Will Skipping Starbucks Get You Retirement Ready?

A lot of us feel like we need to watch our spending and cut out unnecessary expenses to prepare for retirement. Everyone knows saving money is important, but people at every income level vary in their ability to be frugal.

Lots of advice says that simply avoiding small expenses - such as eliminating your daily trips to the fancy coffee shop - will lead to big savings over time. But will skipping those small expenses really be the key to achieving your retirement goals?

As an example, say you quit buying coffee on your way to work. This will save you $5 a day or $25 a week. In theory, one year from now you would have $1,200 stashed in your savings account. 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 finding multiple methods for building wealth is a necessity. 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. 

Excessive Frugality and  Potential Issues

Housing Mistakes

Renting can be a beneficial move, but only in some circumstances. The sense of permanence you feel as a homeowner isn’t achieved as a renter, but you also won't have the same (and potentially expensive) long-term responsibilities. Depending on the housing market in your area, renting could 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. While home improvements can be costly, you will reap the rewards when you eventually sell your home.

Reduced Job Opportunities

Rural areas of small towns and other less expensive areas to live may have fewer job opportunities than expensive areas, such as  large cities. If you choose more affordable housing over the working opportunities of a place with a higher cost of living, you could potentially impact your long-term career growth and general happiness. Lots of people in the DC Metro area live in West Virginia or Pennsylvania and commute, but who wants to sit on the Beltway for that long? 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

You could be missing out on important experiences with friends and family, such as nights out or weekend trips if you’re so focused on cutting back your spending. Make sure to think about including fun in your budget. 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 are definitely benefits to saving. But for some, this means hoarding money under the mattress or burying it in a can in the backyard. Keeping your money out of a savings account is counterproductive, as the value of your savings will only diminish with inflation. Instead, start by putting the money in a savings account or other investment vehicle. 

What Else Can You Do?

Contribute To Your 401(k)

Savings accounts geared toward retirement, such as a 401(k) or IRA, are a great way to save for retirement without greatly reducing your quality of life today. You can have money withdrawn automatically from your paycheck so you’re saving money without even thinking about it. Even better, 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 a very effective way to accrue wealth over time. It is important to note, 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. Most financial advisors have an easy way to calculate how much risk you should be taking and compare it to the risk you’re actually taking. It’s an important conversation to have.

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. This will in turn allow you to save more for your retirement. Keep your eye on the (retirement) prize! 

Maintain a Healthy Mindset

In addition to being ineffective, excessive frugality can increase stress. Constantly worrying about saving a dollar here and there isn’t good for anyone’s mindset. Instead, focus on building wealth. This slight change in your way of thinking will help you prepare for retirement and help limit the anxiety created by money.

Saving is an important aspect of building wealth, but excessive frugality can be detrimental, especially when you make it your only method to prepare for retirement. Remember, if retirement is your end 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.