June 8, 2023

JF3199: The Discipline of Frugality | Passive Investor Tips ft. Travis Watts



Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

68% of the world’s richest people are self-made. Frugality certainly has its place in any financial strategy, but how can it help you achieve your goals? In this episode, Travis discusses the role frugality can play in designing your lifestyle and why you have to be adaptable as an investor to survive.


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Travis Watts: Welcome back, Best Ever listeners, to another episode of Passive Investor Tips. I'm your host, Travis Watts. In today's episode we are talking about frugality. What Got You Here Won't Get You Where You're Going. Disclaimers as always, never financial advice; not telling you or anyone else what to do. I'm not a financial advisor, CPA or attorney, so please seek licensed advice.
With that top of mind, first of all, I just want to say that not all investors get to their goal of let's say financial independence by being frugal. But it was certainly part of my story, it was a big part of my story, in fact. And the more investors I've spoken to over the years, I've just found that this is a very common strategy that people use to get to financial goals. But interestingly enough, there was an article by CNBC that was recently published that suggests 68% of the world's richest people are self-made. And it can be tough to get wealthy if you're frivolously spending your money on things you don't need, hence why so many wealthy people have chosen a path of frugality.

Now, a quick note on the difference between being cheap and being frugal. So cheap is simply refusing to spend money on something because it's expensive, regardless of what it is. So it's more of a money hoarding type of mentality. Frugal is being focused on value. So something may be expensive from a dollar perspective, but it may be worth pursuing, investing in, or buying.

For example, a cheap person may not spend a lot of money on a vehicle using the rationale that "Why would I pay $50,000 for a vehicle that just gets me from A to B, if I could buy a used vehicle for $10,000?" A frugal person, on the other hand, might choose to buy a vehicle for $50,000, let's say, which is still expensive, if they see some type of value in it. For example, what if a person could buy a luxury vehicle for a 40% discount, used, private party? They might be able to turn around and flip the vehicle for a profit, they might be able to use that vehicle for one two or three years and then sell it for perhaps the same price that they paid for it... So there's still a value to be had, despite the price.

So what we're talking about in today's episode is being frugal, not being cheap. And the point of this episode is to examine how frugality can be a great method and strategy to get you to your initial goal, if it's a financial goal. However, it may not be the best strategy to use moving forward from that point to design an optimal lifestyle.

And I'll share a quick story with you of somebody I know. She's a self-made millionaire, she is financially independent today, but she's certainly didn't start there. She started from lower middle class, humble beginnings; borderline poverty, in fact. So the first goal in her journey was simply to get a job and to start making money, and saving it. So she began her frugality journey for decades, in fact, and when she inevitably reached financial independence on her terms, she remained being frugal for a short period of time, but quickly realized that she had a lot of excess income that she was never going to need to live her optimal lifestyle on her terms. And at this point, the game had changed for her. Suddenly, it wasn't about buying the off brand, using coupons and finding every way possible to save a dollar. It became about spending money at this point on the things that truly added value to her life. And some of these included charity, helping others, buying the food she really wanted to eat, traveling where she wanted to go, and overall, just optimizing her lifestyle. And I refer to this as lifestyle design. And to me personally, this is the ultimate goal of financial independence, it's living life on your terms.

Break: [00:06:20.24]

Travis Watts: And this paradigm shift can also relate to investing in general. It's important to recognize that the game is likely to change over time. In other words, what you begin investing in early on in your journey will likely not be the same as what you end up investing in years later down the road. And I'll use my own investing journey as an example. When I first got started, I was doing a lot of high risk, high reward type of investing. A good example years ago would have been when I fixed and flipped properties. So a lot of my annualized returns were quite impressive by percentage. I might have been getting a 30% to 100% return on investment in any given year. But again, these were very risky, and very time-intensive, and not something I wanted to do long-term.

So fast-forwarding, years later, when I became a full-time passive income investor, my yield went substantially down. However, my focus had changed. My priorities had changed to preservation of capital. I didn't want to lose what I had created over all these years, and it also made sense to do so from a dollar by dollar perspective. And I'll explain that.

So let's say, for example purposes, years ago I had $100,000 to invest. That was my total amount of capital. So if I were to do a fix and flip, let's say for simple math I flipped a property and made a 50% return on my money. Well, in that particular year, that would have amounted to $50,000 dollars from a dollar perspective. But moving forward, years later, let's say I had a million dollars to work with in my portfolio, and let's say I made several passive income investments and spread the risk out, and only received a 6% annualized return. Well, that would be $60,000 from a dollar by dollar perspective. So still more money from a dollar by dollar perspective, but also a new focus on preservation of capital, being able to diversify the portfolio more broadly in different markets, and not having the time commitment that's required to flip houses.

So there's a couple takeaways in this short episode, and number one is that frugality can be a great discipline to get you to a financial goal, but it's important to ask yourself once you arrive at that goal what's the real goal in your life? Is it to stockpile extra cash? Or is it to live an optimal lifestyle?

And number two, it's not the strongest that survive, it's the most adaptable. So remember to be an adaptable investor, and yes, seek out the highest and best opportunities that meet your goals, objectives and risk tolerance, but also be open-minded to the fact that the game is probably going to change over time.

Something to think about here for the week. You're listening to Passive Investor Tips. I'm your host, Travis Watts. Please like, share and subscribe to these episodes; share these with anyone you think could find value. I purposefully make these five to seven minutes in length. That's my target timeframe. No fluff, right to the point, to add the most value to you. Have a Best Ever week, and we'll see you on the next episode.

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