Personal Finance

Most Americans Overspend & Fail at Frugality… But It’s Not Why You Think

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
172 Articles Written
frugality-fail

I recently saw an article on the blog entitled, “Living Frugally vs. Spending on What Matters: How I Achieve a Happy Medium” by Elizabeth Colegrove. Liz told us that with respect to frugality, she is an “onion.” I thought that was kinda cute indeed, though I must admit that I did get lost in Liz’s layers somewhat… I’m not that bright, y’all.

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This topic of frugality keeps coming up on BiggerPockets, as it should. In fact, Scott Trench dealt with this issue as well in his latest installment. Frugality and overspending: the sexiest subject matter on the BP blog. Who knew?

Well, you know Ben Leybovich won’t be left out of a sexy conversation. So, here we go.

Logic

There are no easy answers to this question. Why? Because frugality is a moving target. Let’s explore.

Fundamentally, what we are talking about here is the relationship of what we earn (make) to what we spend. In other words, the question we could ask is this:

What percent of your income do you spend on living expenses?

Or:

How little of what you earn does your life cost; what is your “burn rate?”

tax-changes

If you answered 25%, I think most people here would agree that you lead a rather frugal life. If you said 80%, the entire BP community would jump on you to get on a budget. And if you said 105%, meaning you spend more than you make, then we’d right away tell you to attend one of Brandon Turner’s webinars, buy a Pro membership, and use the BiggerPockets Rental Calculator to analyze a multiplex (and buy it with $0 down) ’cause this is gonna solve all your problems…

Disclaimer: That last sentence was a sarcastic funny for which Ben Leybovich is infamous. If you smiled as you read it, congratulations. In addition to a pulse, you also have common sense and a sense of humor. If you didn’t smile as you read that, then, well, I guess you are missing either the pulse, the sense of humor, or both – sorry for that. Regardless, please don’t go buy a fully leveraged multiplex to correct the problem of overspending, even if a calc says it’s a good deal – make sure you do your homework, which is more than just plugging in a number!

More Logic

So, if we agree that spending 25% of the take-home cash flow qualifies you as frugal, then with an income of $100,000, you’d have to figure out a way to live on $25,000. Is that likely?

Related: 10 Things Only Personal Finance Nerds Would Understand

First of all, with an effective tax rate of, say, 30% (and that’s generous for W2 income folk), you’d have to earn $143,000 to bring home $100,000 – not many of you are in this category. But even if you are, what are the chances you can swing life on $25,000? How about $30,000…?!

Fixed Costs

The reason most people lose money in real estate is because when evaluating their deals, they simply plug percentages into their pro forma to represent expenses. Unfortunately, most of these costs are actually fixed numbers, and trying to represent them as percentages leads people to underestimate the cost of ownership rather dramatically.

For example, a water heater for a $30,000 pig and a water heater for a $400,000 home cost the same – let’s say $750 all in. If the pig is rented for $750/month, while the $400,000 home is rented for $3,000/month, the cost of the water heater as a percentage of annualized Gross Potential Income on a $30,000 pig is 8.33%. However, it is only a burden of 2.1% on the $3,000 rental. This is a huge swing, from 2% to 8%. If you were using the BP calc, how would you pro forma this expense in terms of percentage… would you use 2% or 8%?

You see, you cannot pro forma this expense as a percentage – it’s not a percentage expense; it is a fixed expense, and you need to allocate a dollar amount in your pro forma underwriting. You need perspective, which comes from either experience or from reading Ben Leybovich’s articles, and you need to build a pro forma that allows much more sensitivity than that which a percentage of GPI can provide.

And by the way, this is why all of those 2%, 50%, and the rest of “percent” rules are absolute garbage — the real world is not accounted with percentages. I’m not making any friends with newbies here, and my dear friend Brandon Turner will be pissed at me for dissing those rules again. What can I say? They are garbage…

budget

Works the Same With Frugality

Some things in life just cost what they cost. In fact, most things in life are that way. This is what makes it difficult to think of frugality as a percentage of income. If we agree on $75,000 as an amount that is reasonable for most families with two kids to live on, then most families in America spend everything or more than what they make.

Think about this, however: For someone who makes $400,000, $75,000 is only 18.75%. Haha — this means that in order to live on $75,000 and be considered frugal, one needs to bring home $400,000. Are you there? How many people do you know who are?

There’s Another Way

Thus far, we’ve been talking about spending as it relates to what you earn. And the gist is that it is really tough to be “frugal” because most of us flat out don’t earn enough; in other words, your ability to earn tees up your ability to be frugal in our conversation thus far.

Now, this might come as a shock to you, but the reason the rich are getting richer and poor are getting poorer is because the poor try to earn more to facilitate a better life, while the rich simply pass the responsibility of their income and their expenses onto others. Sorry if I offended someone’s sensibilities, but truth is what it is! The rich are getting richer because someone else pays for their lifestyle, and that someone else is… the poor.

