good place, though with DH soon to be out of work I’d like a little bit more cushion between my take-home pay and our spending. And I don’t really want servants or yachts or anything from the goop catalogue etc. A lot of what very rich people spend money on seems wasteful considering how hard it is to be poor.

    • That’s great. I think it’ll take a while to get used to the reduction in income.
      It should feel better after a year assuming everything continues to run smoothly.
      I don’t think you need to spend more.

  9. Highly frugal checking in! 🙂

    We’re on the lower end of that specific spectrum in terms of personal spending—but once the final call on 2020 rings in, I think we’ll actually “up” to FIRE Frugal. We’ll have donated about 50% of our total annual (personal) spending. We won’t be able to keep that up for too long, but our plan is to do so until about May of 2021.

    We should still have protected our underlying FI assets and fall back down to the “highly frugal” category.

    If things get too far out of whack again in the future due to unexpected earnings (sometimes it’s too hard to resist fulfilling or important work), hopefully, we’ll repeat this process.

    As long as you stay in your target “zone” to match your individual goals, the specific things we actually spend on probably don’t matter much. The point is to stay on track 🙂 This helps put it in perspective, thanks, Joe!

  10. i think lots of people would call our lives extravagant just because of our food and wine choices. we don’t care what they think and we share these things regularly. then again there are plenty of common things we don’t spend money on. we’re just a few ticks above 2% and feel like we buy everything we want already. i like the burn rate concept for personal finance. well done.

    • Food and wine are a big part of it. We eat very well but don’t spend a lot because we cook.
      We’ll probably drink more when Mrs. RB40 retires from full time work. She gets tipsy pretty easily so we rarely drink on the weekdays.

  11. This year’s burn rate is unusually high because of some home maintenance – we’re landing somewhere in the 9% range. That surprised me a little bit, we don’t normally calculate burn rate but I also don’t know where I’d place that percentage for a scale of “not frugal enough to too frugal?” We’ve spent a ton on things that are long term quality of life choices and they aren’t extravagant but they aren’t the cheapest things we can buy either. We spend the money on value more than I ever have in the past when I was deliberately choosing to be cheap to save every nickel. I’m pretty glad we haven’t paid for any travel this year because both this spending and that spending together in a year would have been a very tough choice for me to stomach financially, so in some small ways, the circumstances of the year kind of help me focus on those important things. Also if we had traveled like normal, none of this work could have happened with us still being sane. So there’s that.

  12. Do you think the frugal table has a high net worth bias? Some one with a 100K networth and 70% savings rate is doing a great job. But the table would indicate not frugal enough – if I read you correctly.

    That said, I think it is a neat metric for those who’re there, or about to.

    • Yes, it has a high net worth bias. But I think that’s okay.
      If you have 100k net worth, then you need to save more. You won’t be too frugal at that point.
      I was thinking about adding income to the equation, but it’d be too complicated.

  13. Cool post, Joe. I’d never thought about calculating a burn rate before. Looks like we’re at 2% and in the too frugal camp. Our Savings Rate hoovers around 50% and we don’t feel deprived–other than maybe wanting to eat out at restaurants more, but this is due to the pandemic.

    I think frugality is relative to a person’s idea of happiness and wants. While the Frugal Table is subjective, I agree with your breakdown. This is a great way to look at spending and can possibly reign in some super spenders.

    And yes, Buffet is one of the good guys. I have to check out this book eventually. Keep hearing good things about it.

    • Thanks! I think it’s also a good gauge for well off people. If you are wealthy, you should spend a bit more.
      Warren Buffett is a great example. His personal spending is very low, but he donated a huge amount. It’s a good rate at his age.
      Also, he’s giving away most of his fortune when he goes. That’s very admirable.

      • Like the table! Curious if our net worth excludes the debt/mortgage we still owe, does the spending include the mortgage we pay? Apologies, not math or financial savvy here.

        • You should subtract any debt and mortgage from your net worth. So just take the price of your home – mortgage. That’s equity.
          Spending includes the mortgage payment.
          Let me know if I can help with anything else. Good luck!

  14. We’re at about the 3% rate now, but it is with expensive private school. When that and college is done we’ll be way too cheap. I’m trying to think of things like travel, but we’ll see. Maybe we’ll upgrade the house, because I’d like a spa tub and a bigger closet for myself.

    I feel like this burn rate ratio helps people who are later in their financial journeys. There’s just more time to build up a bigger net worth. If you are starting out, you probably have some student loans and basic living expenses that going to hold you back. Maybe spending/income rate could be another factor that pairs well with burn rate.

