Is Living a Frugal Life Really The Best Way To Live?

In college, I paid $10 per month for a barebones gym membership. At the time, all I needed was access to cardio and weight machines.

But a few years after I graduated, my routine became monotonous, and going to the gym became a chore. I went less often and enjoyed myself less when I did go. 

A friend suggested I check out her facility. It had everything my current gym had plus two pools, a sauna, a steam room, and a myriad of group fitness classes -- and it cost 350 percent more than my old gym.

After my one-week trial, though, I was hooked. Even though my financial situation had only slightly improved since college (hooray adulthood!), I knew the money spent would improve my overall quality of life. With a little reworking of my budget, I made room in my budget for the gym membership.

Opportunity Cost

When mulling over everyday decisions like this one, we're weighing what's know as opportunity cost. Opportunity cost is the value of the option foregone when you pursue one choice over the next best alternative. Essentially, it’s the cost of the road not taken.

All decisions have an opportunity cost. In my case, the opportunity cost of attending the new gym was keeping an additional $25 in my wallet every month.

Opportunity cost is often misunderstood; whereas some spendthrifts may define it in strictly financial terms, it's actually a far more expansive concept. It's important to evaluate major decisions in terms of how they affect the big picture: your time, health, psychological and emotional states, and general well-being.

When it comes to opportunity costs and frugal living, there is no magic formula for choosing the best option. It’s a highly personal matter, and in order to understand the consequences of your decisions, you need to consider two key issues.

Frugality and Priorities

The first is to acknowledge the source of your frugality. Determine if you are frugal by circumstance or nature. Are you paying off a mountain of credit card debt, student loans, a sizable mortgage (circumstance)? Or are you just not one for accumulating possessions or nights on the town or any other vice (nature)?

Next, identify your priorities in life -- step back and look at the big picture. Figure out what matters most to you. This is where you rank the importance of your finances, time, health and welfare. Would you rather spend more time at work to make more money or spend the same time with a spouse, child, or friend? Would you rather eat fast food tonight because it’s convenient or prepare your own meal because it’s either healthier or less expensive?

If you choose to stay at the office and work, your opportunity cost would be the time spent with a loved one. Should you choose to prepare a healthy meal at home your opportunity cost would be the $5 for the value meal and a greasy burger and fries.

The issue with focusing only on the financial aspect of opportunity is that you may be sacrificing other important factors in your life. If your frugality is a matter of circumstance, you may find yourself with a fatter wallet, but your opportunity costs may be depleting your overall sense of contentment.

This is by no means an invitation to live outside your means. If you are already living paycheck-to-paycheck, don’t go charge a new flat screen TV because it’ll make you “happier.” The lesson to take away from here is you don’t have to slave to save, unless of course it makes you happy. Nobody’s judging you.

Two Common Examples of Opportunity Costs

Buying vs. Renting a Home -- You have $20,000 in savings. The opportunity cost for buying the home is about $18,000 (you would spend $2000 on a deposit and first month’s rent). But there’s more, the opportunity cost also includes minimal responsibility for major repairs (assuming you didn’t cause them), not to mention a certain level of freedom -- you are not tied down to one location.

On the other hand, the opportunity cost for renting would be the home itself, which is something that can appreciate over time, and you have the option of doing as you please with it. You could also rent it out if you wanted to.

Education -- People go to college with hopes the money they make after acquiring a degree will be more than the four years of salary they missed out on. Even with a full scholarship, the opportunity cost for attending college is the four years of salary you will miss and the cost of accrued living expenses.

Living in a consumer-driven culture, it’s easy for money to become a central focus. During an economic recession, money can become the driving force behind your existence. The good news is if you are miserable, you can sit down and modify your budget to accommodate your priorities. If you are budget driven, set aside some money that will give you some freedom to spend. The opportunity cost of this will, of course, be saving the amount set aside, but what is important is what you gain.

You might find a nice meal, going to the movies, or a three-day weekend getaway outweighs the opportunity costs incurred. It just the thing to get your nose off the grindstone, head out of the office, and gain an all around better perspective. Or maybe you just really love to work or save money. And that’s OK, too.

Ultimately, the choice to live frugally is a personal decision, but this choice should be consistently reevaluated and modified to fit your priorities. If you are happy with a cost- conscious lifestyle, then by all means, keep doing what you are doing. Nevertheless, if you’re living frugally and notice discontentment in your life, perhaps you need to rearrange your budget to accommodate what matters most to you.

You don’t need to turn your life into a shopping spree, but you also might not want to squirrel away every penny. The best way to live is the one that finds a balance between responsibility and overall satisfaction.

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Andre is the cautious-frugalarian who runs How To Save Money. He is currently busy developing his budgeting spreadsheet. When not blogging, he can be found exploring the seabed.