I built a nice home for my family (ask Brandon — he saw it), and I drive nice cars. But I don’t pay my mortgage; one of my businesses does. I don’t make my car payments; my tenants do. It would be stupidly extravagant and reckless of me to do either if I were the entity responsible for making those payments, but I am not. I pass those costs along to clients and tenants, and as a result, I am spending a considerably smaller percentage of my GPI to facilitate a nicer lifestyle than most of my friends. Not to mention that my revenues are much more diversified and much more passive in nature than my friends with W2s.

Importantly, what this means is that my tax burden is much lower than most, which means that I don’t have to earn as much.

In this way, it could be said that I am using others to buy my life — sure, I am. This is America, this is business, and this is real estate.

Related: How to Get Rich: 7 Awesome Ways to Build Big Wealth Today

Conclusion

This conversation around frugality comes down to two concrete realities:

  • One, it is highly unlikely to achieve frugality if your mode of income-generation is W2 or 1099; it simply requires more money than most will ever earn, and
  • Two, frugality is not merely a function of dollars you spend relative to dollars you earn. Frugality is a total perspective on your financial life. Frugality requires that you not generate earned income and that you switch over to passive, because a passive mode of income-generation puts the burden of your income on someone other than you, and you must not be the one paying for your life — you can’t afford it!

So, open your mind…

P.S. Scott, you are talented as all hell, and you were almost there in your thinking. You just need to adjust your perspective one degree. You need to be one iota more cynical! I know this doesn’t come naturally to a pure heart such as yours, but dude, I’m just the messenger. Life is what it is, man!

[Editor’s Note: We are republishing this article so our newer members can weigh in!]

Folks: Would you like to yell at me now, or would you like to thank me?

Leave your thoughts, perspectives, messages of agreement or disagreement below!

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Ben is the creator of Cash Flow Freedom University, the author of House Hacking, and a noted Multifamily Underwriting coach. Through his company, Source Capital LLC, Ben currently operates $40M of multifamily real estate. Learn more about him at JustAskBenWhy.com.

