[Editor’s Note: This is a republished post from Physician on FIRE, a member of The White Coat Investor Network. The original post ran here, but if you missed it the first time, it’s new to you! How you see the word frugal depends on your attitude toward money. Enjoy!]

Frugal. Frugality. Frugaling?

These words, which rarely appear anywhere near the word “physician”, are interpreted different ways by different people. I think we all have the same understanding of the definition, although we may use different synonyms to describe what frugal means to us.

Do you see frugality as a good thing? If so, similar words that may come to mind are thrifty, prudent, penny-wise, or smart with money.

Do you see frugality as a bad thing? Your synonyms might be stingy, cheap, penny-pinching, or tight with money.

Frugality as a Good Thing

When I first started my current job a couple years ago, our ophthalmologist noticed a “new” car in the physicians’ lot at the surgery center. When he learned that the ’06 Chevy belonged to me, he asked if I was one of those frugal guys. I suppose I am. I see that as a good thing; I’m not sure he does, although he seemed to be more curious than judgmental.

There seem to be two types of people in this world: those who feel good when they spend money, and those that feel good when they save money.

early retirement for doctorsI see the dichotomy all the time. The former camp will boast about the $300 massage they enjoyed, the $200 bottle of wine they shared, or the $100 shirt they’re wearing. You can see that it makes them feel good to spend that money, or at least to be able to tell others how much they spent.

Those of us in the latter camp are more likely to boast about how little we pay for cell phone service (mine runs $13 to $15 most months), the good buy we found at the liquor store (Sierra Nevada Snowpack mixed 12-pk for $8.98), or how we are flying our family of 4 to Orlando with credit card introductory bonus miles (happening in 2 days!).

The Opportunity Cost of Being a Spendthrift

When I was a resident, one of our attending physicians shared a story about buying a pair of khakis in a department store after he got his first real gig as an anesthesiologist in the 1980’s. They were $110. The point of his story was how good it felt to be able to spend that money and not care about the price tag. Some residents nodded their head in acknowledgment and admiration. My brain started calculating how much that $110 could be worth after 20 years of compounding, and how dozens or hundreds of decisions like that could be so costly over the long haul.

About five years later, my friend with the penchant for expensive pantaloons called me to inquire about locum tenens work, which I had a fair amount of experience with. He was probably in his early sixties, but still needed the income. That fact probably had more to do with his failed marriages than clothing choices, but still I felt a bit sorry for his situation and I was reminded of his story of the overpriced pants.

I can’t tell you the psychology behind it, but I think some brains’ reward systems are wired very differently when it comes to spending. I get a dopamine release when I find a good buy or avoid what I deem to be wasteful spending. You might get a rush from buying the Coach purse or Tag Heuer watch you’ve had your eye on. I cringe when the cost of four flights goes up $600 because I waited a day too long. You don’t sweat it; you’re a doctor after all.

Frugality: Nature or Nurture?

Which camp you fall into probably has a “nature” or genetic component. Cavemen who could ration mammoth meat over several months were more likely to survive a harsh winter compared to those who devoured a fresh kill every two weeks, living bison-to-bison when the bison hunting was good.

I think the “nurture” component is probably a more significant contributor. Our parents instill their money habits in us. Depending on our relationship with our parents, we may someday emulate their spending patterns or rebel against them. Some who grew up without a pot to piss in may overspend to make up for their meager upbringing. Others from a similar background may have been happy without means, and continue to live a modest lifestyle despite a high income.

Growing up in a household of spendthrifts may likewise lead one to continue those indulgent ways despite not being able to afford the lifestyle. They don’t know any other way to live. Siblings from the same household may see that their previous lifestyle was a house of cards, and as it comes crumbling down, change their ways to live more frugally.

There are some tangible benefits to frugality, particularly in the pursuit of Financial Independence. I’m not going to tell you that you must be frugal, or that it’s a purely positive trait to possess. When taken too far, frugality can cause you to miss out on worthwhile experiences. Frugality can be a hindrance to fun and can lead to hours wasted in search of a slightly better deal. Like so many endeavors in life, there is a point of diminishing returns when applying principles of frugality.

The Law of Diminishing Returns

The truth is, when your income is in the range of a typical physician’s, frugal choices in your day-to-day life don’t make a huge difference. Early bird discounts, discount groceries, and thrift store clothing are all fine and dandy. You might cut $500 a month from your budget by shopping wisely, and that adds up to $6,000 in a year.

$6,000 is a lot of money. This is the part where most articles will tell you that after 25 years earning 8%*, you would have nearly half a million dollars ($478,683 to be exact). Nothing to sneeze at, for sure. Now consider, that at a physician’s salary, that $500 a month should be the difference between putting $60,000 or $66,000 a year towards your debt or retirement, or if you’re a super saver, it’s  the difference between $160,000 and $166,000 a year.

If your savings rate on a $200,000 to $400,000 salary is a lot less than $60,000, you’re doing it wrong.

Now, if you’re doing it right, and putting away $60,000 a year, you’ll have $4.78 million after 25 years of steady 8% gains. If you make little sacrifices every week to put away an extra $6000 a year, you’ll end up with $5.27 million. If your gains are 7.4% instead of 8%, you’re right back to $4.78 million. All big, big numbers. Way more than you should need to retire, and more than I aspire to have.

The lifestyle of someone with $4.8 million is probably indistinguishable from that of someone with $5.3 million. Also, notice that a difference of just 0.6% in return will cancel all of the “scrimping” you did on a regular basis for 25 years.

*8% is higher than I use for most projections, and volatility will lower your compound annual growth rate, even if your average return is 8%. Additionally, I don’t plan on a 25-year career, but I had to go out a ways to get a reasonable effect of compounding. This example wasn’t meant as an affront to frugality. I make frugal choices all the time, but these numbers illustrate that a latte-a-day isn’t actually going to break the bank at the salary a physician enjoys. It’s a lesson I understand, but haven’t really learned.

How can frugality make a difference for a physician?

Think big. Your home. Your cars. Private schools. Second homes. Second wives.

These are the things that can bust your budget. An expensive home costs more to heat, cool, maintain, and improve. Property taxes are higher. You might get your money back when it’s time to sell, but as many of us learned in the last decade, that is not always the case. Cars depreciate the moment they leave the lot. Public school tuition is 100% less than private school tuition. Owning two of anything rarely makes you twice as happy as having one.

Relative frugality when it comes to the big stuff can make a huge impact on your ability to reach your financial goals, a fact well illustrated by the 4 Physicians. Lifelong coupon clipping and reusing dryer sheets (or is it dryer lint?) will have a minuscule effect compared to living in a reasonable home and driving non-luxury vehicles. As long as you “pay yourself first” and save somewhere between 20% and 50% of your salary, you will be in excellent shape in good time.

Again, I’m not trying to make an argument against frugal living here.  Frugality has its merits and I am largely frugal by choice and habit. Sometimes I need to remind myself that I won’t get ahead in life by buying a Baconator at Wendy’s because the coupon gives me a free soda and fries if I do.  Or not to beat myself up over paying $10 to park and avoid making my family walk a half-mile through the slush. We’re doing the big things right. Sometimes it’s OK not to sweat the small stuff.

What are your thoughts on frugal living?  Does it feel better to save or spend?  Are your habits learned or were you born this way? Comment below!