How the ‘wise frugal’ generation is saving their first million

“Wise frugal” is the habit powering their wealth. By spending intentionally and avoiding waste, many in this new generation of wealth builders are already on track to their first million.

Skip the penny-pinching; this is a pro-spending approach

Unlike traditional penny-pinching FIRE models (financial independence/retire early), wise frugality focuses on spending intentionally, maximizing value and building long-term financial security without sacrificing quality of life. These wealth builders steer clear of money-deprivation strategies (e.g. cutting everything except for essentials for a period of time), and make room for pleasure in their budgets. They follow a no-waste rule, and are metaphorically allergic to the idea of overconsumption, tossing out food, spending on avoidable fees, and not getting exceptional value for their money.

Surveys from Canadian financial institutions have found that gen Z and younger millennials are prioritizing saving and investing earlier than previous generations, often automating contributions to TFSAs and RRSPs while intentionally limiting lifestyle inflation. They pay themselves first, investing this money in low-fee portfolios that are age- and risk-appropriate.

Those aspiring to become millionaires within the next 25 years know that the trick is investing about $25 to $30 per day for that same time frame. Assuming long-term market returns averaging around eight to 10 per cent annually and reinvesting all gains, this strategy can grow to roughly $1 million over time.

A simple trick for intentional spending 

Try this: download all transactions (bank, credit card and cash) from the past 30 to 45 days and compile them into a spreadsheet.

Colour code each one intentionally. Apply a green highlight to the transactions that brought joy, good value and felt good. We prioritize these expenses, albeit trying to ensure we’re not overpaying as we go. Apply yellow to transactions that were “neutral.” These are transactions that just have to happen, like rent. Red is applied to transactions that did not bring joy, seemed wasteful or triggered feelings of sadness, frustration or anger. Sometimes this is spending that you could do without, like buying $10 smoothies when you can make them at home. We cut and cancel as much of the “red” as we can.

Behavioural economists have long observed that people rarely change their financial habits simply by setting goals. Seeing spending patterns visually, such as through this type of colour coding or categorizing exercise, helps trigger awareness and makes it easier to change behaviour.

Wise frugal also means evaluating major expenses, which have the greatest impact on long-term financial health. They also take time to change. These include housing, transportation methods, food and dietary changes, tax planning and even the interest paid on debt. Making smart, intentional spending decisions in these areas, like consolidating debt or moving to a less expensive city, can save hundreds of thousands of dollars over time.

The cost-per-use mindset 

I teach the $1 Rule to my wealth builders. If the cost per use is $1 or less, it’s a buy. If not, skip the purchase. So, a $300 pair of running shoes would need to be worn at least 300 times for that cost per use to be $1 or less.

Buying something more expensive can sometimes be better than buying something less expensive that you won’t use as much or that falls apart. If a cheaper pair of running shoes costing $100 is worn only 25 times, and then gets disposed of, the cost per use is $4.

Not all purchases can be evaluated with this cost-per-use framework. An experience to see your favourite band, or to visit an ailing parent or grandparent, is about filling your bank of memories, not your bank account.

Plugging small leaks

Wise frugal wealth builders also hunt down the “small leaks” that quietly erode finances. Examples include unused subscriptions, banking fees, interest charges, extended warranties and delivery apps that inflate everyday purchases. If they find a double charge, or that their partner is paying for the same thing, they get their money back and cancel the overlap.

Guarding against lifestyle inflation

The wise frugal are good at ignoring the temptations to “big-up” their lifestyle as they earn more. Most people do the opposite; make more, spend more.

This new generation of wealth builders is prone to directing a large portion of their new income toward net-worth building goals like savings and investments and paying off debt. Of course, they leave some for modest lifestyle improvements that really make a difference to their quality of life.

Their trick to not spending all this new money is automation. Automation forces consistency around money practices like saving and debt crushing. Automatic transfers into investment accounts or emergency funds help ensure that this new money is set aside before it can be spent. Automation also protects savings habits during busy or stressful periods. When contributions happen automatically, people are less likely to pause investing during short-term market volatility or periods of personal uncertainty.

Wise frugality does not promote stinginess and still allows for generosity like helping a family member in need, tipping fairly or even generously, supporting community causes and more. All of these factors combined have many wealth builders reporting greater financial security, and happiness, along the way.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.