Frugal FI & The Way of Wealth: The Two Paths to Financial Freedom

In our Ultimate Guide to Financial Freedom, I discuss the core concepts of financial freedom in a 3 part ultimate guide to wealth building.

• Frugal FI: First, I discuss Frugal FI which shows you how to focus your life energy and minimize expenses to achieve financial freedom early.
• The Way of Wealth: Second, I’ll walk you through the Way of Wealth which tells you how to increase your income and passiv-FI it.
• Fast FI: Thirdly, I’ll talk about the Fast FI method which super charges your financial freedom journey to under 5 years.

Let’s get started.

As you begin to wade into Financial Freedom literature, you’ll need to decide on what the right mix of cutting costs, increasing income, and creating passive income is right for you.

One path towards Financial Independence discusses how to cut your costs and save 70% of your income. This means focusing on things in life that bring true fulfillment while developing useful skills that allow you to become more self sufficient.

The second path to Financial Independence is increasing your income and turning your income passive. This is the path that I personally subscribe to, although I’m happy to learn from resources in both camps.

Generally, people who achieve Financial Independence and Financial Freedom use a combination of strategies from both paths. The Fast FI perspective takes the best lessons from Frugal FI and The Way of Wealth and looks to accelerate the process to a 5 year time horizon while minimizing risk.

Let’s dig in and explore the these paths to freedom.

Path 1: Frugal FI – Cutting Costs & Frugal Living

Your money is your life energy.

This concept was developed by the brilliant work, Your Money Your Life by Vicki Robin (Author, Narrator), Joe Dominguez (Author). Their nine step program to FIRE (Financial Independence, Retire Early) focuses on becoming aware of your spending habits, tracking them, and changing your relationship with money. This book and Scott Trench’s Set for Life are good starting points for the FIRE beginner. 

Cutting costs is often very effective in the beginning stages, but isn’t something everyone can manage to the extreme degree that FIRE advocates like Mr. Money Mustache or Scott Trench’s Set for Life advocate. Some people have children, others have spouses that don’t embrace a life of frugality and simple living that can lead to FIRE when fully embracing Frugal FI.

Whether you agree or disagree, you do need to have a grasp on how to live below your means to succeed in your journey to financial freedom. The FIRE journey can only start after you produce more income than you spend. Many people have demonstrated that spending can surpass the cash you make at any level which is why someone like Michael Jackson could generate $1 Billion + in his lifetime but continually struggle with as one forensic accountant said an “ongoing cash crisis”.

If you’re living a life of debt and need help to get out of it Dave Ramsey’s Total Money Makeover and Your Money Your Life are good resources to build your initial financial habits and get out of debt.

Cutting costs allows you to have a much quicker journey to Financial Independence. For example, Mr. Money Mustache managed to accomplish this by age 30 through having two strong engineering-level salaries mixed with cutting costs to around $30,000/yr. That means at the conservative 4% rule of thumb he only needed $500,000 saved and reinvested in a simple index fund to achieve financial freedom. Compare that to the household spending $100,000/yr who needs 5x the retirement egg ($2.5 Million) to achieve financial freedom.

With the Frugal FI path to financial freedom, the simple, secure, and well-understood way to reinvest your money would be low cost index funds. Vanguard or similar funds offer a simple way to invest purported by The Simple Path to Wealth. This is another favorite book in the FIRE community.

I’ll revisit this shortly to delve more in-depth into specifics, but let’s round out this introduction by discussing the 2nd path to financial freedom: Growing Your Income.

Path 2: Way of Wealth – Passive Income and Multiplying Means

The greatest advocate of the second path to financial freedom is probably Robert Kiyosaki with his book Rich Dad Poor Dad.

The core concept is that you want to get to the place where your passive income is greater than your expenses. The benefit here is that you can live any lifestyle you choose as long as you have the right assets paying for it.

The most two most common ways to accomplish passive income are owning a business and owning real estate. 

The core concept here is that your income can grow to a near infinite level, but you can only cut costs so far. Don’t spend your life in a scarcity lifestyle, instead maximize your earning potential, and reinvest in passive, cash flowing assets.

You can choose either to minimize your impact on the world and get a consistent, secure cash flow that can meet your necessary life expenses or maximize your life’s earning potential and focus on developing passive income to embrace a work optional lifestyle.

