There are some expenses you can't live without like food, rent, clothes etc. Holding cash in a deflationary (and non fractional-reserve) currency may be the equivalent of a savings account in a bank.

But hey, if people really did decide to lead frugal lives in order to save money, capital would expand faster in areas more essential to human existence. Consider it as a shift toward long-term goals rather than short-term gratification. Of course, the longer the timeframe, the harder it is to predict future demand, so there is a limit to how future-oriented people can get.