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'It's hard to frugal your way to early retirement,' says self-made millionaire who retired at 34

Getty Images | Rebecca Drobis

Hacking your finances — ordering water instead of cocktails, moving to a less expensive area or hoarding grocery coupons just to save a few bucks — has become a bit of an obsession among Americans, especially millennials, looking to get rich and retire early.

Eating $0.69 ramen and skimping on $8 avocado toast isn't a bad idea ... if you're a broke college student. Once you've graduated and hit your 30s, however, it's hard to frugal your way to early retirement.

Why? Because a couple hundred bucks isn't a life-changing amount. The graph below, which uses data from the US Bureau of Economic Analysis, shows that household savings — or whatever income people have left after their spending — has little effect on boosting wealth:

(Data source: Integrated Macroeconomics Accounts of the US; US Bureau of Economic Analysis. Click here to enlarge.)

An abundance mindset can make you rich faster

In 2012, I quit my job in finance and retired at 34 with $3 million. But it wasn't penny-pinching that got me there; rather, it was in large part thanks to my abundance mindset. In the realm of abundance, everything — money, happiness, prestige — is plentiful.

More importantly, those with an abundance mindset make decisions based on the Big Picture. They know that wealth is a byproduct of what they do with their time and money, whether it's investing in real estate or the stock market, working harder so they can get paid more, refinancing their mortgage or starting a side hustle.

Super savers, on the other hand, tend to adopt a scarcity mindset. They make fear-based decisions and avoid taking risks at all costs. They give into lifestyle constraints, move to cheaper cities, choose to rent instead of buy and so on. In other words, they believe everything is limited and that extreme frugality is the only way to get rich.

Life is harder when you only focus on saving money

All those financial gurus who preach that ditching your $5-latte-a-day habit could substantially grow your wealth — and even make you a millionaire, thanks to compound interest — are simply wrong. Let's be realistic: You'd have to forgo a lot of lattes and need a very high annual return to turn those dollar bill savings into $1 million.

I'm not saying you should be wasteful with your money. During the initial stages of my early retirement plan, I stayed in on most nights, ate on an incredibly low budget and shared a studio apartment. But that strategy only lasted for so long.

Based on my own experience — and from what readers of Financial Samurai, my finance blog, have shared with me — here are some potential downsides of trying to frugal your way to early retirement:

  • You get bored. To save on essentials like housing, food, utilities and transportation, you move from a vibrant metro area to a cheaper city. But after some time, things get dull and you start to miss the tremendous amount of culture, diversity and entertainment that were once at your fingertips.
  • You get lonely. While the benefits of relocating to a place with low costs of living is nice, you find it hard to meet new people. (Trust me, the older you get, the truer this becomes.) As a result, your social life slowly dwindles, along with your network of friends and contacts that took years to build.
  • Living arrangements become uncomfortable. To save on rent, you and your partner decide to live in a shoebox apartment. But everything is so cramped that you begin to feel suffocated. Also, because there isn't enough room for personal space, you both find yourselves bickering more than usual.
  • You miss out on real estate gains. Since renting a place is initially cheaper than buying, you talk yourself into doing the former. But this ultimately means missing out on homeowner advantages like fixed-rate mortgages, tax incentives, equity buildup and profits after selling. While real estate isn't for everyone and doesn't always guarantee wealth, the return on rent is always zero.
  • You make less money. Typically, one of the biggest benefits of living in a high-cost city is having access to a wealth of job opportunities with higher pay. If you leave for a cheaper area, those options are no longer available. My advice? Tough it out; stay for as long as possible so you can earn your maximum income potential. Then start thinking about whether it makes sense to move.
  • You miss the window for having kids. I've met a lot of couples who delayed starting a family in order to save money — only to find that, once they've hit their late-40s, their ability to naturally conceive has plummeted. They then have to spend tens of thousands of dollars on medical treatments. But even so, there's no promise things will work out as planned.
  • You can't afford to have kids. Most people don't realize that raising children requires a tremendous amount of time and money — until they do the math and discover that the hundreds of dollars saved doesn't come close to what they need to support a child. Even if you don't have the financial resources, but decide to become parents anyway, you can kiss early retirement goodbye. (My wife and I have two kids and pay $2,380 per month for a platinum healthcare, not to mention the monthly childcare and preschool expenses — which, depending on where you live, can easily cost up to $2,500 per child.)

The smarter early retirement strategy

First and foremost, adopt an abundance mindset. Know that there is plenty of wealth to go around. Stop putting all your energy into "not spending money" — and start seeking and taking advantage of bigger opportunities:

Prioritize your career. Your full-time job is your winning ticket to early retirement, so find something you enjoy doing and devote as much time to it as possible. Grow your skills, impress your boss and build a strong professional network. Become the best in your field so you can get that raise or, even better, land a higher-paying job at another company.

Aim to max out your retirement savings accounts. This is one of the easiest ways for Americans to build wealth, so focus on maxing out your 401(k), IRA, and Roth IRA. If your employer matches 401(k) contributions, at least contribute that amount. Remember, 401(k)s are pre-tax dollars, which means not only is your company handing you free money, but you're also lowering your tax burden by a dollar-for-dollar contribution into your account.

Invest your savings. Once you've taken full advantage of all your tax-advantageous retirement vehicles, it's time to build your taxable investment portfolio. In my opinion, the two most common asset classes that will really help you build wealth are real estate and the S&P 500. The goal is to make prudent investments that will end up generating money for you on its own, so that you don't have to.

Stay on top of your finances. It's vital that you know where your money is going each month. Try to maintain a fixed budget. Check your bank statements. Use a free wealth management tool to track your net worth, analyze your cash flow and manage your investment portfolio.

All these things will help you progress toward early retirement — at least, at a much faster rate than any budget trimming will do.

Sam Dogen worked in investing banking for 13 years before starting Financial Samurai, a personal-finance website. He received a B.A. in Economics from The College of William & Mary his MBA from the University of California in Berkeley. Sam has been featured in Forbes, The Wall Street Journal, The Chicago Tribune and The L.A.Times.

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