At the point of financial independence, wealth building becomes a rewarding game that can allow you to leave a legacy to your children and reinvest your wealth to benefit the world.

Now that I’ve explained the core concepts of these two paths, I’m going to dive in more depth into Frugal FI. Then I’ll follow-up with my second article on the topic to discuss the Way to Wealth. Finally, in the third article of the series, I’ll discuss Fast FI which is the secret I discovered to fast track your journey to financial freedom to 5 years and beat Warren Buffett’s & George Soros’s annual return.

Frugal FI: Steps to Cut Costs & Embrace Frugal Living

Personally, to achieve financial independence, I have combined insights from Frugal FI and the Way of Wealth, but most of my energy was focused on increasing my income and developing multiple streams of passive income (aka, The Way of Wealth).

Below I’m going to touch base on a lot of strategies that are offered by the Frugal FI advocates because of how powerful they are for the right people and the right situations.

Consider this article as a buffet of options. Take what you like and build a plate that suits you. Ignore what doesn’t work for you.

Although I’m not a practitioner of the more extreme forms of Frugal FI, I do have respect for the people who can pull it off. Let me delve into path 1 and give you the core elements as well as practical resources for you to execute this in your life.

Three great resources on this path to financial freedom are: Your Money Your Life, Mr. Money Mustache‘s blog, and Scott Trench’s Set for Life.

Frugal FI Principle #1: The Life Energy Mindset

How can you know what needs to change until you know where you’re at?

To develop a Frugal FI mindset, you’ll want to start by tracking your expenses. This develops awareness with how you spend your money.

In order to change anything, you need to track it.

Alongside this habit, you’ll want to shift your thinking about money. Money isn’t a dollar bill or cash in the bank. Money is your life energy. When you realize that money is simply a store of your life energy, then it leads to the question:

“Is buying that worth spending my life energy on?”

With that question in mind, you can start the path toward early retirement.

How do I track expenses?

I use Mint.com to track all my expenses. This automatically pulls expenses into a software system where you can categorize and see your spending categories. Try doing this for a month to kick it off and estimate a year’s worth of expenses.

This allows you to understand what your largest expenses are as well as what you’re spending money on that doesn’t bring you enjoyment.

Start thinking about your money as life energy and ask yourself for every purchase, “Is this purchase worth this amount of life energy?”

You’ll find that a lot of the expenses you spend on aren’t worth to you what you’re getting out of them.

A pizza with friends might be as enjoyable or more than an expensive meal out.

Furthermore, there are a lot of expenses like cable TV (does anyone still have that?) or expensive cell phone carriers that can easily be cut in half by switching to alternatives without sacrificing anything.

The importance here is to build the habit of seeing your spending and reframing it to understand how it contributes to your life. Also, you should take some time to research the alternatives and see where getting a few quotes can save you big.

An alternative way to track your expenses is with a monthly excel spreadsheet similar to how my wife and I track our household budgets.

Your Money Your Life suggests a more detailed approach to tracking expenses. Track every expense in a journal, and graph your current expenses and passive income compared to your financial freedom goal.  To accomplish this, get a piece of graph paper. One line on the graph should be your month’s expenses. A second line should be your monthly passive income (index fund investing, bonds, rentals …etc). The point when your passive income crosses your expenses is the cross over point.

That means you’ve achieved financial freedom.

Your passive income can be calculated by actual passive income, or simply taking 4% of your total net worth (all assets minus liabilities), since that’s a conservative estimate of the returns you can achieve in low cost, relatively low risk index or bond investing.

Frugal FI Principle #2: Cut the Biggest Expenses

After tracking your expenses and building out your estimate of annual expenses, look at the biggest expense categories.

Generally, your house, your travel, and car expenses are at the top of the list. Let’s look at ways to bring down those costs while improving your life.

House Hacking

House hacking takes your most expensive category of housing and turns it from a liability to an asset by thinking creatively about it. 

There are a lot of benefits you get by making a real estate investment your primary home. You get lower down payments, better financing options, and government guarantees. Why not take those benefits to turn your home into an income generating investment.

