Millionaires Who Are Frugal When They Don't Have to Be

I think it really depends on the kind of life you want whether one million is enough to live off. There is this guy, "Mr Money Mustache", that preaches a "frugal" lifestyle as a means of retiring very early with less than a million in the bank. On his blog he talks extensively about this.

In particular, he provides some evidence that it's safe to spend 3-4% of your assets every year, indefinitely, if you invest in index funds. That means that it's enough to safe about 30 times your annual expenses. For me, that would be around 650000 Euros. A million certainly would cover this, and have something left over for extreme crisis.

Frugality is easiest to practice as a habit. E.g. rather than regard entertainment as an expense, frugal folks make simple errands and tasks into their entertainment.

Also frugality is not about showing off, except among frugal friends comparing notes.

Another factor its that not advertising one's wealth is an inexpensive form of household security.

Agreed; lots of folks have enough passion for cars and driving that a Ferrari is not such a preposterous thing, weighed against its marginal utility; and, the race-inclined Ferraris have turned out to be pretty good investments.

Compound interest? Where? The interest rates are such that inflation would destroy whatever gain you have. Nearly all savings accounts are paying an annual yield of less than 1%! That means WITH compounding, you're looking at a 1% or lower gain. Inflation is typically between 1-4%, with 2% being the benchmark in terms of financial planning, though admittedly in April, we had slightly negative inflation, but that trend won't continue.

Investing is the only way to build wealth. It's impossible to save your way to financial freedom. If you make an average of $100K per year from age 30-60, that's $3 million in income. Assuming about 35% in state, local and federal taxes, that leaves you with $65K per year. Now, you're saving 10% of that per year, that's $6,500 saved per year. With a 1% rate, at the end of 30 years, you have about $229K. Assuming you live to be 80, that's $229K that needs to earn enough to pay your bills. Even if you saved 20%, you'd still not even have $500K at the end of 30 years.

With the same 20% savings rate and some reasonably smart investing (12% returns,) then you'd end up with over $3.5 million over the same period. If that investing is in real estate, you could potentially earn that gain tax free (or tax reduced) because building depreciation percentages can generally exceed the "profit" from real estate cashflow. On top of that, a 1031 exchange means you can keep selling and trading up to larger and larger real estate without paying a capital gains tax, which means you build even more net worth that can then be leveraged to buy more properties. Most millionaires get there because of property, very, very rarely because they save their way to it. A typical middle-class wage doesn't lend itself well to saving your way to millions. The math just doesn't work, the tax code also doesn't support it.

Frugality isn't the key to success. The $30 you save by washing your own car is peanuts compared to the value of that time doing something more productive (like sourcing real estate or researching investments.) Frugality can actually cost you more money because of the time-value of money. But admittedly many of us have inherited our parents/grandparents' Depression Era, middle-class ethos. It's a classic example of Rich Dad Poor Dad.

I think "frugal" in this context means "spending within their abilities".

In contrast, many lottery winners are bankrupt within 5 years. Why? They're "rich"! They can spend money like it's water! And they do... Then they run out.

As other commenters point out, a million dollars is money, but you still have to be careful. You probably still have to work.

You can go out for dinner three times a week at a reasonable restaurant and not worry about it. You can buy a decent car without it impacting your budget too much.

They're not penny-pinching. They're not part of the 47% of americans who'd have trouble raising $400 for an emergency expense.

But care-free? Nope.

One trip a year to Italy is probably $5K for two people. In comparison, that's like $50 for someone with $10K to their name. It's money, you likely have to plan for it, but it's do-able.