    Mark Ferguson Flipper/Rehabber from Greeley, CO
    Replied over 4 years ago
    What you are basically saying is the rich start their own businesses and take control of their lives, while the poor rely on jobs and others to pay them a wage. I completely agree! I focus on making as much money as possible and saving enough to continually build up my investments. Rental number 14 is under contract now!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Well, Mark – I am not sure that this is all about income. The bottom line at 12% effective tax rate looks a lot different than it does at 35%. But, I suppose things work out either way. Just be sure that the income streams you are building are passive and sustainable in nature. Thanks for commenting, man!
    Scott Trench President of BiggerPockets from Denver, CO
    Replied over 4 years ago
    Well Ben, this is new – you being (mostly) complimentary! I like the change haha. Want me to be cynical? How’s this: If you call yourself an entrepreneur, investor, or are at all ambitious about your personal finances, then you’ll stop whining about your “fixed expenses” right now. Just like everybody else, I rented an apartment for the first year of my working adult life, drove a fancy new car, and accumulated wealth painfully slowly. Then I changed my mindset and started shedding those fixed costs systematically. I bought some pots and pans and started cooking, eliminating supposedly fixed food expenses and lunches out. I bought a bike and started commuting for free, eliminating supposedly fixed transportation expenses. Then I bought a duplex, rented out the excess available space, and started living for free, eliminating the supposedly fixed housing expenses. I’m now in the process of buying energy efficient appliances and finding creative ways to reduce my electrical and gas bills, eliminating another of your supposed fixed expenses. Fixed expenses? Give me a break. I done “fixed” ’em. You can too.
    Jeff Bader Investor from Portland, OR
    Replied over 2 years ago
    Yeah, frugality is relative. Sure, you may save some money by riding your bike around town like a twelve-year-old, but once your time is worth $100 an hour and you’re making six figures, little things like a $250 car payment are in the noise of monthly operations. A hundred here and a hundred there is soon undetectable, not having any impact whatsoever when your accounts are routinely fluctuating by tens of thousands of dollars. Part of the reason poor people stay poor is because they’re “penny wise and pound foolish.” From my limited experience, being penny wise is good for very little. Trimming every little expense is most useful when you’re dirt poor. Making just a few wise choices that have large impacts vastly outweigh things like energy efficient appliances. Focusing on limiting your expenses as a means to achieve wealth is just not going to give much bang for the buck, and so I’m not sure why Ben believes that poor people’s response to “want” is to try to earn more. That’s actually what rich people do. I’m guessing that the answer lies in our different definitions of the word “earn.” I will strongly disagree with Ben’s choice of words when contrasting the rich and the poor. Ben almost, *almost* speaks in a way that would lead me to believe that he thinks that a poor person is poor because of a rich person. But I think that would be one of only about two things that Ben has said with which I’d disagree.
    Stephan Rose from Warwick, Rhode Island
    Replied over 4 years ago
    Okay, this response was just plain inspirational!!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Scott – you are once again talking out of your ass…haha Always wanted to say that on a blog, so thanks! Listen, I drove a 1998 minivan that I bought used for $1,000 for the first 5 years of my kid’s life. My wife had a civic that we bought new in 13 years ago and had paid off in 3 years. That was a time to live frugally. Life allowed us to live frugally. We had no kids and we had no healthcare expenses, emergency visits, or anything else. We thought we were in control – just like you think now… I easily spend easily $25,000/year + on medical. not by choice, you understand? My son needs every holistic medicine that there is. My purpose in life is my children’s well-being. and these costs are fixed. Just dropped $2,000 on an HBOT rental for 5 weeks. Did the same 3 months ago. Will do 2 more within the 12 month cycle. I am not complaining. I can afford it. Why – I got Cash Flow. Serge S. has even more Cash Flow. That’s what it takes. We pass the burden onto someone else, and this is how we afford crap. You, work at BP. You should be saving every penny you earn and buying CF with those pennies. I am 40, Scott. I’ve worked hard to be here, and I am not done. I drive a nice car, and I enjoy getting into it every time. But, this is not the “expensive” expense in my life – this is peanuts. I could dump this expense in a sec. However, unless you are suggesting I sell my kids to Brandon Turner, there are much harder and more fixed costs associated with grown-up life, of which you’ll find out when time comes 🙂
    Robert Blake Investor from Aurora, Colorado
    Replied over 4 years ago
    Don’t sell your kids to Brandon – he’s a notorious cheapskate and almost certainly won’t give you what they’re worth!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Haha – Bella is grabbing stars right out of the sky on her violin. And Aaron is a darn genius… Brandon coudn’t afford em. And I am NOT doing owner-financing on this deal yo… I love Brandon enough, though, that I will share 🙂 Use your imagination on that one…
    Joe Fost
    Replied over 4 years ago
    Oh Ben, Ben, Ben, I do appreciate the lighter style. It suites you better, your readers, thank you. I guess that is presumptuous, I thank you. I am a saver, frugal, but also spend on what is important to me/family. Interestingly, we live on about 35-40K a year for our expenses. But because I’ve been frugal, I know have no house payment and no car payment and I drive an electric so very little maintenance costs. This would be considered well under 25% of gross or net. Many of the engineers I work with are also frugal. I’ve found that engineers are generally good at understanding money and saving. So, there’s some outliers for ya. I’d like to add a variable to your piggy water heater example. I’ll debate that the amount of the hit that the water heater causes to your cash flow, is not about if the property is rented at $750 or $3000. If the $3000 class A property is a negative cash flow hog, then, well, that ain’t good. Where as the $750 class B “pig” is cash flowing at $300 a month, well, I’d rather be there. Care to `splain your thoughts in more detail. Seems like you are a little late to the “attack the one percent” party. I get the meaning and the reference is to provide guidance and passive activity is were it’s at. I feel the need to defend my fellow one percenter peeps. I’ll rebut that the 1% pay for everyone else. (Let the flame war begin now!). Please explain how having a low tax burden allows you to earn less to keep your life style? Tax is dependent on taxable income. Stating you have a low tax burden implies you have a great accountant if you make a lot of cashola. Since you followed with not having to make a lot of money, well, if ya don’t make squat in the wonderful progressive tax system we have, you pay no tax and ya are not contributing your share to our the growth, upkeep and defense of or great nation. (oh yea, let the comments continue!) Unfortunately, for me, I took care of ya. That should generate some activity for ya to keep up your ratings and controversy level!