Here are a few ideas:

• Duplex House Hack: Invest in a duplex and rent out the other half of it. 
• Roommate Hack: Buy a house but have your roommate(s) pay for some or all of it. You earn equity while cutting your housing cost.
• Apartment Hack: Buy an apartment building, and live in your building while renting out the other apartments.
• Live-In Flip: Buy a house. Live in it for 6-12 mos, and flip it using the BRRR method. BRRR = Buy, Renovate, Refinance, (move out) and Rent.
• Vacation Home Hack: Purchase a vacation home and rent it out as a short term vacation rental. You can use it whenever you want, and rent it out whenever you’re not using it.
• Dream Home Hack: What if your dream home could also be an income producing asset? Do you dream of living on a large plot of land? Why not turn it into a farm, a ranch, an orchard, or perhaps an energy farm (solar, wind… etc)? You could build your dream home so that you can rent out rooms or small condos on your homestead as AirBNB rentals. This could fund the amenities you’ve always wanted in your dream home (pool/sauna/tennis courts, …etc) while generating positive income. Utilizing this perspective, there’s a lot of room to dream and have other people pay you for your perfect home and retirement. 

Car Hacking

In this section, I’ll outline the Frugal FI case against owning your own car.

The truth is your car expenses are largely unnecessary expenses if you’re willing to adapt your life to achieve a Frugal FI path to freedom. On top of this, traveling in a car has negative externalities:

• Cars are unhealthy to drive versus ride a bike. 
• Cars pollute the environment.
• Cars encourage a sprawling society that overconsumes resources.

First of all, you can choose to live near your work and in a city that doesn’t require you to own a car. That immediately cuts significant costs from your budget. By living near to work, you can ride a bike. This gets you exercise as well as eliminates the expense of car insurance, car payments (if you financed your car), car maintenance, and gas bills.

Depending on your car, this could save you $6000 – $12000 per year while giving you good exercise every day. That’s a lot of dough saved.

There are also a lot of options to use car services like Uber as needed to go hang out with friends, or ride share with friends and family. 

Credit Card Hacking

Another hack that you can explore is point hacking or credit card churning. If you want to do 1-2 big vacations a year, why not have the whole thing paid for by taking out new credit cards, getting the points, and paying off the balances? Credit card companies will give you free travel points, hotel points, and money to open a credit card. Generally, the impact on your credit is negligible if done correctly and all the balances are paid off.

I personally used this strategy to pay for a round trip vacation with my wife to go to Hawaii. Although that vacation ended up being crushed by COVID-19, leaving me with a lot of points and nowhere to go in 2020, the underlying strategy remains.

And, yes, I am a little bitter.

Finally, if you don’t have something like a 2% cash back card for every-day purchases you’re missing out on free money. I use a cash back card as my primary card, then occasionally church credit cards to get travel points.

Highlights to Consider in Credit Card Churning:

•  Credit Score Impact: Conservative estimates say to stop credit card churning 2 yrs before you buy a house, a car, or need a major credit pull since all the short term hits to your credit will drop off by then. In my experience, if you don’t do credit card churning heavily, then you can accomplish it without a major impact on your credit score.
• Pooling Points: Pooling points from minors, and spouses can significantly imcrease your ability to church cards while leaving the primary breadwinner with minimal impact to their credit. Some companies allow you to combine points after earning them separately: BA Avios, JetBlue TrueBlue, ANA Mileage Club, Hilton, and Marriott.
• Don’t Pay Interest or Fees: Make sure to hit your spending limit, pay-off balances to avoid interest, and cancel cards to avoid the annual fees.
  
• Manufactured Spend: Although this isn’t necessary for card churning, there are ways to create spending that costs little or no money but allows you to hit your credit card spending requirements or rack up points. Click Here to learn more.

Enjoy your free travel, but you may want to avoid this strategy during global pandemics.

Here are some great resources and tools to learn more about point hacking and credit card churning:

• What Card Shold I get flowchart? Weekly Updated Post: Click Here
• Reddit Wiki on Credit Card Churning: Click Here
• Introduction to Manufactured Spend: Click Here
• Churning Spreadsheet Template: Click Here
• Travel Wallet: An app to keep track of cards and points: Click Here

Frugal FI Principle #3:  Focus on Acquiring Skills, NOT Stuff

The Frugal FI mentality is more than simply saving money.

It’s a philosophy of life that says simplicity and skill acquisition can bring more fulfillment and freedom than a  net worth can. This focus on what truly matters in life removes the added complexity that comes with a materialistic mindset and shortens your path to financial freedom. 

