Perusing social media might lead you to believe that frugality is the essence of financial literacy. Not necessarily. Frugal people rarely own airplanes or yachts. The 47 percent of Americans who are financially literate and budget-conscious, according to Harris Insights and Analytics, very well might.
Frugal people focus on not wasting money — on minimizing their expenses. This can be difficult for low-income households to manage thanks to liquidity restraints, according to a report in the Journal of Marketing Research.
Though those low-income households stand to benefit the most from frugal strategies, such as the ability to buy in bulk, they are unfortunately unable to put those strategies into effect.
Financially literate people, on the other hand, understand the consequences of their financial decisions and act accordingly. They use financial resources intentionally. Financially literate people focus on making good money decisions. And the best decision often isn’t the most frugal one.
Living Within Your Means
The common ground between frugality and financial literacy is living within your means. But the two approaches are quite different.
In the context of doing well financially, living within one’s means requires that the sum of one’s expenses and savings must be at or below one’s income. This principle transcends both ideologies.
To be financially successful, one has to live within one’s means.
This “means equation” says that we get to spend no more than we make. The frugality camp focuses on minimizing the expenses side of the equation. Unfortunately, neglecting the revenue side can be a big mistake.
Reducing Expenses vs. Increasing Revenue
It should be fairly apparent that there’s more room to change the revenue side of the equation than the expense side — at least theoretically. Changes to the expense side of the equation are limited to the total of the expenses — you can’t reduce your expenses beyond zero.
The revenue side does not have this barrier. The revenue side is, theoretically, infinitely changeable.
There may be a variety of challenges when it comes to making dramatic increases in the revenue side of the equation. This is especially true in the short term.
Increasing one’s income can take a lot of time and hard work. It can also require you to make an intermediate investment, such as getting training or education.
Meanwhile, frugality — much like laziness — pays off immediately.
This is frugality’s great benefit. Frugality as a tool can help us to navigate times of low income, such as a period of unemployment. Frugality can also help us to push out additional savings to meet a short-term goal.
But eventually, a frugal lifestyle often burns us out. Living “without” robs us of many simple pleasures. It robs us of the emotional peace of enjoying simple things because it makes us believe that we’re bad for wasting money on ourselves.
Frugality vs. Financial Literacy: The Bottom Line
In the long term, we need to tell frugality to pound salt. We need to understand that our self-worth is not equal to the number of pennies saved, and we will buy that damn ice cream if we want. Some of those little expenses contribute to self-care, which is important for our mental and emotional health.
Financial literacy — making informed and intentional financial decisions — allows us to do what we want, if we’re willing. If we’re willing to understand the ramifications of our decisions, then the sky’s the limit.
Or the sea’s the limit, depending on whether you picked the airplane or the yacht. It’s all about decisions.
In the long run, you can have anything that you’re willing to earn and build for. Or you can spend less and have what’s left over. Frugality is a tool. Financial literacy is the whole tool set.
The ball is in your court. Choose wisely.
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