I live a frugal life well below my means because I disregard wealth that is only on paper. As far as I’m concerned, the equity in my home and my stocks and other investments make up my illusionary wealth. I’m more concerned about real wealth. According to a recent article by Bloomberg, household wealth in the United States climbed to $2.95 trillion because of gains in the stock and housing markets. Gains in so-called household wealth has tempted more people to spend. I am not going to fall into the trap of thinking growing household wealth means I can overspend. In reality, most wealthy people live below their means. It’s usually the people who have tons of debt who flaunt their material success to the rest of the neighbors. I try to stick to the basics when building real wealth.
Ignoring home values
Unless I am ready to sell my home, I don’t need to know how much my house is worth. Just because my neighbor sold his home at a profit, doesn’t mean I can do the same. Plenty of other neighbors have sold their homes at losses. The fact that I could take out a home equity line of credit doesn’t make me feel rich. Having a high credit limit isn’t what I’m after. I look at my real wealth as the what I own outright. In another 10 years, my mortgage will be paid off. I’ll feel a lot wealthier then.
Guarding against a crash
I’m taking steps to guard against a stock market crash by having stop losses in my retirement account. However, I still remember older colleagues who sold their mutual funds at the bottom of the bear market during the economic downturn. I don’t think about how much my retirement accounts are worth at this time because I know they can go up or down dramatically in value. The only real wealth I have is the money parked in a cash position, but it’s costly to access before I reach retirement age due to early withdrawal fees.
Overcoming psychological dangers
I think it is human nature to want to spend more as income and net worth increases. I avoid lifestyle inflation by ignoring any pay bonuses or pay raises. I immediately increase the amount of money that is automatically deducted for retirement when I receive pay increases. I keep the same budget now as I had when I first purchased my single-family home about 10 years ago.
Non-liquid wealth such as my home and stock market investments make me feel good, but I have to keep focused on my end goal. I need to have at least $1 million saved for retirement so I can replace current income as well as a paid-off house to reduce expenses. I’d be excited if I could boast about having a net worth that is above $1 million, but it’s not going to change my day-to-day budgeting. I’ll still skip that daily visit to the gourmet coffee shop and Friday night visit to the movie theater because I want my illusionary wealth to have a chance to become real for me one day.
More from this contributor:
How I Tricked my Family into Saving More
Becoming a Roth IRA Millionaire
Learning I Desperately Need to Budget