Here are the core precepts of the Frugal FI perspective:

• Renaissance Man: A Frugal FI perspective can turn you into something akin to a renaissance man who embodies many skill sets and has free time to pursue their interests. Each skill drives down the cost to live, increases happiness, and increases the ability to flexibly produce income.

• Develop Skills to Use Multi-Use, Flexible Tools: One pan can cook nearly everything you need. However, alternatively you can separately buy a griddle, sandwich maker, egg fryer, grilled-cheese maker, … and on and on. Value tools that can be used for multiple purposes and develop the skills to be able to effectively use the minimal number of tools for the maximum number of purposes. Again, this perspective reduces costs and increases your skill leading to personal growth. Personal growth in turn leads to happiness and a reduction of things (tools) leads to lower living costs, less required storage space, and less complexity in your life. This same perspective can be taken toward clothing, furniture, and virtually all the stuff that makes up your life.

• DIY over Hiring: Most services that people buy can be learned by searching YouTube and watching a video. By embracing learning, you can reduce the cost others charge you for services to near zero. By developing the skills necessary to fix your home, your car, your computer, … and on and on you’re growing your personal skill set (personal growth) which leads to happiness, and drives your living expenses down. This idea runs contrary to the Way of Wealth which suggests that you should specialize and hire people for jobs outside of your domain of competence. However, oftentimes even someone progressing toward financial freedom by growing their income will need to start with a DIY perspective until their time becomes more valuable.

Frugal FI Principle #4: The Skill of Spending

• Rent Perspective on Purchases: Would you buy ten years of stock in toothpaste or shampoo? Then why do you buy 10 years of your car inventory by getting a new car? Change your perspective to buying high quality products that last, but get them used. Consider a purchase as if you’re renting the item and consider the price you’ll get when you sell it. If you can get a used couch at $200, and sell it 5 years later for $150, that’s only $10/yr. Compare that to purchasing a new couch at $600 and selling it 5 years later for $200. 

• Shop Prices: Prices vary widely between equal value producers. One electrician doing the same work with the same skill set may charge twice as much. Try getting 5 quotes or 10 on big projects and compare reviews online. Pay for skill, and not for good marketing.  You can take a similar mentality for grocery and essentials shopping. Know the prices and keep a journal of prices for essentials. Be willing to wait until prices drop to the level you’re willing to buy at. If you’re willing to wait you can often design the food you’re eating around what’s on sale that week. Many products drop in price cyclically and you can take advantage of those savings if you pay attention. Some good examples of ways to save money by shopping prices are cell phones (pay less than $33/mo), car insurance, home insurance, mortgage (refinance when interest rates are low, but shop banks for quotes), …etc. 

• Wait and Buy Don’t Go Into Debt: Debt is a way to purchase items before you’ve saved enough money to be able to buy them. Oftentimes with houses or cars you can end up paying twice or more the value of the asset when you add interest onto the cost. Instead, buy things you can afford to pay for in cash. Until that point, save the money for a big purchase. 

Frugal FI Principle #5: Simple Investing: Passive Income Through Public Market Investing (Index Funds, Bonds…etc)

Ultimately, you likely won’t only save your way to financial freedom.

The goal of Frugal FI is to drive your costs of living down, learn to focus your life on happiness, not consumption, and then enact a simple investing plan. 

The best resource to the simple, consistent investing plan is: The Simple Path to Wealth by JL Collins.

A few other notable mentions are:

• Index investing: The Little Book of Common Sense Investing by John Bogle
• Public Market Investing & Personal Portfolios: Money Master the Game by Tony Robbins
• Public Market Investing & Personal Portfolios: Unshakable by Tony Robbins

Let’s summarize the simple investing plan and you can delve into those books above for a more thorough process.

The basic case is that index fund investing is likely going to perform better than alternatives managed by active money managers. Bogle has pointed out for years, and with thorough statistical analysis how this is simply a fact. Tony Robbins builds on that case and offers a range of passive investable assets and a strategy to find a wealth advisor who can manage your money to reduce risk.

Honestly, if I were to do this strategy, I wouldn’t spend the 1% of wealth managed to employ a wealth manager when you can simply buy a passively managed index fund and achieve better returns, but that decision is up to you.

The Simple Path to Wealth outlines the path of index fund investing for everyday people.