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Joe – Controversy…me…?!?! What? You must have me confused… The epiphany came about 11 years ago. That year, we, musicians, managed to pull in 6 figures. We felt happy as hell – until tax time…We were self-employed, to boot! That wasn’t gonna work… It’s a lot easier to maintain a nice life-style with tax burden 10%, than it is at 40%. It’s not a function of the accountant being good. I make it easy for them in how I structure my incomes and modes in which I take possession of money. Everything by the book! The book is written for us to succeed, we just have to know how to read… I love the 1%. I want to be the 1%. This is by no means an attack on 1%. If anything, I am attacking people for not taking control and figuring out “how”…
    Joe Foster
    Replied over 4 years ago
    Hey Ben, I’m more interested in your deal and tax structuring and 10% tax rate now! Although a penny pincher, I still have a bunch of W2 income and from it, yea at the 40% marginal federal. Sucks. Perhaps a blog post on the tax structure used? Most of the bean counters I’ve consulted are not much help. WIth that said, there are only so many ways to get income with little or no tax. Roth, using depreciation (deferred or 1031), munis, corp structure where ya are paid in dividends (but the corp is taxed). Ya gots self employment tax, unless yer not counting that 15+% I’m retiring soon so getting my REI (rentals+lending) income in a smaller tax bucket would be very nice. pm me if ya like with more details on the tax side joefoster62 at gmail Joe
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied almost 3 years ago
    Yes Please. I’d love to hear more about tax strategies for reducing overall tax percentage. Are you using an S corp? How do you structure your businesses? I am using Brandon’s BRRRR strategy, and taking advantage of the zero tax on capital gains when you sell if you have lived in the house 2 of the preceeding 5 years. Yes, this is limited to selling 2 properties every 5 years, but, it takes advantage of deducting capital expenses while living in the property and repairs while renting it out. And I’m a newbie, so I only have two properties so far: but I have aspirations to build that into more properties by keeping some rentals 🙂 I am also planning to buy more properties from a roth once I figure out a low-tax way of getting my cash from 401K to Roth. I’d really love to learn how you do things to keep the taxes low.
    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied almost 3 years ago
    Yes Please. I’d love to hear more about tax strategies for reducing overall tax percentage. Are you using an S corp? How do you structure your businesses? I am using Brandon’s BRRRR strategy, and taking advantage of the zero tax on capital gains when you sell if you have lived in the house 2 of the preceeding 5 years. Yes, this is limited to selling 2 properties every 5 years, but, it takes advantage of deducting capital expenses while living in the property and repairs while renting it out. And I’m a newbie, so I only have two properties so far: but I have aspirations to build that into more properties by keeping some rentals 🙂 I am also planning to buy more properties from a roth once I figure out a low-tax way of getting my cash from 401K to Roth. I’d really love to learn how you do things to keep the taxes low.
    Joe Harper Landlord and Appraiser from Bartow, Florida
    Replied over 4 years ago
    This is brilliant. Thank you for taking the time to articulate these thoughts. I am right there with you but couldn’t figure out why I still believe the haters. “Don’t listent to your broke uncle!” – Dave Ramsey I am in the verge of quitting my w2 job making $55k and this math really clarifies the decision. This is like a mile marker.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Rick on – Joe!
    Steven Francis Real Estate Investor, Realtor from New Bedford, Massachusetts
    Replied over 4 years ago
    Interested in seeing what you have to say about discussed topic.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    How do you mean, Steven?
    Serge S. Rental Property Investor from Fountain Hills, AZ
    Replied over 4 years ago
    Leybovich the great has come around full circle! Wasn’t it just a year ago that you were bragging about driving a 20 y/o minivan and denying yourself any and all unwarranted purchases? Now your driving a fancy Lambo and eating lobster? Sounds like your tenants are treating you quite well. No more bragging on the forums about who drives the shittiest car. Scott Trench is right on his take at least partially. At his age everything should in fact be about converting wages into investment income. The more you can cut down on cost of living, the faster you get there. The problem Scott is that there is no limit to this mindset. You have been able to ditch the car and buy a duplex. Thats fabulous but why not rent out the extra bedroom in your side of the duplex? Why not recycle all the used coke cans in the BP office, doesn’t take but minutes. You see, what Ben is saying is that there comes a time when that lifestyle simply is not worth it. The real debate is as to when is that time. You learn to get comfortable living off a percentage of your income. When that income is passive and stable then you can increase that percentage. As that income grows, then and only then can your lifestyle follow.
    Randy Reed Real Estate Professional from Odenville, Alabama
    Replied over 4 years ago
    Right now, I’m driving a 12 year old mini van. 😉
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Nothin wrong with that. Did it for a decade…
    Randy Reed Real Estate Professional from Odenville, Alabama
