“The biggest mistake is not learning the habit of saving properly.” This is what Warren Buffett (Trades, Portfolio) told college students in a speech, emphasizing the importance of frugality in achieving financial independence. He later advised, “Don’t save what’s left after spending, but spend what’s left after saving.”
Buffett and his Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) business partner, Charlie Munger (Trades, Portfolio), are prime examples of how living frugally and below one’s means is the pathway to financial freedom. With a combined net worth of over $100 billion, the legendary investors could afford any luxury. Yet they still live simple, frugal lifestyles.
Their philosophy is that avoiding unnecessary costs and excessive consumption provides the fuel for investments to grow. As Munger says, “The first $100,000 is a b****, but you gotta do it.” Here’s how adopting the frugal habits of Buffett and Munger can set anyone on the path to financial independence.
Why frugality matters
Frugality provides the foundation for financial independence in several ways.
First, it enables saving a high percentage of your income rather than overspending on non-essentials. The more you can save, the sooner you can amass enough capital to become financially independent.
Second, it helps avoid falling into debt traps that drain your future income. Debt repayments hamper the ability to save and invest.
Spending only on necessities also means more money freed up for investing. Invested prudently over decades, even small savings can compound into a large nest egg.
Finally, with enough capital accumulated through disciplined saving and investing, you gain the freedom to retire early or pursue work you enjoy rather than needing a paycheck.
Buffett’s definition of frugality
When Buffett was once asked why he leads such a humble lifestyle despite his massive wealth, he responded:
“I have everything I want. I have more than I need. I’ve got a warm home, all the food I can eat, two cars—everything I need.”
This exemplifies Buffett’s view on frugality. It is not about depriving yourself or pinch-penny scrimping. It simply means focusing your spending only on the things you truly value rather than keeping up with the Joneses.
Munger on the benefits of frugality
While seen by some as greedy, Munger views frugality as prudence and avoiding waste. Munger said at a Berkshire Hathaway annual meeting, “Frugality has gotten a bad name, but I think frugality is an enormous virtue”
In another speech, he said, “I always knew I was going to be rich. I don't think I ever doubted it for a minute.” While partly humorous, this confidence came from living prudently within his means, saving aggressively and investing wisely from an early age.
Living frugally like Buffett and Munger
Despite their massive wealth, Buffett and Munger lead surprisingly frugal lifestyles. Here are some examples:
- Homes: Buffett still lives in the modest five-bedroom house in Omaha that he bought in 1958 for $31,500. Munger has lived in the same home since the 1960s.
- Cars: Buffett drives older Cadillacs, while Munger drove an 11-year-old Toyota Camry until he was 90.
- Food: You are more likely to see them at McDonald’s (MCD, Financial) or Dairy Queen than at a fancy restaurant.
- Clothing: Buffett wears suits that cost a few hundred dollars, but look dirt cheap next to his billions.
- Splurges: Buffett allows himself a luxury – having a private plane. However, it is a NetJet fractional ownership, so Buffett only pays by the hour of use. Further, NetJet has been a subsidiary of Berkshire Hathaway since 1998.
Their frugal habits extend to their businesses as well. Berkshire Hathaway is known for having an office culture allergic to excess.
How to incorporate their frugal hbits
While we may not all aspire to Buffett-like wealth, adopting some of his and Munger’s frugal habits can set us on the path to greater financial independence.
One way is to focus on value and utility rather than brand names or status appeal when buying cars, clothing or other necessities. Avoid overspending just to impress others. Consider buying used items that serve your needs just as well instead of always buying new ones. Cars and furniture are examples.
Another method is to avoid conspicuous consumption that provides little utility compared to costs. Fancy $300 dinners deliver no more nourishment than a home-cooked meal.
Do not upgrade to the latest technology unless the benefits meaningfully improve your life. Stick to what still works well rather than getting every new gadget.
Further, use coupons and discounts to save on grocery bills. Buying store brands over name brands also cuts costs with little sacrifice in quality.
Maintain your belongings well to extend their useful life. Investing in upkeep costs much less than replacing them new.
Apply the same thrift in your business by cutting unnecessary costs and avoiding lavish offices that do not boost productivity.
Always keep in mind Buffett’s famous quote: “If you buy things you do not need, soon you will have to sell things you need”.
Saving and investing your way to independence
Frugality frees up capital that can be channeled into savings and investments that compound over time.
One way to leverage this is to save aggressively. Try to allocate around 30% or more of your income to savings rather than non-essential spending. The more you can save, the faster you can gain your freedom. Further, invest savings prudently. Create a diversified portfolio of stocks, bonds,\ and other assets. Seek quality investments trading at discounts rather than speculative bets.
Reinvest all dividends, interest and gains. This recycles income back into investments to compound your returns. Also hold investments for the long run. Give them years or decades to grow through the power of compounding. Do not panic sell during market dips.
Another way is to retire early. Once your portfolio grows to around 25 times your annual spending needs, you should have enough capital to retire well before the traditional retirement age. However, continue living frugally. Maintain your simple, low-cost lifestyle to make your portfolio last.
The FIRE Movement’s formula for financial independence
The FIRE movement – Financial Independence, Retire Early – has harnessed the power of ultra-frugality to achieve financial freedom at very early ages. While extreme, FIRE disciples provide an instructive model:
- Save over 70% of income. They slash costs to extreme levels, saving the vast majority of their earnings.
- Retire in your 30s or 40s. With enough capital saved by their mid-30s, many FIRE followers are able to quit their jobs for good.
- Withdraw 3% to 4% of your portfolio annually. By keeping withdrawals low, they can live off small distributions from their investment portfolio.
- Maintain a frugal lifestyle. Continuity of their frugal habits ensures their savings last indefinitely.
Using this hyper-frugal approach, FIRE achievers prove it is possible to gain financial independence very early in life through disciplined saving and investing.
Gain your financial independence
In his speech, Buffett emphasized the importance of developing sound savings habits early. Most would benefit from heeding this advice and adopting the frugal mindset of Buffett and Munger. Living below your means frees up precious capital from needless consumption. Wise investors take that capital and put it to work in value-focused investments that compound over their lifetime.
Staying disciplined through bull and bear markets allows portfolio values to snowball over decades. Before you know it, the money you saved and invested frugally has grown large enough to provide lasting financial independence. That is how the Oracle of Omaha and the vice chairman of Berkshire Hathaway amassed their billions – through the simple, timeless formula of frugality plus value investing.
