I’m Frugal…Now What?

Piggy bank2

In my post Live Like a College Student, I encouraged new grads to continue being frugal and to save money. But what if you’re already frugal? I know a few friends and relatives in their 20s who aren’t living the high life and have a healthy savings rate, but unfortunately, the money is sitting idly in a bank account. So what should they be doing with their money instead?

Invest it!

“But I’m scared of the stock market,” you say

Rather than leaving a large amount of your savings in a bank account, make your money work for you. Many people, especially millenials, fear the stock market. While it is understandable to be apprehensive being that you observed the 2008 stock market crash and subsequent recession wreck havoc on many people’s finances. The media has also done a great job in scaring people. However, you have to invest your money if you want to build wealth. Hiding the bulk of your savings in your mattress or in a savings account won’t do that. In fact, the value of your money will be eroded by inflation. No one can predict what the stock market will do, but it’s very likely that another stock market crash will occur. But that’s okay because the stock market has historically given investors about an 8% return. Remember, you’re young and you’re a long-term investor. The next time there is a stock market crash, just think of it as stocks going on sale and a buying opportunity.

But I don’t know how to invest?,” you ask.

Index Funds

Other than being scared of investing, a lot of people are also intimidated because they don’t know the first thing about investing. Don’t worry if you don’t know much about investing or have any inclination to learn. You can set up a “lazy portfolio” and it’ll probably perform better than your friends who “think” they can beat the stock market. Or if you want to be even more hands-off, just invest in an “all-in-one” fund.

Some, on the other hand, think they know more about investing than they really do and “invest” in individual stocks. For most people, they’re better off sticking with index funds. Like many of my peers when I was in my 20s, I thought I could beat the market by predicting which stocks would soar. Well my track record is pretty poor, and I would have done a lot better just investing in an index fund.

Automate your savings

Automating your savings makes saving money easy. By having money automatically sent from your paycheck to your 401k/IRA account/etc, you take the stress out of saving. Even better, every time you receive a raise, increase the amount you save. I have received steady increases in pay the last few years, but my paycheck has stayed about the same. This prevents lifestyle inflation as you’ll never miss the money since it is out of sight, out of mind.

As for your 401k, don’t settle for saving up to the match. Save much more than that if you have decent options in your 401k (if not, invest in an IRA account). At my first job, my employer matched up to 5%, and I thought I was a rockstar when I increased my contribution to 7%. That’s just not going to cut it. But of course, at a minimum, invest up to what your company matches. Don’t make the mistake of many Boeing employees who have collectively turned down $98 million in matching funds by not contributing up to the match.

Real Estate: Should I buy or rent?

For most people in their 20s, just starting in their careers, it’s probably better to rent rather than buy a place. You want the flexibility just in case your career takes you someplace else. You don’t want to be forced to sell your home as there are transactional costs and you might get caught in a down market. Plus, you’re young, who wants to be stuck maintaining the yard and taking care of other home-related projects? However, there are some instances where I do think it would make sense to buy a house at that stage of your life.

I have a friend who purchased a duplex a few years after he graduated from college. He rented out one unit and also rented a room to a friend in his unit. The rental income that he received paid for his mortgage. He was living rent-free! Now, years later, the property has also appreciated so it’s been a great investment for him. So, I think it makes sense to purchase a house in your 20s if you’re purchasing the property as an investment and it will cash flow. It definitely depends on where you live. It makes sense to buy in some areas in the country, whereas it makes more sense to continue renting in other parts. Check out the Rent vs Buy calculator to help you make your decision.

Increase your income

Invest in yourself and acquire marketable skills to increase your salary. While in some circumstances you may need to go to graduate school, you don’t necessarily have to quit your job to acquire new skills, as it’s possible to learn new skills online. Check out Udemy or Treehouse. Another way to increase your income is to have a “side hustle” or part-time job. Check out this site for a list of 50 side hustle ideas.

What other advice would you give to someone just starting out on their financial journey? What advice would you give your 22 year old self about finances?

41 thoughts on “I’m Frugal…Now What?

  1. Tawcan

    These are great tips. It’s really about save, invest, and try to increase your income in parallel.

    If company that you work for is matching your 401K/RRSP contribution, take advantage of this. That’s called free money. I’m always surprised how many people say no to this kind of free money.
    Tawcan recently posted…Instilling financial responsibility in kidsMy Profile

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  2. Hannah

    I think that you offered great insights on the great rent or buy debate. If you’re young, don’t buy unless you have three viable “exit” strategies. Happily live there long term for less than renting (mortgage has to be about half of rent for this to be true), sell it at a profit (“Forced appreciation” is a good bet here), rent it out long term for a positive cash flow. Unless you start with all three as an option, you might get trapped in a bad investment.

    Reply
    1. livingrichcheaply@gmail.com Post author

      Yep, I kept hearing that buying is ALWAYS a good idea and that renting was flushing money down the drain. That’s just not true.

