There is a fine line between being frugal and cheap. On the surface, the two can be mistaken to be interchangeable, but in reality, they’re not. The mindset is different and in this post, I’ll be going over what sets them apart and how that affects investing style as well.
What Is Being Frugal
Being frugal is about getting the most value out of a purchase. Value in this case is a mix of quality, efficiency, and price. The bottom line of being frugal is to strike the right balance between quality, efficiency, and price to derive value.
What Is Being Cheap
Being cheap is about putting the price as the bottom line. The lowest price wins. Put another way, when it comes to value the price matters the most, while quality and efficiency is put on the side.
Different View in Value
Cheap and frugal look at value differently and that is what sets them apart. Value in this context consists of a mix of quality, efficiency, and price. Someone who is cheap put nearly all importance on the price category. Someone who is frugal would put emphasis on quality, efficiency, and price and might give more weight to one depending on their personality and circumstances.
To get a good idea of the difference let’s go through an example and step through the mindset of being cheap and being frugal. Bob and Alice need to make a bike purchase for them to get around town. Bob went to the store and bought the cheapest one in the store. Alice went to the store and pull up some reviews for each of the bikes in her price range. After a bit of research, Alice purchase a bike that has great reviews and was in the middle of her budget.
Both Bob and Alice used their bike to get around town daily. Almost every single week, Bob complains about the chains falling off and he needs to fix it. Alice on the other hand has not encountered any problems with her bike.
In this example, Bob was being cheap and end up with a bike that is not reliable and ends up causing him trouble on a weekly basis. Alice was being frugal by having a budget and did some research to find out how good each bike was. Alice was able to find a bike that suits her need and is reliable.
Cheap and Frugal Can Overlap on Occasions
Once in a while, there will be times when being cheap and frugal can lead to the same purchase. Such situations are when there are very limited options. For the case of the Alice and Bob example, suppose there were only two bikes to choose from. One was out of budget for Alice and Bob and the other is not. In such a case, both Alice and Bob would pick the same bike to purchase. This type of situation can lead to confusion between someone who is frugal and someone who is cheap.
Being Cheap or Frugal Affects How You Invest
So, you’re probably thinking how in the world did being cheap or frugal lead to investing. Well, the answer is that it defines your mindset. Someone who is cheap thinks differently than someone who is frugal and that leads to different characteristics and personalities.
Someone who is cheap would likely put more emphasis on short-term thinking and may overlook red flags. This characteristic mismatch would make someone who is cheap a terrible investor as the price overshadows everything else. However, this can make someone who is cheap a good trader as they can identify what is cheap and sell when it is no longer cheap in short time frames.
Someone who is frugal would likely do more big-picture thinking and analyze the overall value of a company. This characteristic would make the person a terrible trader in a short time frame. However, they would make a great long-term investor as they look at the big picture direction for a company along with their valuation.
I hope this post help clarify the difference between being cheap and being frugal. If you found this post helpful, share it with others so they can benefit too.
If you’re new to investing and need a guideline to help you start your investment journey you can check out my post on setting yourself up for financial success. It is also important to have the right mindset when it comes to investing. To learn how important your mindset is you can check out this post on the topic.
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