Financial education has never been a priority in the U.S. According to a Ramsey Solutions report, only 17% of Americans say they took a financial literacy course in high school, and 88% say high school did not “adequately prepare” them for how to handle money in the real world.
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As a result, it can be hard to know which financial advice is worthwhile when it comes to social media and financial TV shows. For example, “getting frugal” by giving up your daily cup of coffee is often touted as a path to long-term wealth. But is it really true? Here's the financial reality behind this idea.
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Frugality makes you rich
Americans ages 55 to 64 have an average retirement account balance of just $185,000. But Aon Consulting Group calculates that the average American household needs to save at least another $470,000 to maintain their standard of living in retirement. Can frugal living help make up the difference? Probably.
Finance luminary Dave Ramsey estimates that not drinking Starbucks coffee every day could save you $63 per month, $766.50 per year, or $22,995 over 30 years. If you instead invested that $63 per month at a 10% annual return for 30 years, you'd save an additional $142,410. This alone would go a long way toward closing Aon's estimated $470,000 retirement savings gap.
Ramsay isn't the only one encouraging people to cut back on spending to boost their savings. Kevin O'Leary, the famous “Shark Tank” investor, tweeted, “Stop wasting your money on $5.50 coffees and $15 sandwiches. Pack a sandwich, skip the fancy latte, and watch the savings grow.”
While no one eats coffee and a sandwich every day, if you could theoretically save around $17 by making these things at home each day, that would save you $510 per month and generate $1.1 million in savings.
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Or is that even possible?
Not everyone is on board with the idea that giving up your daily coffee or sandwich is the path to long-term wealth. Besides the fact that many people feel that their daily Starbucks is a necessity, not a luxury, giving up anything “good” or “enjoyable” reduces the quality of life. Financial experts like Ramit Sethi, for example, say there's a better way.
Sethi specifically criticized O'Reilly's tweet, tweeting back: “Kevin, try telling them you made your own coffee to increase your net worth.”
Sethi's argument is that building long-term wealth isn't about saving money, but about creating a budget that works for you and allows you to invest enough. Sethi's argument is not just that you won't make millions by saving $3 or $5 here and there, but that you want to enjoy life along the way. That's why he doesn't support the “Financial Independence, Retire Early (FIRE)” movement, which sacrifices too much quality of life. For Sethi, earning a $30,000 fortune or augmenting your income with a side hustle or business is the true path to wealth, not denying yourself the simple pleasures.
Is there a middle ground?
Saving enough doesn't have to be an either/or proposition. You don't necessarily need a huge income to save seven figures, and you don't have to forgo all of life's little luxuries in order to retire. By taking a balanced approach, you might be able to enjoy life now while also saving enough for retirement.
According to the US Department of Labor, the average salary in America was $59,384 as of the fourth quarter of 2023. Imagine your working life was like this: your average salary in your 20s was $30,000, in your 30s $40,000, in your 40s $50,000, and in your 50s $60,000. Saving 5% of your income every decade would bring you 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. Investing these amounts at a 10% annual return would put you at about $925,000 in your retirement account, just shy of the legendary $1 million figure.
This is a smart investment strategy that allows you to invest relatively small amounts consistently to reap the benefits of compounding. How do you save that money every month? One strategy is to invest any “extra” or “found” money you have, like a year-end bonus or tax refund. Another is to follow the example of self-made millionaire Jonathan Sanchez. Sanchez says that frugality is about “not wasting money on purpose.” That's why he never spends money on new cars, fast fashion, surplus food, or low-quality “investment items” like mattresses or refrigerators. He also makes better use of his time by delegating easy tasks that cost a little more.
After all, a long-term investment plan is the path to true retirement wealth. To get there, you have to find a way to save money. Frugality can help, but it's not enough.
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This article originally appeared on GOBankingRates.com: Can Being Frugal Make You Rich?
