Monday, August 17, 2015

Frugal vs Quality of Life

Several of the dividend bloggers write about their frugal lifestyle. I think they sometimes take it too far. It makes sense to live within your means. What's the point of investing if you keep spending money on stuff you don't need. You'd be better of putting the extra money into your portfolio. Being frugal means that your portfolio returns can covers your expenses sooner, since your expenses are lower than they would be for a non-frugal person. And for many investors that's the goal -- cover expenses with dividends, and retire. For me this is not the case. I love my job, and I love the income it generates. My dividend income is used to build up my portfolio. When it reaches a decent size, then yes, I will use it to cover non-discretionary expenses like mortgage, insurance and utilities. But only if I no longer want to grow the portfolio, which I think I will want for a long time to come.

I may over time reduce my fresh capital growth, so I have more cash to spend. And I will spend it. There are a few big expenses in my future. College for two kids, new cars for my wife and I, and, down the road, increasing medical expenses. That may mean my dividend portfolio will get limited fresh capital, but if my strategy works, there should still be good growth, as I select companies that have a dividend growth strategy.
Some other areas I'm not frugal in are vacations. We spend a lot of money on trips. I believe that it is money well spent. It an investment in experiences for the kids. We could easily do day trips locally, or do a cheap camping or beach trip. That would save me $5-10k.  I'd love to have that money in my dividend portfolio. But I think living live is the most important thing. What's the point of being old and having all that money, but no great memories. Seeing the joy in my family's eyes is priceless. So we sometimes spend $1000 on a day with bears, or whale sharks, or dolphins. And it's absolutely worth it. I think a pure frugal person wouldn't do that.
I'm also not frugal in other areas. I will buy a new car, not used. I drove my car for 14 years. I want a car that I pick out, and that has everything I need. I will however shop around for a good deal, and I will not get sucked into the brand and upgrade funnel. I will look for a 0% finance deal, like we did for my wife's car. I have money saved up for a car, and if I can get financing, that money will go straight into my portfolio. If it's $20k, that means roughly $400 per year, or more than one car payment per year is covered by the dividend. But then again I did drive an old car for a long time, with no a/c and other inconveniences. Not buying a new one saved me a lot of money. If I can keep each car 14 years, instead of 6, then over my lifetime that will save me from buying 3 or 4 cars. Easy money if you think about it.
We are frugal about other things -- we don't go out to dinner much. We pack lunches instead of buying. We shop for deals and buy big when there are specials on non-perishables. I manage the temperature in the house for reduced costs, even at sometimes slight inconvenience. And I don't just buy 'stuff'. Instead of buying things, I just put them on my wishlist on Amazon. When I go back a month later I wonder what I wanted with the thing.
So it's balance -- I spend on things I care about that are important to my quality of life.  But I stay disciplined about investing for the future.

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