Is frugalism only way to wealth creation

I recently came up on a discussion group where the above point was being debated. Is frugalism only way to build wealth or if one builds wealth for the first 30 years or so of one’s working life, whether one will have enough time to enjoy life?

These are pertinent questions.

It is true that one has to enjoy one’s wealth. There are no two thoughts about it. But in this world of uncertainty, one needs to plan from the beginning to generate enough corpus to sustain one throughout life. Now, how much does one needs for this. Lets take a rough estimate.

In this calculation, there are few important items. Current expenses, time and estimated inflation. Inflation as all are aware, is the rate of increase of prices and is normally expressed on a yearly basis. That means purchasing power of money will reduce at that rate for an year.  Now if  monthly expenses of normal household is Rs 30000 per month and inflation is 7% on an average, the expenses after say 25 years will be about 19.5 lakhs. That means, one needs to have a corpus, which can generate a sum of about 20 lakhs per year after 25 years. That means one need a corpus of about 2 crores @10% interest rate to meet his expenses requirement.

Yes, it is a big corpus. Also, expenses may decrease after children grow old and start earning for themselves. Considering these aspects, the corpus may be brought down somewhat. However, the future is unknown. There can be unexpected expenses like medical costs or some amount required by a child.

Now accumulating this money is a daunting task. But the time will come to our rescue. If one plans religiously from an early age, it is not so big  corpus. But if one delays, the effort required will be much higher.

There is one more aspect here. It may be possible that one stops a regular paying job and pursue an activity of one’s choice. It may or may not pay at the level of current regular job. But to pursue, one needs to have a corpus to fall back on in case of any necessity.  

Another aspect which can be thought of can be family responsibility, in case something happens to the bread earner. Normally many do not people consider this as a requirement. There is a psychological phenomenon called ”Survival ship bias”. One tends to think that as I didn’t meet with an accident till date, I will never meet an accident. This is illogical and one should plan for eventualities.

Thus, frugality is required to take care of one’s future responsibilities and aspirations. Hence it is advisable to start early and create a corpus.

Once a person understands the need for it, it may be easier to embrace the concept and succeed.