Updated on 03.04.09

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

Trent Hamm

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.

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  1. Trent, I think the concept of ‘portfolio’ anything is the right way to start.

    You start by taking small baby steps, steps that are most important, and then you build from there. You don’t become a polar bear by jumping in an ice cold lake, you have to train yourself to stand the water. Same thing with frugality. You don’t become frugal by rearranging your entire life, you start with small changes. Eventually small changes add up to big changes, and before you realize it you’re a steam roller of frugality.


  2. Studenomics says:

    To be honest I have found myself engaging in passive frugality many times because it is so simple. Instead of looking for the cheapest vacation spot you can just decide to not go on vacation at all or not buy a car at all.

    However, with that being said I feel that passive frugality is very short sighted. Portfolio frugality will ensure that you save money without compromising the quality of your life.

  3. !wanda says:

    It depends on your personality, right? Someone who is low-energy might find it very easy to start on passive frugality techniques, because not buying stuff doesn’t require energy, while someone who is restless might enjoy implementing the strategies needed for active frugality. Someone who is addicted to shopping might like to begin with some of the portfolio techniques, because initially you’re still buying stuff.

  4. Gabriel says:

    Great tie-in. Everyone has a different personality, and some types of income/frugality will appeal more than others. The mistake that people make is when they lump everything together.

  5. Saver Queen says:

    Interesting conceptualizations. I do all three. But most of the “active frugal” activities I take on are the ones I enjoy anyways, such as cooking and baking.

  6. Saver Queen says:

    Interesting conceptualizations. I do all three. But most of the “active frugal” activities I take on are the ones I enjoy anyways, such as cooking and baking.

  7. That’s a neat way of looking at this. Being the frugal nut that I am, I do a fair amount of all three types. That works for me, though, because I’m highly motivated to save money and reduce expenses.

  8. SJ says:

    Great post!! The breakdown was nice and elegant =)

  9. Kelly says:

    Great Post! I have been doing all three of these types of frugality and didn’t even know there was a name for what I was doing.

  10. Passive frugality is easiest when you are a sentimental person. You refuse to throw away items which are old but still functioning.

    I remember my grandpa as the best representative of passive frugality. He will repair an old fan and television set instead of buying new stuff.

    I am into a bit of all three actually. Portfolio frugality seems to be the most uncertain as my investments seem to be mostly kaput at the moment.

  11. jan rowley says:

    I love this post. You spell things out so they make sense. Like it would be stupid to not save money! Would like your opinion on Welch’s new “AquaJuice”. It is bottled fruit juice with 50% water added. I did a post on it Sunday. I think that is the most ridiculous waste of money. You want something lower in calorie? Try adding your own water!

  12. Debbie M says:

    My favorite kind of frugality is where you find a substitute that you like just as much as what you used to do, almost as much, or, better yet, even better. For example, I’ve had a lot more success and happiness buying ten-year-old reliable model cars than a three-year-old not-so-reliable model car. I find that thrift stores have more variety than malls do and are more likely to have my size. And I like buying things from bulk bins because I can buy exactly how much I want–if I want to try a recipe with an unfamiliar spice, for example, I can buy just the amount the recipe calls for.

    I’d classify this method of frugality as passive because once you do the research or experimentation and make the discovery, the benefits keep coming indefinitely.

  13. Oskar says:

    Once again a very good post, passive frugality is often looked over, if you use the things you already payed for it is free! Even if the cost of replacing the TV or the Computer is small it is higher than the cost of using the old one a while longer…

  14. Chad @ Sentient Money says:

    A quick summary eveyone should take a look at right now.

  15. KATY says:

    Great post, – but the broken lid handle is dangerous, no?

  16. EGD says:

    “Active” frugality could also be described as turning down the thermostat manually instead of blowing $100 on a programmable one. I would like acknowledgement that non-programmable thermostats save money too, provided that you USE THEM.