      Reply
  3. Laurie @thefrugalfarmer

    I love index funds as far as investing, but even if you’re scared to invest, I would advise 20-somethings to save something, even if they leave it in a money market account. We have an epidemic on our hands as far as emergency savings in this country. The habit of saving just doesn’t seem to exist for a majority of people. Great info here, Andrew!
    Laurie @thefrugalfarmer recently posted…Dealing With ShameMy Profile

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    1. livingrichcheaply@gmail.com Post author

      It’s sad when the news talks about the savings rate in the US…some years it’s even negative.

      Reply
  4. Shannon @ Financially Blonde

    I would have told my 22 year old self to forget about what other people say and challenge yourself to save more than 15 or 20%. I made a great income through most of my 20s, but I also spent a good amount too because I thought I was doing great saving 15%. Looking back, I realized I could have and should have saved more but instead I spent it.
    Shannon @ Financially Blonde recently posted…Music Mondays – Out of TouchMy Profile

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    1. livingrichcheaply@gmail.com Post author

      It would be great if more 22 year olds saved that amount, but you’re right, we often can save much more than we do…we just don’t do it.

      Reply
  5. Abigail @ipickuppennies

    I know that at some point I’ll need to put trust in the stock market. For something other than retirement accounts.

    I think the important thing is to remember that the market tends to be cyclical. So yeah, at some point your portfolio will take some terrifying drops. But as long as you don’t panic and dump everything, things will come back around. Hence the average rate of return that people quote.
    Abigail @ipickuppennies recently posted…Pancreatitis. Or kidney stone. Or ulcer.My Profile

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    1. livingrichcheaply@gmail.com Post author

      I would say most of my money is in retirement accounts too. I haven’t maxed out those accounts. I like tax shelters. You’re right about those who panic and dump everything…it almost always ends up badly. You buy high and sell low.

      Reply
  6. SavvyJames

    Education, education, education. I always encourage people to learn as much as possible about personal finance, thereby putting themselves in a position to develop their own financial plans (e.g. buying a home, saving for children’s education, retirement, etc.) and execute with a high level of confidence.
    SavvyJames recently posted…How to Finance a Small Business FranchiseMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Too bad there is not more financial education in our school system. Hopefully, more people will be motivated to learn about how to deal with their finances.

      Reply
  7. DC @ Young Adult Money

    Yeah being frugal is great but it’s just the beginning! I think most recent college grads are likely to have at least some student loan debt, so knocking that out might not be a bad choice if the interest rate is high. Definitely getting some money in the stock market is a good idea. I’m so glad I set up auto-contributions to my 401k right out of the gate.
    DC @ Young Adult Money recently posted…7 Ways to Make More MoneyMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yea, that’s definitely one thing that is tough on recent college grads: the amount of student loan debt. I’d definitely try to put money towards that if the interest rate is high. On the other hand, I know we’re on the same page about low interest student loan debt =) Auto-contributions are the best…it’s much easier when saving is put on autopilot.

      Reply
        1. livingrichcheaply@gmail.com Post author

          I was very lucky to have taken on student loans when the interest rates were REALLY REALLY low.

          Reply
  8. femmefrugality

    Never heard of Treehouse, but I’m flipping excited to check it out! These are some awesome tips. I’m still wary of treating my home as an investment, but that’s one situation where it may be different as someone with a family vs. someone younger or in a different situation. I think I’d care a lot more about the people living in the same unit as me now that I have kids, and taking a gamble, even a well-calculated one, in real estate scares me a bit more now that I have their futures to watch out for. And I was in college during the recession. And maybe I’m just risk-averse. Because it sounds like your friend made out.
    femmefrugality recently posted…6 Reasons Writing for Blogs is the Ultimate Side Hustle for MomsMy Profile

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    1. livingrichcheaply@gmail.com Post author

      I know what you mean. I wouldn’t want to rent out the unit I’m living in now that I have kids. Although I have considered purchasing a multi-family house and renting out one of the units. I’m pretty risk-averse myself and never considered investing in real estate. I stuck to index funds, but recently I’ve been looking into real estate and think that if you take well-calculated risks, it can work out. Of course, it really depends on the location and the property. I know a lot of people got burned during the housing bust, but I think if you buy a property in a stable market and it cash flows, it can work.

      Reply
  9. No Nonsense Landlord

    Keep renting. rent only the size of place you need, or get a roommate. Buy only what you need to maintain that space. No lawnmowers, etc. Move close to your job, and change jobs if the money is better,.

    Or you could buy a lawnmower and make some money on the side. For less than $1,000 investment, you can have a small business that makes an easy $1,000 a week.
    No Nonsense Landlord recently posted…June – July 2015 Rental Cash FlowMy Profile

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    1. livingrichcheaply@gmail.com Post author

      For some reason, I thought you would be an advocate for buying. I definitely agree that you should only rent the size you need. Too many people have much more space than they really need. Being close to your job is also a great tip…I hate my long commute.

