This is why savings rates are north of 75% on this site. Let’s say your after tax income is 30000 and you save 80%.
Year 1: Spent 6000, Base 24000.
Year 2: Spent 6000, Base 48000.
Year 3: Spent 6000, Base 72000.
…
Year 6: Spent 6000, Base 144000. The base is now yield 5760 per year.

I didn’t include compound interest.

Those who only save 15% will spend 65 years to get a sufficiently large base. Saving 30% will take 35 years of work. The reason is that 1) With smaller savings rates, you’re spending a lot more and so need a lot larger base. 2) You’re saving relatively less.

One of the main arguments for frugality is to realise that every dollar you spend could instead be used to earn additional dollars through wise investing. Of course, bare essentials such as food and shelter are always necessary. And then you have the never-ending debate between “enjoying” your money while you still can instead of hoarding it away.

My philosophy is that if you are not at least trying to limit your expenditures and saving more, then you have no right to complain about your working lifestyle or envy those that do attain financial independence.

I am doing a combination of re-earnings and re-re-earnings, boosting my monthly dividends to cover my slightly increased expenses in the 2 years I have been living off them. By building in this monthly surplus, I can keep the principal intact and grow it a little with what I reinvest from the re-earnings.

This summation of the underlying mindset really speaks to me. People often comment that it’s not worth picking up a penny from the ground. I always stoop down, pick it up and think to myself “this cent represents the annual interest on a dollar; so a small portion of my capital just increased its ROI.” Kind of like re-earning but an order of magnitude smaller.

Once you’ve accumulated enough wealth to live off your unearned income (eg. retire) it’s fine to spend all the first-order REAL (ie. above inflation) interest or dividend income, as you don’t really need to be accumulating any more wealth at that stage.

It’s only in the intermediate stages where people might consider using second-order investment earnings to supplement their earned income, but I still don’t think that’s a good plan, as you are sacrificing earlier retirement date for some extra consumption during your working years.

Anyhow, the question of living off first-order or second-order investment returns is less important that what level of investment return you attain. For example, someone who invests a million in a bank account with an after-tax return that barely keeps pace with inflation would not achieve any increase in real net worth over time, as there wouldn’t BE any second-order real income. On the other hand, someone who invested the million in a diversified high-growth mix of assets that returned, say, 2% above inflation could spend part of this first-order investment income (up to 2%pa) and still maintain or slightly increase their real net worth over time.

Finally, the chances of a significant number of people actually sticking to a plan of living off second-order (or even first-order) investment income is pretty low based on historical results. Otherwise there would be a lot bigger proportion of the population living the lifestyle of the idle rich — sitting back and living off the second-order income of investments made by their forebears. A more realistic plan for most people would be to consume all first-order income and some of their investment capital during retirement, aiming to only leave a small inheritance for the descendents to enjoy.

@ debbie m – So if you get $1000 think of it as $40 a year until the end of time. I got a post called the true cost of coffee addiction that explains it in more detail. I have calculated it in terms of lifestyles too. I like to add a multiplier, since I gather that I can get 3-4 times more for my money than a person who does not shop for specials, etc. There are actually quite a few people who find a job in a high cost of living place (like Vegas) and live in their car. They can earn and save tremendous amounts of money.