For many Americans, the dream of being able to retire at all, let alone retiring early might seem impossible. Just trying to get by on a daily basis can be a struggle, which is highlighted by the stats showing that 4 in 5 Americans live paycheck to paycheck.
In theory, retirement planning sounds straightforward.
- Maximize your income.
- Minimize your expenses.
- Invest the difference.
Follow those three steps consistently over a long period of time and before you know it, you’d have a nice little nest egg waiting for you at retirement.
But clearly, this doesn’t tell the whole story. It sounds a bit too simple, right?
While this may make your prospects sound grim, pursuing financial prudence is still a worthwhile pursuit. I’m not saying it will be easy, but the best things in life rarely are. If you ask me, achieving financial freedom and being able to live the life I want sounds pretty amazing and easily worth the effort.
In truth, people often become too focused on the second step: minimizing your expenses. They believe that the answer to their financial problems is to be frugal. In a way, it’s the easiest of the steps to conceptualize.
I’m going to tell you straight.
Being frugal alone is likely not going to get you to retirement. Penny pinching isn’t the answer.
Earning more money takes effort and sounds like work. When’s the last time you wish you could spend more hours at your desk working instead of being at home with your loved ones?
Investing sounds complicated and risky. American’s also don’t think they earn enough to even invest.
So, as humans, it’s only natural that we take the path of least resistance. Coupon clipping, getting rid of cable television or cutting down on Starbucks coffee. You get my drift.
Bear in mind that if you’re basing your retirement on how much you spend now using the 4% rule, then that is how you may need to live in your retirement. If you’re only eating out once a year now, then the likelihood is that won’t be able to do more often than this in your retirement.
Being frugal now means you need to be just as frugal in the future. Many people forget this.
Does this mean that being frugal and saving money is a waste of time and fraught with peril? Absolutely not! It 100% needs to be a part of your long-term strategy life if you’d like to achieve your financial goals as soon as possible.
What I am saying is this: be realistic about the financial limits of frugality but also the lifestyle constraints and implications it will have on your life once you’re retired.
Another thing to consider when being too focused on frugality is its effect on relationships, be it with a spouse, family or friends.
Once you’ve trimmed away the big excesses in your expenditure and have no more easy wins, then you might begin to tighten the belt to a point that no longer makes sense.
No gifts this year. At all. For anyone.
No more date nights.
The list can go on. Most people don’t have the discipline to get to that point though, and that’s okay.
In truth, your proficiency at earning and growing your income can play a much larger role on your ability to retire. It’s kind of funny that everyone is in a rush to retire and leave their day job, when it’s that very job that is allowing them to save for the future. This doesn’t even take into account the major role that 401(k) contributions play in retirement planning.
However, your work isn’t done once you get that job. Hate it or love it, many of us get too used to our monthly paycheck. We enter cruise control and stop pushing ourselves.
We get overly comfortable and we stagnate professionally, greatly hampering our earning potential.
We end up neglecting our job and focus on the small wins frugality provides instead of seeking bigger opportunities.
Improving yourself and developing a network to get that pay rise, promotion or new job will help you progress towards retirement more than any amount of budget trimming will do.
Think of frugality like losing weight. The first few pounds are quick and easy. After a certain point, each extra pound takes a hell of a lot more effort to shift. This effort could be better spent on maximizing your income.
Once you’ve secured the best possible income from your job, it’s time to focus on a second income or side hustle. One personal finance writer even recommends charging your kids rent.
Now you’ve got your budget squared away. You are in perfect frugality harmony: not spending too much, but not saving too little. You are killing it at work and getting the pay you truly deserve. Your side hustle income is growing.
Sorry to break it to you, all of this still might not be enough for you to retire.
The old saying of “cash is king” does not apply here. Cash, when it comes to saving for your retirement is definitely not king.
This is because the value of cash gets eroded with time due to inflation. $1 today is worth less than $1 in ten years time. Its value rots away. By leaving your money in the bank or under the mattress you are losing valuable time and money.
This is why the difference between your income and expenses must be invested. Expenses are just one part of the wealth building equation. Do not forget the other two parts: maximizing your income and investing the difference.
What you invest it in depends on your risk tolerance and your time horizon. Someone retiring in 30 years could be more adventurous in their investing than someone planning to retire five years from now.
Recognizing the limits to frugality is vital to your retirement success but also your happiness. I am not advocating wasteful spending. Just don’t fool yourself into believing that being frugal alone is a sure-fire way to ever-lasting financial freedom. You’ll only be disappointed. Worse still, you’ll work for much longer than you want, robbing you of your precious time.