  17. Todd says:

    Programmable thermostats start at $30, at least where I live. And I’ve already saved many times that in less than a year.
    It’s true that I could have just adjusted the old one manually, but I didn’t. And when you can make something “passive” that was “active,” and still save a bunch of money, why wouldn’t you?

  18. Carrick says:

    I know this was already discussed at length in another post, but I’m always surprised that people use “cheapskate” when they mean “frugality”, and that they use it like it’s a bad thing. I mean, what’s wrong with trying to save money? What’s wrong with wearing things out until you buy a replacement? It’s good for the environment, it’s good for your bank account… I’m not seeing any negatives here.

  19. Craig says:

    Once you can work on the active income, then you can concentrate on the passive income in all areas.

  20. Mule Skinner says:

    @EGD — I adjust the non-programmable thermostat; but I make other heating adjustments too. Doing so makes me go to the basement, thus getting some exercise on the stairs.

    I had a programmable some years ago, but after the original battery wore out, I was never able to find a replacement that would last long, so I eventually switched back to a simple thermostat.

  21. Mule Skinner says:

    @Debbie M — I am intrigued by the idea of the ten-year-old reliable car. I think you are on to something here, although finding one that old that really is reliable might be a challenge.

    I actually own a ten-year-old car that I bought new, and I can vouch that it is reliable. But it’s not for sale!

  22. I’m not sure if I would income rental income as source of passive income UNLESS you have a property manager and they handle everything for you.

    I enjoyed the post!

  23. Chris says:

    Dustin is right, I believe very few people who own rental property would agree that the rental income they receive is passive.

  24. Diane says:

    If you’re going to buy a new car, taking good care of it and keeping it running & reliable for 10+ years sounds like a good form of frugality to me.

    I currently have a 3 yo van that I bought new for a great price. I take good care of it and I hope to keep it reliable for a long time to come!

    I’ve done some things that qualify for each of your categories – changing out most bulbs for CFLs, insulating the water heater, using/wearing things longer, growing some vegetables.

    My best advice for passive frugality is stay away from malls & stores unless you have a specific purchase in mind. I CAN go shopping without spending, but why? No point in seeing things that I like & want, but don’t want to spend money on.

    Finding things to do at home that you enjoy is a good way to be frugal – gardening, walking the dog, grilling & eating on the patio, riding bikes, having coffee/tea & reading the paper on the patio all keep us busy & happy at home, spending less money than going out. (Yes, we like to be outside… we live in the South, so we can do these things nearly year-round.)

  25. Nice transition of the concepts. I agree with you on the upfront investment and long-term dividends of portfolio frugality . . . just set it up and forget it!

  26. Leszek Cyfer says:

    Maybe naming the types of frugality help somebody, but it is making simple things complicated.

    What rings true for me, especially in the comments is the cheapskate/frugal thing. We live in neurotic times, and throwing things away is one of example of inability to stay calm and be here and now.

    Well, to make a starting point it is okay to get rid of all the excess, the “stuff” that springs from whimsical buying sprees and is never used but instead crowds every corner and shelf.

    But the things that we need, that we use, have to be sturdy, comfortable, nice and chosen for longevity of use. The good quality furniture, utensilia, clothes and tools can last for many, many years. And price is not representative of this longevity – as someone pointed out the really sturdy stuff is easiest to find in shops with used things.

    Someone have said that the ‘sentimental’ people have it easier to keep things longer. I fully embrace this notion. Living frugal you are not surrounded by a throng of objects but a handful. It is easy to get into a relationship with nice, dependable, faithful things. You grow to like your unbreakable coffee mug, with delicate wear signs. It is your, recognizable, faithful mug that you would be sorry to part with because it served you for years and was a part of many happy and so-so mornings giving you strength to carry on…

    And so what if someone calls you sentimental for that. It’s healthy, it’s firm, good, here and now, not neurotic ‘I have to have’ the newest, coolest latest, trendy stuff that everybody uses or happy people on TV use it.


    Keep only things that you like, that you are sure of and harbor good feelings for. The rest is a moneysinking quagmire of “stuff”.

    Be sentimental :)

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