I am often asked by the media if, in my Rich Habits Study, I found any evidence that the wealthy were frugal or cheap. For some reason, they like to lump these two traits together as if they were one in the same. They are not. Being frugal is very different from being cheap.
What it Means to Be Frugal
Sixty-seven percent of the rich in my study said they were frugal. To them, frugal meant spending their money wisely. It meant buying quality items or services at bargain prices. Most of the wealthy in my study were raised by poor parents or middle-class parents who made a point of instilling in them good habits. Being frugal was one of those good habits they learned from their parents and that they took with them into their adult lives. Looking for value and quality makes you frugal.
When it came to clothing, for example, 8% of the wealthy in my study shopped at Goodwill stores, in search for brand name, high quality clothing at a deep discount. This often required the additional cost and aggravation of getting their Goodwill clothes tailored, but, to them, it was well worth it. They were getting the best clothing at prices Walmart couldn’t offer.
Another example of their frugal spending patterns was how the rich shopped for groceries. Thirty percent admitted to regularly using coupons to buy their groceries. And they also liked to buy their groceries in bulk at places like Costco and Sam’s Club.
When it came to credit cards, 81% of the wealthy used only credit cards that offered reward points or dollars. They would then use their reward points or dollars for travel, gift cards, to buy coffee, etc. Rewards they accumulated on their credit cards, as far as they were concerned, was free money. Who doesn’t like free money?
And when it came to banking, 38 of the millionaires in my study, or about 16%, chose credit unions over traditional banks. Why? They were frugal and credit unions, to them, offered superior personalized service at a bargain price. They liked the fact that the banking personnel seemed more committed to helping them with their banking needs, that there was little turnover and this meant they were able to develop long-term relationships with the tellers and bankers. Seeing the same faces, year after year, was comforting. Relationships, after all, are the currency of the wealthy.
The wealthy were also frugal when it came to purchasing cars. Forty-four percent only purchased high-quality used cars. Typically, these were cars coming off two or three year leases. According to Kelly Blue Book, new cars lose as much as 25-30% of their value in the first two years. That’s a big discount for a quality vehicle purchase.
What it Means to Be Cheap
Sixty-six percent of the poor in my study admitted to being cheap. Cheap to them meant spending their money on the cheapest product or service available.
Being cheap is a Poor Habit because quality is very rarely given any consideration at all. They need X, so they look for the cheapest X they can find.
Being cheap is one of those taxes the poor pay that the rich don’t. Cheap products break or deteriorate at a much quicker rate than quality products. Quality products can last for a lifetime.
Those offering cheap services are often inexperienced or not very good at what they do. If they were good, they would be able to command higher prices. Cheap service providers can get you in a lot of trouble, especially when it comes to taxes, legal representation or even just getting your car fixed. Cheap service providers are able to keep their fees down by paying their staff lower wages. This means they are not getting the best staff or are settling for inexperienced staff.
Being frugal will not make you rich, but it does mean you will keep more of your money as your purchases are driven by quality and price. Being cheap will not make your poor, but it does mean you will keep less of your money due to the low quality you receive in exchange for your money.