    Replied over 4 years ago
    Nothing at all. I hope to keep it for four more years, but I’m not sure I can make it to 20. By then, I may be ready for the finer things in life.
    Chuck B. Investor from Louisville, Kentucky
    Replied almost 4 years ago
    I’m sorry, but that’s impossible. 😉
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Serge – I am still frugal as hell, and you know it. I have to be. But, at 40, I am no longer driving beaters or collecting coke cans either 🙂
    Serge S. Rental Property Investor from Fountain Hills, AZ
    Replied over 4 years ago
    Well maybe you should consider collecting coke cans again:) You have switched to the dark side my friend. Driving a $100k Lambo and eating Gafilta fish! The horror of it all. Don’t forget to wrap the car with pictures of your face on the front and send all your tenants and student thank you letters with pictures of what their earned income bought you the greedy landlord.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Hahaha – let’s save the Gafilta jokes for off line…funny stuff though..lol Serge S. has a sense of humor y’all – who knew?!
    Gary O
    Replied over 4 years ago
    This amazes me. I had a conversation earlier this evening about raising the minimum wage to $15 an hour and I told the person who could have been my friend that all that would do was allow a few people to pay more debts off for people who owed at our current rates and eliminate some existing jobs. The numbers may change, but the game remains the same. I really do have to go back and read all these related articles. I know they will be worth the read because I have read some really good things from all the mentioned authors. Masterfully done as always, it does kind of scare me that I never understood that understanding that making more for most people only means they will pay more of another mans bills makes me cynical .
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Gary – that’s the point. It’s all cynical as all hell. That’s the “read between the lines” component of this article. It’s cynical. Life is cynical. Money is cynical. business is cynical. Game is cynical… I try to make it a little less so by delivering more value than I charge in all of my endeavors, bit it is what it is – cynical. You have to make that OK in your own mind, otherwise you can’t function. And if you can’t function, you can’t win…
    Gary O
    Replied over 4 years ago
    This amazes me. I had a conversation earlier this evening about raising the minimum wage to $15 an hour and I told the person who could have been my friend that all that would do was allow a few people to pay more debts off for people who owed at our current rates and eliminate some existing jobs. The numbers may change, but the game remains the same. I really do have to go back and read all these related articles. I know they will be worth the read because I have read some really good things from all the mentioned authors. Masterfully done as always, it does kind of scare me that I never understood that understanding that making more for most people only means they will pay more of another mans bills makes me cynical . Reply Report comment
    Gary O
    Replied over 4 years ago
    This amazes me. I had a conversation earlier this evening about raising the minimum wage to $15 an hour and I told the person who could have been my friend that all that would do was allow a few people to pay more debts off for people who owed at our current rates and eliminate some existing jobs. The numbers may change, but the game remains the same. I really do have to go back and read all these related articles. I know they will be worth the read because I have read some really good things from all the mentioned authors. Masterfully done as always, it does kind of scare me that I never understood that understanding that making more for most people only means they will pay more of another mans bills makes me cynical . Reply Report comment
    Larry Schneider Investor from Pittsburgh, Pennsylvania
    Replied over 4 years ago
    One should not confuse frugality with being cheap. I avoid cheap people. The ones that still leave a 10% tip for a good waitress annoy me. In a group setting they don’t leave anything and rely on the others to get the tip. Cheap people horde things because they cant get what they paid for it 20 years ago. Cheap people never give that young boy $10 for helping to get a clothes dryer down the steps to the basement. Cheap people don’t sent thank you notes. Cheap people never offer a few dollars to pay for gasoline. When a tenant moves out and offers to leave their new dining room set, cheap people never get them a nice Olive Garden gift card as a thank you.. Cheap people never buy lunch. Frugality is spending money wisely and carefully. Riding a bike to work is an acceptable frugal thing to do. Riding in an automobile to work with another person and never even offering to pay for an oil change is cheap.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Hahaha – that was funny, Larry! You saying that Scott is cheap?
    Stephan Rose from Warwick, Rhode Island
    Replied over 4 years ago
    100 % agreement!
    Michael Gabrieli from Bensalem, Pennsylvania
    Replied over 4 years ago
    The Thing about Personal Finance, its personal. Frugal living is all relative. Yeah you can still live frugally making 60k a year but all your expenses just add up for 30k a year (very easy to do if you are paying off multiple loans, plus rent, Health insurance, car insurance, cable and phone, not eating lunch out all the time and spending your weekends going to a bar and have a water with lime, and tell others its vodka). One person sees this situation and thinks he is poor because he has a poor mindset. Another person sees this as frugal living because he knows once he pays off his multiple debts, he would use similar $$ amount and put it on savings instead of paying for other people’s dreams while living a frugal lifestyle (my point in life). Most Americans Fail at frugality because they have a poor mindset, and they are only caring about the bills they see month to month and the income they make month to month. When I saw the title, I thought this was going to be an article about how Americans have a poor mindset and that are not really living frugally because they are not choosing frugality they are choosing survival. To chose a life of frugality, you have to come to the realization that you want to stop being of poor-mindset and in constant debt and they want to choose the path of being financially fit then to financial independence than ultimate financial freedom (residual income much greater than monthly expenses and that you are retired when you want to retire).
