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
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 RRSP
Retirement savings accounts 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.
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.
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 consult a financial advisor to start building your wealth and securing your retirement.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.