Yahoo Finance Can Frugality Make You Rich?
Financial education has never been a priority in the United States. According to a report from Ramsey Solutions, just 17% of Americans reported taking a financial literacy course in high school, and 88% said high school didn’t leave them “fully prepared” for how to handle money in the real world.
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One of the consequences of this is that it can be hard to determine which financial advice being dispensed across social media and even on financial television programs has merit. “Being frugal” by giving up a daily cup of coffee, for example, is often cited as a path to long-term riches. But is that really true? Here are the financial realities behind this idea.
Frugality Can Make You Rich
Americans ages 55 to 64 have a median of just $185,000 in their retirement accounts. But based on calculations from Aon Consulting Group, the median American household needs at least an additional $470,000 in their nest egg to maintain their living standards in retirement. Can a frugal lifestyle make up the difference? Perhaps.
Popular financial personality Dave Ramsey estimates that if you skip your daily cup of coffee from Starbucks, you could save $63 per month, $766.50 per year, or $22,995 over 30 years. If you invest that $63 per month at a 10% annual rate of return for 30 years instead of spending it, you’d end up with an additional $142,410 in your nest egg. That alone can go a long way toward making up that $470,000 retirement savings shortfall computed by Aon.
And Ramsey is far from alone in suggesting people trim their expenses to help shore up their nest eggs. Famed “Shark Tank” investor Kevin O’Leary, for example, tweeted that people should “Stop wasting money on $5.50 coffee and $15 sandwiches. Pack a sandwich, skip the fancy latte and watch your savings pile up.”
While no one would likely eat coffee and sandwiches every single day, if you could theoretically save $17 or so from making those items at home daily, that would save you $510 per month, generating a potential nest egg of $1.1 million.
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Or, Can It?
Not everyone supports the belief that giving up daily coffee and/or sandwiches is the path to long-term wealth. Beyond the fact that many people feel their daily Starbucks is a necessity, not a luxury, cutting out anything “good” or “fun” dampens your quality of life. Financial experts like Ramit Sethi, for example, say there’s a better way.
Sethi specifically called out the tweet by O’Reilly, tweeting back, “Kevin, tell them if it’s making your own coffee that led to your net worth.”
Sethi’s point is that it’s not pinching pennies that creates long-term wealth. Rather, it’s creating a budget that works for you that devotes ample money to investments. Sethi’s point is not only that saving $3 or $5 here or there won’t make you millions, but that you want to enjoy your life along the way. That’s why he doesn’t support the “Financial Independence, Retire Early (FIRE)” movement, which requires too much sacrifice to your quality of life. For Sethi, getting the big $30,000 raise or increased income via side gigs or businesses is the true path to wealth, not denying yourself simple pleasures.
Is There a Happy Medium?
Building a sizable nest egg doesn’t have to be an “either/or” proposition. You don’t necessarily need a huge income to generate even a seven-digit nest egg, nor do you need to deny yourself every little luxury in life just so you can retire. By taking a balanced approach, you may be able to enjoy your life as you’re living it while still socking away enough to prepare for your retirement.
According to the U.S. Bureau of Labor, the average salary in America as of the fourth quarter of 2023 was $59,384. Imagine that your work career looks something like this — you earn an average salary of $30,000 in your 20s, $40,000 in your 30s, $50,000 in your 40s and $60,000 in your 50s. If you save 5% of your income in each decade, that would amount to just $125 per month in your 20s, $167 per month in your 30s, $208 per month in your 40s and $250 per month in your 50s. If you invested these sums at a 10% annual rate of return, you’d end up with about $925,000 in your retirement account, just shy of the mythical $1 million figure.
That’s a prudent approach to investing that takes advantage of compound interest on relatively small amounts, consistently invested. How could you sock away that money every month? One strategy is to invest any bits of “extra” or “found” money that comes your way, such as a year-end bonus or a tax refund. Another way is to follow the real-world example of self-made millionaire Jonathan Sanchez, who says being frugal is more about being “intentional and not wasteful.” To that end, he never spends money on new cars, fast fashion, excess food, low-quality “investment items,” like mattresses or refrigerators. He also delegates simple tasks, even if they cost a little money, so that he can use his time more fruitfully.
The bottom line is that a long-term investing plan is the path to generating true retirement wealth. To get there, you’ll have to find a way to set aside the money. Being frugal can help, but it’s not the whole story.
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This article originally appeared on GOBankingRates.com: Can Frugality Make You Rich?
