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.1

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

Housing Mistakes

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.

Reduced Job Opportunities

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.

Quality Of Life

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.

Holding Onto Money

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?

Contribute To Your 401(K)

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. If you choose to have money withdrawn automatically, you’re saving money every paycheck without even thinking about it, and your employer may match a portion of your contributions. By the time retirement arrives, you will have made money from your savings and the extra contributions accumulated from your employer.

Invest

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. We can help you here!

Stay Focused

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.

Maintain A Healthy Mindset

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 feel free to reach out to us for help to start building your wealth and securing your retirement!

Schedule a meeting with us!

- Ken Brown & Michelle Kessel-Harbart

https://www.fdic.gov/regulations/resources/rates/

This information has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the information, however, the accuracy of this information is not guaranteed. All investing is subject to risk, including possible loss of money you invest. Diversification does not ensure a profit or protect against a loss. The information provided in this commentary is for informational purposes only and is not a solicitation to buy and/or sell. Investors must consider the investment objectives, risks, charges and expenses of any investment carefully before investing. Avisen Wealth Management (Member FINRA/SIPC) does not provide tax or legal advice. Please consult your accountant &/or legal counsel for guidance. Avisen Wealth Management, CA Ins License #0E52062