    Tim Hoffman Investor from Rockford, Illinois
    Replied over 4 years ago
    Good article Ben. I see it as a coded message (and some straight talk) to those not yet living on their passive income. Frugality is a way of life, a mission, it is in your blood and who your are. Making the change from constant frugality to allowing yourself to enjoy some of the fruit of your (tenants) labor is the hard part. How do you go from bragging about driving an 18 yr old truck with 265k miles to buying a new(er) one and still call yourself frugal? I am slowly making the change and allowing myself to spend a little more but still put more in savings every month then the average person earns via w2 per month. The adjustment in mindset is like changing religions, scary.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Tim, my message is – invest your money; spend someone else’s. Be frugal with your money – splurge on someone else’s…:)
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Michael – don’t miss my point. You cannot be frugal by definition if you rely on W2 income. This type of income shaves results in a loss of 25% minimum before you even start to taxes. And then there’s the rest of it…
    Tommy DeSalvo Real Estate Agent from Cincinnati, Ohio
    Replied over 4 years ago
    Thanks Ben. Your articles are very informative and I’m doing my best to put them into practice. It’s a total change of mindset from what has been ingrained in us for years.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    I believe that – we are not taught anything that makes a damn bit of sense! Thanks indeed for the kind words, Tommy. Glad to help!
    Frankie Woods Investor from Albuquerque, NM
    Replied over 4 years ago
    This is exactly what I’m working towards. I have too much reliance on the W2 income. However, even given the small hiccups along the way, that is slowly beginning to change for the better. Thanks again for another killer article!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    Frankie – I got one thing to say to you: Rock on!
    Mark Forest Real Estate Investor from Fenton, Michigan
    Replied over 4 years ago
    I think any graduating high school senior should be required to read The Millionaire Next Door. The authors say to live BELOW your means. I can not understand how so many people can afford $100 a month plus for their cell phones, cable bills etc. Then there are the toys; big four wheel drive trucks and/or sports cars, motorcycles, snowmobiles. I want to spend my money to make more money.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied over 4 years ago
    That’s exactly the point – spend your money to make more money, spend other people’s money to have fun in life. Put yourself in the path of money, and position yourself so that a bit of it settles with you as it passes through you. RE works as well as it does precisely because it accomplishes this very objective… Man – I have a video on this on my website, but I think this is my topic for next week here…
    Daniel Mohnkern Investor from Titusville, Pennsylvania
    Replied over 4 years ago
    Nice article, Ben. It brings my mind to Robert Kiyosaki’s (3rd book?) where he talks about his wanting a Porsche, so he bought an apartment building that would make the monthly payments on his new car. Most people would just buy the car and ruin their finances. My tenants always buy me nice things. I once thought of thanking them but figured they just wouldn’t understand. P.S. thanks for saying “ass” only one time in this piece.
    DL Martin Rental Property Investor from Cincinnati, OH
    Replied over 4 years ago
    Excellent article, on many points. Consider rookie professional athletes. If the rookie athlete would just invest his signing bonus and live off of the residual income until he makes it to his second contract, then he would have a nice little (or maybe large) income for the rest of his life, without ever touching the principle. But that seldom seems to be the way that it works out for them… (I remember when Barry Larkin of the Cincinnati Reds signed his first Major League Contract. He could have bought any car that he wanted but He bought a new Toyota.) Because of my disdain for Ben, I refuse to give him credit for writing it. As a matter of fact, I am quite certain that Ben stole this content from someone else. (Probably from BBT. Brilliant Brandon Turner.) Note to self: Call the FTC !!! DL
    Anthony
    Replied over 4 years ago
    Ben, I walked away from this article with a new perspective. For so long I have been focused on saving 50% of my income to invest in passive income. I’ve also learn to create additional income over the internet and am now looking for a way to invest in my first multifamily property just outside of Cleveland, Oh. What articles of yours would you suggest for someone looking to get into multifamily housing?
    Christy Barton Wholesaler from Indianapolis, Indiana
    Replied over 4 years ago
    This is great. When we first started looking into real estate, I remember at a REIA hearing the speaker say “think of each house your purchase and the cash flow as one of your bills getting paid. The first one can clear your car payment, and the next the phone bill, etc.” I have never forgotten that. So, that’s why I’m really eager to get start purchasing rentals of my own. Thanks for the reminder!
    Reed Starkey Investor from Belleville, Michigan
    Replied over 4 years ago
    There are nice houses in Lima?
    Ian Fretheim Investor from Minneapolis, Minnesota
    Replied almost 3 years ago
    Frugality is not deferring frugality. That’s business. Frugality is not a number. That’s failing to understand frugality. Frugality is not spending money on dumb s***. Frugality is using your intelligence and creativity to accomplish that task. How do you do it on a W2? People live on 25k. People live on 20k. Happily. Frugality begins when you start to see the challenge and freedom of “can I live happily on 20k? How?”