This article is an excerpt from the Shortform book guide to "Unscripted" by MJ DeMarco. Shortform has the world's best summaries and analyses of books you should be reading.
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Can saving money make you rich? How does frugality hold you back from acquiring wealth?
You can’t save your way to serious wealth. When you try to live frugally and focus on saving every cent, you can’t focus on the myriad ways you can proactively increase your income.
Here’s how being frugal holds you back from achieving financial success.
Frugality Doesn’t Create Wealth
The idea that being frugal creates wealth implies that you can build wealth by working a low-paying job and saving every cent. DeMarco argues this belief cripples your chances of acquiring wealth because it restricts your focus to your outgoing expenses in the hope that sacrificing pleasures and budgeting every cent now will magically grow your savings into sizable wealth in the future. However, DeMarco insists that if your income is small, you won’t be able to save enough to create wealth. Further, inflation will reduce the value of any money you do manage to accumulate.
(Shortform note: While DeMarco argues that frugality restricts your focus to outgoing expenses and meager savings accounts, David Bach (The Automatic Millionaire) argues that this approach improves your quality of life now and gives you the freedom to make profitable choices for your future. This is for two reasons: First, savings help you face unexpected events, such as job loss, without diminishing your financial security. Second, extra money in the bank gives you space to make decisions about your lifestyle and financial goals. For example, when you don’t have savings, you’re forced to stay at your job. On the other hand, having enough money to support yourself allows you to quit your job and work on developing your business.)
Leverage Time to Create Passive Income
Overcome this belief and cultivate an entrepreneurial mindset by leveraging time to create passive income. According to DeMarco, the fastest way to acquire wealth isn’t by saving every cent, but by developing a business that generates recurrent income without your direct involvement.
He explains that relying on a wage or salary limits how much you can earn and subsequently save because you only receive money based on how many hours you work or how much you produce. For example, you work for an online publisher and either get paid $20 an hour or $20 for each article you submit. So you must work five hours or submit five articles to generate $100—both methods restrict your income to how much time you contribute and limit the amount of money you can save.
(Shortform note: While DeMarco claims that working for others automatically restricts income, Robert Kiyosaki (Rich Dad Poor Dad) argues that employees can surpass income limits by opting to receive a commission for the value they produce. He explains that when you work for an employer, you’re only paid a fraction of your generated value. For example, you earn $20 an hour working 40 hours a week—$800 a week. However, your work generates $5,000 in sales for your employer per week. If you ask for a 25% commission, you’ll receive $1,250 a week (a $450 increase). Unlike standard wages, the more sales you generate, the more income you receive. Since you can theoretically generate infinite sales, your income is no longer capped.)
On the other hand, investing time in work that generates passive income—by creating a product or system that earns an income long after your original time investment—expands your income potential and your ability to accumulate large sums of money. For example, you invest your time into creating a $20 book that sells in global markets. The ongoing sales of this product generate an income far beyond the hourly wage you would’ve received for your original time investment.
Consequently, DeMarco insists that investing your time and money in assets that appreciate over time—such as physical or intellectual property that you can lease, sell, or distribute—is the only way to grow your net worth and earn millions.
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Here's what you'll find in our full Unscripted summary:
- Why the only way to achieve financial success is to adopt an entrepreneurial mindset
- Eight beliefs about money that prevent you from achieving wealth
- Actionable ways to adopt an entrepreneurial mindset
