Active, Passive, and Portfolio Frugality: Where Should One Start?

Active, Passive, and Portfolio Frugality: Where Should One Start?

March 10, 2009 @ 2:00 pm - Written by Trent
Categories: Frugality, Getting Started
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One of the most common ideas expressed in personal finance books is distinguishing between three different kinds of income:

Active income is earned through your active effort - in other words, the money you make from your job. Your paycheck is active income. Income from any side businesses you have is active income. Incidental earnings, like finding money on the street, is active income, too, since you actually had to contribute effort to receive it at all.

Passive income is income that you receive without continual active effort. Income from a rental property is passive income. Book royalties are passive income. A website you set up once, put ads on, and walked away from is passive income.

Portfolio income is income that you receive from your financial investments. Interest from your savings account is portfolio income, as are dividends from your stock holdings or income from selling an investment.

What intrigues me about this division of incomes is that it lines up well with different types of frugality.

First of all, there’s active frugality. Active frugality results from continuous effort and continuous choices to save money. Using a shopping list at the grocery store is active frugality - you have to make up a shopping list each time, but you’re rewarded with the money you save on the shopping trip.

On the other hand, passive frugality is the result of simply not doing something. Choosing to continue to use a crock pot with a broken lid handle is an example of passive frugality. Wearing well-worn socks is another example. Driving your car until it completely breaks down is yet another example. Simply put, you can save a lot of money by simply using things until they’re completely used up.

A third type of frugality is what I’d call portfolio frugality. Portfolio frugality happens when you make an initial investment of time or money into something that will pay dividends slowly over a long time. Installing energy efficient lighting in your home is a form of portfolio frugality. Putting in a programmable thermostat is portfolio frugality. Putting a black cover over the windows in an unused room is portfolio frugality.

From where I sit, most of the negative reputation that frugality gets comes from active frugality (”it seems like a lot of work to save a little money”) and excessive passive frugality (”what kind of cheapskate has holes in their socks?”). Those forms of frugality tend to run more against the grain of mainstream society and meet more resistance from others.

Thus, if you’re getting started on frugality, I recommend trying out portfolio frugality and a few basic pieces of passive frugality. Do things like swapping your light bulbs out, installing a programmable thermostat, and waiting another year or two to upgrade your computer or cell phone.

As you get more and more used to the pleasures of saving money, you can continue to push things until you find your comfort level. Try out higher levels of passive frugality (can’t you get a few more miles out of those socks?) and dabble in active frugality, too (why not make a grocery list before you go? How about cutting out those stops at the fast food restaurant?). Eventually, you’ll find your own comfort level, where you see yourself saving plenty of money but not behaving in a way that makes you feel “cheap.”

Personally, I really enjoy seeking out “portfolio frugality” options. I love doing things up front that continually save me money over the long haul without my active intervention or without any real change in my quality of life.

http://www.thesimpledollar.com/2009/03/10/active-passive-and-portfolio-frugality-where-should-one-start/