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The Only Leverage We Have Is Extreme Frugality

charleshughsmith.blogspot.com / CHARLES HUGH SMITH / THURSDAY, DECEMBER 26, 2013

Debt is serfdom, capital in all its forms is freedom. The only leverage available to all is extreme frugality in service of accumulating productive capital.

There are only three ways to better oneself financially: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract, faking disability, selling derivatives designed to default and other criminal activities.)

The only way to accumulate capital to invest is to spend considerably less than you earn. For a variety of reasons, humans seem predisposed to spend more as their income rises. Thus the person making $30,000 a year imagines that if only they could earn $100,000 a year, they could save half of their net income. Yet when that happy day arrives, they generally find their expenses have risen in tandem with their income, and the anticipated ease of saving large chunks of money never materializes.

What qualifies as extreme frugality? Saving a third of one’s net income is a good start, though putting aside half of one’s net income is even better.

The lower one’s income, the more creative one has to be to save a significant percentage of one’s net income. On the plus side, the income tax burden for lower-income workers is low, so relatively little of gross income is lost to taxes.

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