. Give up the cable. Whoa. Just saved $100 each month AND picked up an extra 6 – 18 hours that I can use doing things that I actually care about. Ben, I know that you write to get a rise. You’re not being frugal just because you’ve figured out how to get others to pay for your lifestyle. You’re much closer to being cheap than frugal, though really you’re just being savvy. A frugal person knows that a nice car is a big advertiseent that says, “hey, look, I don’t have a clue what money is”. Why? Because a nice car, while nice, and admittedly enjoyable, is nothing more than nice, and admittedly enjoyable. Not frugal, no matter how you pay for it. Want to be frugal? You don’t need complex business structures or more money or to get off of your w2. You, just need to learn how to spend less. Only earn 40k? Great, you’re already living off of less than Ben thinks is even possible! Learn to live on half of it (that’s 50%). What happens then? When you live on half your income, you save one year’s worth of income every year and you learn how to live when things get tough. You should be starting to see freedom from the W2 now. Is it easy? No. Not for a 40k earner and not for a 400k earner. Frugality is not about the numbers. It’s about the person. This is where Ben’s advise actually comes in and shines. After having become fairly John Coltrane with your frugality improvisational technique, you need to do more than just save it. 10, 15, 20k per year is nice, especially if you’ve learned to live on that amount, but you want that amount to be working for you. You want to use it to build a situation where others ARE paying for the remaining 50% of your lifestyle. One devil’s advocate to another: don’t confuse frugality with business smarts. Learn frugality and learn business savvy. The former is your base. The latter will be your RE empire.
    William
    Replied almost 3 years ago
    Frugality is really evaluating where you’re spending your money and making sure it is going to what will make you the most happy overall in your life. For some, that might be a nice car. For others, a vacation. For yet another, early retirement. Most people, if they actually start considering their purchases for their happiness value, will naturally spend less as they start valuing future spending more. I agree that while some costs are pretty fixed (health insurance and groceries come to mind) the vast majority of our personal expenses are variable and can be reasonably made percentages of income. Utilities, mortgage, eating out, Christmas presents, disability/life insurance, vacation, transportation etc-all very adjustable. Whether a family of four “has to spend” $75K I’ll leave up to the reader, but I can tell you that by figuring out how to live on less than that I was able to start the nest egg that resulted in me being a multi-millionaire by 40. There’s always someone down the street making a little less than you. Figure out how to live like him and bank the difference. Future You will thank you for it.
    David Thompson Rental Property Investor from Austin, TX
    Replied almost 3 years ago
    No one understands frugality really until you’ve lived w/your Chinese mother in law for 18 years and who only takes $1 with her during our semi-annual neighborhood garage sales and comes back w/it in tack and tells me to get in my car and go pickup all the stuff she negotiated w/the neighbors that improve her life in very modest ways (some cooking utensils, clothes that she can mend up for herself or my wife, a stool to help her reach things in the cabinets, etc). She continues to amaze me.
    Mike Dymski Investor from Greenville, SC
    Replied almost 3 years ago
    She’s just working towards being one of your accredited investors.
    Noah Garcia Banker from Tampa, Florida
    Replied almost 3 years ago
    What advantages do you gain by having your primary residence owned by your company?
    Lisa Widdowson Investor from Arlington, Virginia
    Replied almost 3 years ago
    I agree with your conclusions. However, the sentiment of the article makes it sound as if the poor are being taken advantage of and that something about this is unfair which I disagree with. The reason America as a stable economy is because it provides an environment for businesses to be formed and flourish and then hire other people who don’t have the skills or the interest to being business owners. People also forget about the risks of owning a business and make it sound like it’s just so easy when in fact we all know that isn’t true. It’s hard work and also requires having a capacity to take on risk. Not everyone can do that and those who make it work do deserve to get some payment for that. Let’s also not forget that if people didn’t own businesses the majority of Americans would have nowhere to work. It just frustrates me when people who have worked hard to get where they are are positioned as taking advantage of others instead of providing them with an opportunity for employment. It you want to talk about taxes, obviously the passive income is the best way to save on taxes but most people are not living solely off of passive income. The real people who are bearing the tax burden of are high earning self employed people like lawyers, accountants, doctors, etc. There are expenses required from running a business (e.g. meals and entertainment) that are not fully deductible and thus these people end up paying tax on which creates taxable income that is overall higher than the 39% tax bracket. Noone sees these individuals as being taken advantage of where in fact these are the folks who are supporting our society in every way. Since I happen to be one of these people, my goal over time is to reduce these services that I provide and increase my passive investments. I will have more time, pay less taxes but some of those people I have been employing will be out of a job. No one thinks about the consequences of that but the fact is that many of these high earners, although educated in their professions, don’t understand this fundamental issue. They continue to pay over 50% tax every year and support the economy while the rest of the country talks about how the 1% are these greedy people who live high lifestyles while others go hungry. You have obviously worked very hard to get where you are and are a successful business person who employs many people. Don’t diminish your accomplishments by making it sound like other people are paying for your lifestyle. If you look at it that way, someone else is always paying for your lifestyle whether is be your customers, the government, your investments or your employer. It also gives real estate investors a bad name.
    JL Hut Investor from Greenville, Michigan
    Replied almost 3 years ago
    Lets think a little deeper here, W2s have positives also. I have no W2 income, all passive rental income. But, I pay over $22,000. a year for health insurance and co-pays and its the least expensive coverage I can get. It consumes 20% of my income. Many W2ers pay little to nothing for health coverage. So you have to consider it as a hidden tax for self employed. My effective tax rate was 12% plus 22% for health insurance equals 34%. A friend of mine (a teacher) pays 1% of his income for health insurance. Every year for the last 5 years my health insurance has gone up $2,000. a year. That means I must increase my income every year by that amount to break even. easy to do now in an up market, not so easy in 2010. Lets not sugar coat one side of the coin to much, there is positives and negatives on each side.
