What started as a save and be ultra frugal to become financially free and retire early has come under fire in recent years.
Content on social media has morphed from investing advice discussing how just investing $5 a day could completely change your life to satire around these strategies and how you’ll never be able to afford the first downpayment on your home even after cutting out everything you enjoy.
Both sides have their merits and valid arguments.
The way they have been presented on social media, however, has made it seem like you have to sit on one side or the other and follow the ideologies to an extreme.
You could either be ultra-frugal and never “waste” a single dime or live only once and blow all your life savings.
But what people need to understand is that these examples aren’t meant to demonstrate that the extremist side is good. You’re supposed to take the good things from both sides and find a middle ground for a higher quality of life.
Cutting Out $5 Lattes Will Never Make You Financially Free
The posts I often see on social media nowadays criticize how advice to cut out your $5 daily lattes or avocado toasts will never make you financially free.
It’s always supported by some basic math.
If you save $5 a day for a year, it only amounts to $1,825. Extend that to five years, and it’s still only $9,125.
Of course, you’re supposed to be investing that money and not just holding onto the cash, but even that doesn’t look particularly good.
A $150 per month investment at 8% interest rates compounded monthly for ten years would become an investment worth close to $28K.
It’s not great when you consider that $28K is only a 20% downpayment for a $140K studio apartment in a less desirable part of town, which is difficult to find right now, let alone in ten years.
Hence, people have been asking, “All of this frugality for what?”
The Opportunity Costs and Mindset
Of course, people tend to miss the point. First, it’s not cutting the $5 latte itself that will make you financially free, but getting into the mindset of being more financially efficient and cost-mindful.
Keep in mind that losses can compound the same way as gains.
These $5 lattes get more expensive over time and especially in combination with other expenses. If you are spending $5 every day on coffee, there’s a good chance that that’s not your only expensive habit.
Frequently ordering delivery, having multiple unused online subscriptions, luxury vehicles, and other expenses can easily turn your expenses from $150 to a few hundred or even a thousand dollars every month.
If we replace $150 with $1K in the compound interest example above, you would have $185K by the end of 10 years. And in just five years, you’d have about $75K.
Of course, you’ll only be able to pull out a thousand dollars in savings if you are already earning a good amount of money to spend in the first place.
But even for those on a lower income, being more cost-mindful is important (even more so) because the opportunity cost of a $5 daily latte could actually be higher than 8%.
8% is about the average long-term stock market return. You don’t have to invest in the stock market with your savings.
If you have a little bit of time, these extra savings can actually go toward upskilling yourself and increasing your own income.
Being Cost-Mindful But Not Greedy
What you should really take away from these hypothetical savings and investing scenarios is that you should be cost-mindful but not necessarily greedy.
You could try to live your life to extreme frugality, but at some point, what does the saved money even do for you anyway?
For most people, we save money to ultimately enjoy the things that money buys. It makes little sense to stockpile money and never use it.
But of course, the problem is that if we spend everything we have, we quickly run out of money and will be miserable in the aftermath.
The key is to figure out what habitual purchases increase value over the long term and which ones don’t. Having a coffee every day might be required to do your work successfully, but buying a $5 latte versus making your own are two different things.
That’s not to say you can’t or shouldn’t buy expensive things though. Every so often does not hurt and can be rewarding. It becomes detrimental, however, if the purchases become habitual.
Treat yourself every so often, but not so much that a treat becomes an essential item.
Financial Disclaimer: The views in this article are the author’s personal views. This commentary is provided for general informational purposes only. It does not constitute financial, investment, tax, legal, or accounting advice or an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with their advisor. The information provided in this article has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Investing in stocks, bonds, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Their values change frequently, and past performance may not be repeated.
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