What this article covers
Opher Ganel shows that with 38 years until retirement, a dollar invested today is likely worth about $6 after inflation, and spending an extra dollar a day can add more than six months to your working life. Five years from retirement, that same dollar grows to only about $1.30, so the opportunity cost of spending falls sharply. His conclusion: be frugal early, then give yourself more room to enjoy your money as retirement approaches.
Key Takeaways
Early in your career, a dollar spent can cost about $6 of retirement wealth
With 38 years until retirement, a dollar invested now will likely be worth about $6 after inflation, and diverting $1,000 a year from spending to investing could leave your portfolio more than $100,000 richer. Opher Ganel adds that each extra dollar spent also risks lifestyle inflation, which makes the habit costlier still.
Small spending cuts can bring financial independence years closer
In his example, someone saving 20% of income needs almost 38 years to reach financial independence, and shifting another 5% of income to savings gets them there about 52 months sooner. On a $60,000 income that’s $250 a month, or about $8 a day, and every extra daily dollar spent adds over six months of work.
Five years from retirement, the opportunity cost of spending is far lower
Close to retirement, a dollar invested might grow to only about $1.30 after inflation, and investing $1,000 a year until retirement would add about $5,600, barely more than the $5,000 a savings account earning roughly the inflation rate would add. That’s why Opher argues you can afford to spend somewhat more on experiences later in life, after being frugal early.
Especially if you follow various bloggers in the Financial Independence, Retire Early (FIRE) movement, you know that a dollar spent now isn’t just a dollar.
It’s also all the dollars that spent dollar would have brought in had you invested it instead.
If you read my article, Pro Tips for Reaching Early Financial Independence, you realize that this dollar you just spent also risks getting used to spending another dollar like it tomorrow, and the day after, and the day after that… What’s known as “lifestyle inflation.”
What Is the Real Opportunity Cost of Spending a Dollar?
Let’s agree at the outset that certain fixed expenses can’t easily be changed.
Let’s also agree that you may not want to accept the lifestyle implications of changing e.g. your rent or mortgage payments, auto loan payments, utility bills, etc.
However, I’m sure you’ll agree that over the past month, you’ve spent quite a few dollars on things you wanted, but didn’t really need.
I know I have.
If you have 38 years ahead of you before retirement, a dollar invested now will probably be worth about $6 when you’re ready to call it a career, after accounting for inflation.
If you keep adding just one more dollar each year, those will grow to more than $100 in 38 years.
If instead of one dollar, you divert $1000 each year from spending to investing, your portfolio will likely be more than $100,000 richer.
In How Soon Can You Reach Your Personal FIRE Point, I present a table that helps you figure out the real long-term opportunity cost of spending those extra dollars vs. investing them.
For example, if you currently save 20% of your income and plan to live in retirement on 80% of your income (after accounting for inflation), the table shows you need almost 38 years to reach financial independence (FI).
Shift 5% of income from spending to savings, and you’d reach FI about 52 months earlier. If your annual income is $60,000, that means you’d need to reduce your monthly spending by $250 and invest it instead. That’s about $8/day.
Spending an extra weekly dollar costs you about an extra month of work before you can retire.
Spending an extra daily dollar adds over 6 months to your work life.
Why Does the Opportunity Cost of Spending Shrink as Retirement Nears?
The thing is, the above is true if you’re at the start of your work life.
You still have decades ahead of you for every invested dollar to compound, and for every dollar of lifestyle inflation to bite your wallet and your portfolio.
However, if you’re only 5 years from retirement, you’re almost out of time for compounding to help.
The flip side of that is that the opportunity cost of an extra dollar spent is that much less. In this scenario, a dollar invested now might be worth $1.30 in 5 years (after inflation). Investing an extra dollar each year until retirement would add just over $5.60 to your portfolio.
Make that $1000 a year instead of $1, and your portfolio would grow by just $5600. That’s barely more than the $5000 it would add if you put it into a savings account where interest is about the same as inflation.
The Bottom Line: Be Frugal Early, Then Spend More Freely Later
As a financial strategist, I’d never encourage anyone to waste money.
I’d also be careful of suggesting you shouldn’t try to set aside and invest as much as you reasonably can most of the time.
However, what all this means to you is that if you have decades before you may reach FI, now is exactly the time to err on the side of being more frugal rather than less.
When you’re older, you’re closer to retirement, probably making a good deal more money, and maybe past most of your major spending (e.g., down-payment on a first home, raising kids, sending those kids to college, etc.).
At that point, the opportunity cost of an extra dollar spent is much lower, so you can err a bit more on the side of spending some more to experience more fun things, even at the cost of investing less than you could if you stayed very frugal.
After all, as my grandmother would say, “Ever since they invented death, nobody is safe in this life.” Nobody promises us that we’ll actually live to retire, so make sure to enjoy at least some of your hard-earned cash today. Balance your future self’s needs and wants with those of your current self.
Frequently Asked Questions
What is the opportunity cost of spending money?
A dollar spent now isn’t just a dollar: it’s also all the dollars it would have earned had you invested it instead. With 38 years until retirement, Opher Ganel estimates a dollar invested today would likely be worth about $6 after inflation, so the true cost of spending it is much higher than its price tag.
How much does extra spending delay retirement?
In Opher Ganel’s example, spending an extra dollar every week costs about an extra month of work before you can retire, and an extra dollar every day adds over six months. Conversely, shifting 5% of a $60,000 income (about $8 a day) from spending to investing could get you to financial independence about 52 months sooner.
Why does the opportunity cost of spending shrink as you get older?
The closer you are to retirement, the less time each invested dollar has to compound. Five years out, a dollar invested might be worth only about $1.30 after inflation, and $1,000 a year invested until retirement adds about $5,600, barely more than the $5,000 it would add in a savings account earning roughly the inflation rate.
Should you be more frugal when you’re young and spend more later?
Opher Ganel argues that if you have decades before reaching financial independence, now is the time to err on the side of frugality. Later, when you’re closer to retirement, likely earning more and past major expenses like a first home and raising kids, you can lean a bit more toward spending on experiences, since nobody is promised they’ll live to retire.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.