The way I would enact this is by choosing a low-cost index fund with a company that minimizes fees such as Vanguard. Then I would setup an automatic draw from my bank to invest in the index fund using dollar cost averaging. That just means put the same amount in every month no matter the high or low of the market.

Choose to work with quality banks that minimize fees like Charles Schwab. I will Teach You to Be Rich has a good outline of the best credit card options and the best bank options that minimize fees and maximize cash back. He also has specific suggestions for how to setup an auto-draw to make an automatic, leave-it-and-forget-it investing system.

When you can live off of 4% of your total invested wealth (4% rule) then you’ve reached a conservative cross-over point where your investments pay for your lifestyle costs. Frugal FI accomplishes this through cost cutting and reinvesting in simple, proven long-term investments like index funds.

This method of investing might be a bit boring and offers lower returns than real estate and small business investing but it’s simple and well understood. In the next two articles we’ll talk about how to put the investing plan into overdrive, but the resources in this section will give you an investing foundation for future conversations.

If you’d like to get a taste for high return investing, the Fast FI strategies offer a path to bring you to Financial Freedom in 5 years or less. A good starting place is my article, 32% Return – The Investing Strategy that Beats Billionaires, alongside the companion Investment guide: Beating Buffett: Fast FI Portfolio Guide.

The next principle of Frugal FI helps you focus your life energy on what matters to you rather than needless spending.

Frugal FI Principle #6: Enjoyment of Life Over Spending Money

The bottom line is that when you focus on the products and services that improve your life but don’t cost much money, you end up happier, less stressed, and with less clutter. The Frugal FI method to financial freedom optimizes your life around happiness not consumption.

The two books that best highlight this Frugal FI perspective are: Early Retirement Extreme and Your Money or Your Life.

The core premise is that stuff doesn’t make you happy. Personal growth, freedom of time, community, and experiences drive much more happiness than your income or accumulating stuff.

Therefore, you can make huge strides toward financial independence and happiness by aligning these forces.

By developing a skill at spending, you can limit your spending and purchase only the things that you need or bring you significant life fulfillment. Knowing that every dollar is a unit of life energy focuses your perspective on not wasting your money in a consumerist mindset.

When viewed through this lens, you weigh every expense against your goal of freedom and happiness.

Here are a few life hacks that reenforce this perspective:

• Camping: Take up Camping and local travel as a recreation to avoid unnecessary international travel. There are experiences all around your home that you’ve never explored but could provide abundant enjoyment with minimal travel and low cost. This lowers your expenses and increases your life enjoyment.
• Small House or RV: Buy and live out of an RV, a small house, or use a camper to make camping a longer recreational activity.
• Art & Music: A high quality musical instrument is a single purchase that can give you joy for a lifetime. Similarly, buying what you need to make art, hobbies, and crafts offer a small expense with incredible fulfillment. Look for those trade-offs where small expenses lead to outsized fulfillment.
• Writing: Alternatively, writing can be an incredibly fulfilling hobby that costs near nothing.
• Join Local Community Groups: Human connection matters more in creating a happy life than expensive stuff. Join or participate in a church, community group, or volunteer for the cause of your choice.
• Purchase Clothes that Go with the Same Pants: Simple things like purchasing clothes and accessories that all go with one pair of pants or shirt makes fashion flexible and low cost. You don’t need different outfits that narrowly fit together which can multiply your clothing expenses unnecessarily.

There are a lifetime of tips for you to find that give happiness without costing you anything, and that’s the point. Being frugal isn’t the same thing as being cheap. Frugality is a skill at spending and optimizing the use of your life energy.

This wraps up part one of my three part series: Catching FIRE. 

If you want to learn the principles of maxmizing wealth and increasing income, the next article was written for you. Although a perspective on frugality supports wealth-building, increasing your passive income is the fastest way to build true wealth and reach financial freedom.

To learn more about The Way of Wealth, check out part 2 in our 3 part series on wealth: Catching FIRE 2: The Way of Wealth.

If you’d like to learn more about our Fast FI approach to investing that offers a path to financial freedom in 5 years or less, then visit our Fast FI Club page. 

To wrap up the article, here’s a quote from Benjamin Franklin to send you on your way.

“Do not squander time, for that is what life is made of.”

The Way to Wealth, Ben Franklin.