You Skip Starbucks & Pack Your Lunches, but is Frugality the Key to Reaching Retirement?
For many, preparing for retirement means spending strictly and limiting unnecessary expenses during their working years. Saving money is important, and people at every income level vary in their ability to be frugal.
You may have heard that simply avoiding small expenses - such as eliminating your daily trips to the coffee shop - can lead to big savings over time. But are skipping on small expenses really the key to reaching your retirement goals?
Let's say you stop buying coffee Monday through Friday, saving $5 a day or $25 a week. In a year, you would (in theory) have accumulated $1,200. Considering that the average savings account has an interest rate of 0.05 percent, according to the Federal Deposit Insurance Corporation, $1,200 a year even with interest would likely not be enough for retirement.
But if retirement is your goal, then acquiring multiple methods for building wealth is necessary. Read on to learn how being excessively frugal may not necessarily help you retire, and what else you can do to better reach your retirement goals.
Potential Issues with Excessive Frugality
Under the right circumstances, renting can be a beneficial move. It doesn’t offer the same sense of permanence as homebuying or the (potentially expensive) long-term responsibilities. Depending on the housing market in your area, renting can even save you money.
However, renting (when not out of necessity) can mean missing out on the opportunity to build equity in your home and take advantage of certain tax benefits. Plus, selling your home offers the potential to make you money in the long run, especially if you’ve made improvements to the property.
Some benefits of renting can be flexibility, consistent monthly expenses, and not needing to handle your own repairs. Some benefits of owning can be stability, tax deductions, and building equity.
Less expensive areas (such as rural areas of small towns) may have fewer job opportunities than expensive areas (like large cities). With that in mind, choosing more affordable housing over the working opportunities of a place with a higher cost of living could potentially impact your long-term career growth and general happiness - especially if you’re limited to certain industries or fields of work. Cities can be more expensive, and you should always work with what you have, but staying close to important opportunities could potentially bring greater wealth later in life.
There’s a difference between being frugal and living cheap.
Excessive frugality may lead to purchasing substandard items that are easily broken. Instead of high-quality one-time buys, you make repeat buys of the same item because of the subpar quality.
Thus, over time, you end up spending more on, for example, buying six $10 pairs of shoes (total of $60) in a span of two years, whereas, you could’ve only spent $50 on a sturdier pair which could last for more than two years.
Cutting back on spending could mean missing out on important experiences with friends and family, such as nights out or weekend trips. Neglecting to let loose and relax (within reason) not only impacts your quality of life, but it could further affect your opportunities. Alternatively, new experiences may help broaden perspectives and improve mindsets.
Remember that time when you binged eat after being on a calorie deficit for two weeks? Or that time when you threw the towel and quit the gym? Now you’re more of a couch potato than you ever were and getting back on track has become harder.
Much like going on a strict diet, frugality can wear you out, or worse, cause you to snap.
As you hold off on that well-deserved pat on the back for doing a great job, you become frustrated with the thought that you haven’t been doing enough and see your goal as too big of an ambition and too far off.
This may lead to burnout, overspending, and impulse buying, causing you to jeopardize what you’ve already worked hard for.
There certainly are benefits to saving. But for some, this means holding onto their money under the mattress. Keeping your money out of a savings account is counterproductive, as the value of your savings will only diminish with inflation. Instead, start by placing the money in a savings account or other investment vehicle.
What Can You Do Instead?
Retirement savings accounts, such as a 401(k) or IRA, are a great way to save for retirement without greatly reducing your quality of life today.
Most employer sponsored retirement plans will give you the option to contribute a certain percent of each paycheck directly into their retirement plan. This is very beneficial for those who struggle to save. You will be contributing to your retirement savings without even realizing it. Your employer may even offer a matching component and contribute to your retirement savings along with you!
Another retirement saving vehicle is an IRA. Depending on your situation, you have the option to contribute to a Traditional IRA or Roth IRA. A Traditional IRA is pretax (allows you to deduct contributions now) and your investments will grow tax deferred into retirement. Meanwhile, a Roth IRA allows you to pay taxes on contributions now, your investments grow tax free, and, if you follow all of the rules, withdrawals will be tax free in retirement.
If you are considering opening a Traditional or Roth IRA, it’s important to meet with a Financial Advisor to discuss what will best fit your needs.
Investing can be an effective way to accrue wealth over time. But investing should be done in accordance with your personal tolerance for risk, as reaching your retirement goals shouldn’t risk your lifestyle and financial standings today.
Whether focusing on your career, or a side job, continually improving will help prevent stagnation. By continuing to grow, you can expand your skillset and professional value, which ultimately can impact your career satisfaction and income.
It’s common to feel like you’re stuck on autopilot. I recommend keeping a list of short-term, medium-term, and long-term goals written down. This will give you the drive to keep working hard so you can meet your goals.
In addition to being ineffective, excessive frugality can increase stress. Instead, building wealth will help you prepare for retirement and help limit the anxiety created by money.
Saving is an important aspect of wealth, but excessive frugality can be detrimental, especially when it is your only method to prepare for retirement. Remember, if retirement is your goal, then growing your wealth is key. Keep these tips in mind and consult a financial advisor to start building your wealth and securing your retirement.
Investing in the now is as important as preparing for the future. Got promoted recently? Led a successful project? Go ahead and buy yourself a gift or eat out with friends to celebrate. Feeling a bit dazed and having a hard time focusing? Go on and order your favorite Starbucks drink.
Celebrate small wins. Sometimes a well-deserved pat on the back takes the form of one Grande Caffé Mocha.
At MBE Wealth, our financial advisors and planners can find solutions for you to enjoy both the present and future, and live life to the fullest. Learn about the different retirement strategies and reach out to us to find out which works for you!
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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your financial advisor, attorney, or tax advisor. For additional information and disclosures, please visit our website at www.mbewealth.com. MBE Wealth Management, LLC is a registered investment advisor.