    Melroy D'Souza
    Replied almost 3 years ago
    Thank you JL Hut for this other perspective.
    Alison Meehan Investor from Montpelier, Virginia
    Replied almost 3 years ago
    This is the best article I’ve read on budgeting. I’ve read a lot about it as a stay at home mom, and most say income doesn’t matter. Trust me, I know that is BS. My husband and I are the opposite of big spenders. We buy used clothes, furniture, cars, etc. regardless of income and prefer to bike rather than drive when we can. We both saved the first 5,000 we earned in our early 20’s and put it straight into retirement (although I wish now we’d put it into real estate). Our retirement account is growing by about $10,000 a year, although we haven’t been putting much in lately. We have over $10,000 in our kids college funds although they are only in preschool. We’ve only had 1 car all 8 years of our marriage. Still, we only earn slightly more than our expenses. His salary effectively goes down each year because of increased health care costs for insurance. I’m home with our kids for now. So, although I try very hard to only buy what we need, only use cash, ect. I’m shocked by how little money we have and how quickly it goes. We do own 1 rental house. Our goal is at least 10 if not 25 at this point. Passive income is the ONLY way to get out of the sagging middle class for us and have the kind of life I’d like to have along with the careers we’ve chosen. Budgeting and cutting expenses is so limited! Income absolutely matters.
    Brad Lohnes Investor from Cambridge, Waikato
    Replied almost 3 years ago
    Hi, Alison. Income only matters once you get to the point where you are currently. Being frugal and budgeting has a far more dramatic effect on your future financial situation than earning extra money but not changing lifestyle (I’ve written an article here on BP about this 😉 ). But once you are living frugally, income absolutely makes all the difference. 🙂 Also, $10,000 in college funds while only in pre-school! Wow, impressive. How are you doing that – i.e. would the money be better invested elsewhere and used for education at the appropriate time?
    JL Hut Investor from Greenville, Michigan
    Replied almost 3 years ago
    Hang in there Alison, it maybe cloudy today but the sun will shine tomorrow. You have made a lot of good decisions so far. Your investing in your kids with your time, you wont have to bail them out of jail in the future. Also you have done better with your cash than most. Many ignore the risk of leverage in an up market, but I will save that for another post.
    Nathan Mansur Investor from Buffalo, New York
    Replied almost 3 years ago
    Thank you to BP for posting this article on the email updates. Being a newer BP member myself, I’m glad I was able to read this article and gain a couple nuggets to save in my notes. This type of MINDSET about creating passive income from your businesses to pay for the lifestyle you want to have is SEVERELY LACKING in today’s society. Simultaneously, adding more passive income by being “frugal” and saving the greatest % from a W-2 or 1099 ( your own energy/time input) is also extremely important. The concept of trading “good for great” comes to mind when I read this article. Stop paying for “good” mediocre wants/desires in the short term and live RADICALLY, so that in the long term you can live like others could only DREAM. I hope to continue applying this attitude of living on less of your own earned income in order to achieve financial Independence with passive income, and by my example be a role model to teach others how to escape the 9-5 “rat race” and working for someone else.
    Nathan Mansur Investor from Buffalo, New York
    Replied almost 3 years ago
    Thank you to BP for posting this article on the email updates. Being a newer BP member myself, I’m glad I was able to read this article and gain a couple nuggets to save in my notes. This type of MINDSET about creating passive income from your businesses to pay for the lifestyle you want to have is SEVERELY LACKING in today’s society. Simultaneously, adding more passive income by being “frugal” and saving the greatest % from a W-2 or 1099 ( your own energy/time input) is also extremely important. The concept of trading “good for great” comes to mind when I read this article. Stop paying for “good” mediocre wants/desires in the short term and live RADICALLY, so that in the long term you can live like others could only DREAM. I hope to continue applying this attitude of living on less of your own earned income in order to achieve financial Independence with passive income, and by my example be a role model to teach others how to escape the 9-5 “rat race” and working for someone else.
    Christopher Smith Investor from brentwood, california
    Replied almost 3 years ago
    I would prefer to read articles that stick solely to the efficient and effective operation of real estate activities rather than ones that appear to be fairly thinly veiled attempts to sidecar class struggle issues. There are numerous other forums for open, candid and straight forward polemical discussions on that issue for those who feel the need to express such sentiments. Just would really hate to see this blog become a home to transparent efforts to engage in guilt mongering and / or identity politics.
    Chris Field Investor from Milford, Connecticut
    Replied almost 3 years ago
    Great post! I won’t bat an eye spending 60k on upgrading one of my properties but I’ll cry like crazy spending $3 on a coffee when McDonald’s sells them for $1.
    Ramon Purifoy Realtor from Fayetteville, GA
    Replied almost 3 years ago
    I like the article, but this seems to be a matter of semantics in perspective. Your “earned” income whether from a boss or from a renter is still your source/earned income (assuming you are not doing anything secondary on the side). You will clothe, feed and take care of your family from that source and your limitations are based on the source. The benefit comes in that your rental income has a higher potential of growing than your traditional W2 position. It also comes with flexibility. I like to say time+money=lifestyle where time=life and money=style. The more you have on the left side, the better the right will be. I don’t disagree with frugality being relative as most things are.
    RJ Mitchell from Stockholm, Stockholms län
    Replied almost 3 years ago
    Honestly, the ‘golden nugget’ in this is that a life of frugality is relative and limited in potential for growing someones net worth. Boom