Frugal or cheap? 5 ways to tell

This post comes from Tim Parker at partner site Investopedia.

There's a fine line between frugal and cheap. Frugal people understand that paying more doesn't necessarily mean a better value. People labeled as cheap wouldn't pay a premium price regardless of the value.

Billionaire investor Warren Buffett is often labeled as frugal. Your neighbor, whose claim to fame is the fact that all of his or her belongings were purchased at a garage sale, is probably cheap.

Here's how to avoid being labeled cheap:

Frugal people know when to pay up. Cheap people look only at price. They believe that the only way to achieve value is to pay less, but they fail to take into account other factors. Frugal people know that sometimes it's best to pay up. A quality mattress may cost more, but the added support and ergonomics may help alleviate back pain. Paying the extra money for a pair of timeless jeans from a premium store may result in longer life and fewer signs of wear.

Cheap people may not be as skilled at managing their money as frugal people are. Let's assume that a cheap person and a frugal person head into an appliance store to purchase a dryer. The cheap person would look for the lowest-price model, while the frugal person would evaluate the energy efficiency and compare gas vs. electric. He may research the model and read customer reviews. Before  he makes a purchase, he will look for rebates and sales at other stores.

The better use of his money may be a higher-priced model, but the cheap person may not see a need to research when the lowest-price, basic model is in front of him. (Post continues below video.)

Cheap people think everything is overpriced. You've been with this person. This is the person who complains to everybody about the cost of everything. If you go to a restaurant,he doesn't understand why a burger is $10. If you take him to a baseball game, he complains about the price of the ticket. Even the candy bar at the gas station is too much. Frugal people may be thinking the same thing, but they understand that voicing it makes them sound cheap. Instead, frugal people don't purchase the candy bar.

Frugal people put people above savings. Have you ever gone out with somebody who uses coupons to save on the price of a dinner? That's frugal and most people wouldn't see that as cheap, but how about the person who uses the coupon and then tips based on the amount after the coupon instead of the original price? Frugal people love to save a buck, but they don't take money away from others to do it.

Cheap people don't buy necessities. Have you ever met somebody who won't go to the doctor because it costs too much? How about somebody who doesn't plan to help his child with college expenses because of the price? Those may be extreme examples, but cheap people may not even pony up for life's basics. Frugal people look to get the best price they can.

Frugal people see the higher purpose. Frugal people love to save a buck, but that doesn't mean they aren't generous with their money. They believe in giving to worthy causes, but will exhaustively research charities to find ones that don't have high administrative costs. Or they might forgo organized charity and give only to family and friends with a real need. (Buffett, for example, has promised most of his fortune to the Bill and Melinda Gates Foundation.)

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Cheap people have a different mindset. They see their money as theirs and they may hold it for the rest of their lives. Their children may speak of them as somebody who rarely gives a gift or helps when help is needed. This may lead to a strained relationship with that parent. Money appears to mean more to them than their relationships with others.

The bottom line
We admit, there is no scientific way to distinguish between cheap and frugal people. There are cheap people we love and frugal people we dislike, but perhaps the best distinction comes from understanding value.

More from Investopedia and MSN Money:

• How to make your first $1 million
• 5 ways to trick yourself into saving money
• Celebrities with big dreams that paid off
• Frugality: The right life choice
• How do your finances stack up?
• When frugality goes too far