The Frugal Minimalist

In macroeconomics class yesterday, we discussed something called steady-state. It’s the phenomenon where an economy invests in its capital structure (K) in order to increase its GDP. As K increases, so does the amount of capital that is depreciated every year. So eventually, all of the savings that economy creates goes towards maintaining the current K, so no more is created. At this point, GDP growth halts, and forward progress is difficult to make.

I realized that this is true for so many people, too.

People acquire more and more possessions:

• House - maintaining a house is very costly, in terms of both time and money. The weekends spent cleaning and fixing could be time spent with family, or traveling, or creating.
• Car - aside from the cost of gas, there are many other maintenance issues that you have to deal with when owning a car: Getting its oil changed, buying new tires, brakes, fluids, insurance costs, and the costs to the environment.

Then there’s the services with monthly fees that add up quickly:

• Cable - this one is perhaps the most expensive of all. You spend a large amount every month for many channels you don’t watch, when you could get a lot of it online for free on Hulu or the channel’s website. And the time that television costs us every year is far too great.
• Internet - I won’t argue you shouldn’t have internet, but it does have a substantial cost.
• Netflix - this is a great service, but when it is one of many you pay for it can grow to be quite sizable.
• Magazines - keeping only the subscriptions that you read fully can help you reduce costs.
• Cellphone - cell plans aren’t cheap these days, and having all the bells and whistles will add up.
• Credit card debt - this is a big one. People buy a lot of these products on credit cards because they don’t have the money for them, and then the credit card becomes another monthly payment to drain your check to zero.

People will continue to buy more and more, until eventually they can’t contribute more to savings and they can’t buy anymore stuff. They’re stuck paying for what they have, and can’t get what they think they want.

Growth comes to a standstill, and the people flounder in debt, and worst of all, unhappiness. How to avoid this? The same way that countries like China have been doing: high savings rate. China has a much higher savings rate than the US, about 30%. The US savings rate is essentially zero . So, while China will eventually hit steady-state (all economies do, at least in simple terms), they will be much farther up the economic “hill” than we are.

But it doesn’t have to be the same for people, because we don’t need to constantly spend money in order to increase our income. In fact, most of what we spend our money on does nothing to increase our income, rather it increases our expenses.

When an individual gets a raise or a promotion, they usually increase spending to match. With that mindset it’s a zero-sum game with yourself. More money comes in, but your freedom decreases. You have more stuff, more baggage, more anchors, holding you down. There is a hidden cost of stuff, one that we may not realize.

Don’t get caught in the trap of spending all of your money on maintaining your stuff. You should be spending your money on experiences, and the things that will truly bring you joy.