  15. My burn rate at worst is 3.2% if I include my primary home and 3.7% without.

    I think the hard part after being frugal for so long is to actually start spending down when you finally retire.

    Nicely done with the breakdown percentage classification.

  16. On your scale, I’m on the cusp between too frugal and highly frugal, but I don’t feel that way. My measure is whether I don’t do something that I want and can afford to do simply because I don’t want to spend the money. Most of the time, I pass that test so I wouldn’t consider myself to be too frugal. Since retiring early, what I have noticed is that my view of what constitutes good value has changed though.

    • That’s a good point. I still stop myself pretty often. For example, I want a new wok. Our current one works fine, but it doesn’t look very nice. From a functionality standpoint, there is no need to get a new one so I haven’t purchased a new one yet.
      If I wasn’t frugal, I’d but a nicer looking wok a while ago. 🙂

  17. Interesting post. Based on your table, I’m in the “highly frugal” range, but it certainly doesn’t feel like it. I think “too frugal” is pretty subjective.
    If you’re comfortable with your level of spending and saving enough to meet your retirement goals, it shouldn’t matter. There is no right or wrong, just shades of grey.

    Some folks will retire earlier than others of course, but that’s just a personal choice.

  18. I’m in the “Too frugal” bucket. My wife and I are nearly 50 with two kids in middle school. Housing and our kids are our biggest expenses. We spend very little on ourselves. Lately I’ve been racking my brain to figure out how to spend more on ourselves. It’s actually very difficult to think of something that provides value to us. I’ve ordered a 2021 Corvette Stingray that might be delivered next year. It is completely impractical for our lifestyle but it would be an unusual splurge for us.

    • We’re in a similar position. It’s difficult to loosen up after being frugal for so long.
      I think we’ll try to spend more next year when we travel. We also need to remodel our house. That will solve it…
      Enjoy your Corvette!

  19. I used to be frugal when I was a struggling poverty case from the time I was 32 years old until I 42 years old. Not anymore, however. My opinion is that anyone who has a great deal of money and is still cheap or frugal is suffering from poverty consciousness. The person may as well still be poverty stricken.

    For example, I have a friend who earns $125,000 a year as a professor and has a net worth of $3 million to $4 million. He doesn’t own a cell phone or a car and lives in a studio apartment. He has gone out to dinner with me at least 700 times over the years. We have always used my car. One would think that each of these car rides would be worth at least $1 each time. Yet he has never once thrown a little extra beyond his share of the meal or offered to buy me dinner because of all the car rides I have given him. When I calculate his share of the meal, and if I owe him 40 cents after I give him his change, he will demand later that I pay him his 40 cents.

    Some people will say that is how my friend got rich. Hogwash! As Wallace D. Wattles wrote in his class book “The Science of Getting Rich”, “Getting rich is not the result of saving, or “thrift”; many very penurious people are poor, while free spenders often get rich.”

    Here are some things that I do now to truly enjoy my prosperity (and show that I am not frugal anymore):

    * I always have wine at a restaurant – more than one glass, too, of the expensive stuff.
    * I never ask for discounts, even senior discounts, and I am 71 years old.
    * Up until the pandemic, I hadn’t made coffee at home for at least 30 years; indeed, I would usually have two or more coffees a day at a Starbucks or other fine coffee bar.
    * I never pay attention to coupons. I detest them.
    * I read a lot but haven’t been in a library in over 10 years. I always buy the books I want to read.
    * I fly Air Canada Business Class or International Business Class (really First Class) several times a year.
    * I have no problem paying $500 for a jacket that fits me well I really like. In fact, I have several in that price range. But I do not like a brand name such as Hugo Boss written in big letters on any of my clothes.
    * I don’t eat a lot of meat but when I do eat meat I don’t worry about price. I’ll gladly pay $45 for a good steak at The Keg Restaurant and order their Mollydooker Boxer Chiraz wine at $64 a bottle. I normally tip 20 percent
    * I always take my credit cards with me.
    * About a month ago, I gave away one of my bicycles to a homeless person even though I could have sold the bicycle for $200 or $300.
    * I prefer meeting friends for dinner instead of lunch despite the fact lunch is cheaper. Normally, I like to go to fine restaurants at least two or three times a week.
    * So far this year I have given $4,750 to charities and I expect that to go up to $6,000 by the end of the year.

    One last note: Even though my income has come down around 67 percent this year, I continue to spend a lot of money (knowing that my prosperity consciosness helps me earn more money). I still save quite a bit of money – likely more than over 90 percent of people save.


Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.