      Reply
  10. Done by Forty

    If there’s a small criticism I have with the frugality approach, is that it doesn’t really address the “what next” question you posed very often. Mostly, people’s advice begins and ends with a variety of ways to spend less of your money. Which is great, of course.

    But unless you really know what you’re going to do with that extra money, what’s the motivation to spend less in the first place?

    Investing (and, specifically, investing for a purpose) is the big goal, IMO. The frugality is secondary: one tool that helps you get to that goal.

    I love your list. While you mention tax advantaged accounts, I think perhaps focusing overall on “minimizing taxes” is a worthwhile goal for young people, especially if they follow your last piece of advice to earn more income. Once you get past a certain income, you understand why it’s important to fully leverage every tax shelter available.
    Done by Forty recently posted…The Miracle of the CommonsMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Saving money is only half the battle…you have to invest it for it to grow. You’re definitely right about minimizing taxes. I’ve become a bit of a nerd about taxes and am always interested in learning new ways to reduce my taxable income.

      Reply
  11. Our Next Life

    This is great advice! Unfortunately, it’s probably a bit too advanced for our 22 year old selves — though fortunately we’ve grown a lot since then! 😉 When we were 22, we needed to be told to stop using those credit cards, stop going out every night, and stop feeling like we needed cool wardrobes! That would have saved us the headache of having to pay off credit card debt and crack down on things a few years later! We did a pretty decent job with 401(k)s, but certainly could have maxed out sooner. I’m positive that, if we’d known that ER was a thing, we would have gotten serious about our finances a few years earlier, though certainly feel lucky to have figured things out before age 30, so our impending retirement around age 40 still isn’t too shabby. But it could have been 35! :-)
    Our Next Life recently posted…What We’ll Lose When We Stop Working // The Lament of Aspiring Early RetireesMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Hey, you guys are retiring at 40 so you must have done a lot right. But it’s true…if I could give my 22 year old self advice, I’d be much further ahead. I guess sometimes that 22 year olds have to learn for themselves.

      Reply
  12. Even Steven

    Having a plan and making goals. Whether you have 100K in student loans or contribute 1% to your 401K, don’t blindly pay down debt or invest, learn and plan along the way. Make a plan that by 30 you will get rid of your student loans or have 100K in your investments. If you have something to reach for you will become more involved with your finances and reach that goal sooner than without a plan.
    Even Steven recently posted…Staring at Your FutureMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yes, like your early retirement blueprint. It’s important to have goals and to have a plan of action.

      Reply
  13. Holly@ClubThrifty

    I would definitely do things differently if I could. I wasted soooooooooo much money in my early 20s. If I could have half of it back, I would be rich!
    I would urge any young person to avoid debt like the plague and stash as much away in savings and retirement as they can get away with. Start living on a smaller percentage of your income and build your lifestyle around it.
    Holly@ClubThrifty recently posted…How is My Credit Score Calculated?My Profile

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    1. livingrichcheaply@gmail.com Post author

      Hahaha, yea it seems like many regret their financial decisions in their 20s. But, hey…you guys are doing great now and that’s all that matter. Sometimes we have to make mistakes to learn from them. I’m with you on debt…avoid like a plague! If you can’t afford it, do not buy it.

      Reply
    1. livingrichcheaply@gmail.com Post author

      Yes, student loan is a huge burden for many 20 year olds nowadays. I definitely think its a good idea to tackle your student loan debt when the interest rates are high, but I think you have to start building wealth early on too. That compounding works magic if you start early.

      Reply
  14. James Brown

    Thank you for such a practical guide. But I liked the last tip much: “Increase your income”. Really one should not just increase his income, but also try to build a few different sources of income in order not to keep all eggs in one basket…
    This can be difficult and time-, energy- or -money consuming but later its rewards are huge.
    James Brown recently posted…4 Ways to Improve Your Credit Card Debt SituationMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yes, good point. It’s always good to diversify and have different source of income. It’s even better when those sources of income are more or less passive.

      Reply
  15. EL @ Moneywatch101

    I would tell my 22 year old self to be more entrepreneurial and to forget about part time jobs that lead no where. Building something like a side business does more for you than just working a job. I was already somewhat frugal then, and saved back then. I would tell myself to invest it all into JNJ, PG, and Exxon. ( I would be retired by now)
    EL @ Moneywatch101 recently posted…Why Do We have Unexpected ExpensesMy Profile

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    1. livingrichcheaply@gmail.com Post author

      Yea I did try to start an internet business with a friend in my 20s but I do wish that we hadn’t given up. I know there are many proponents of dividend investing and I do see the advantages, but do you really think that you would be retired if you invested in those stocks. I still prefer growth stocks and look at total return versus just dividend yield.

      Reply
    1. livingrichcheaply@gmail.com Post author

      I increased it not too long ago too and hope to max it out soon. I definitely should have increased it earlier.

      Reply
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