People often think of miserly old “Scrooges,” pinching pennies, or stretching a dollar when they hear talk of frugal living. Is a penny saved a penny earned?

Money is Not Linear

Frugality is often thought of in straightforward or linear terms. In other words, a plus b equals c. If you skip that daily $7 daily coffee, you’ll save $49 a week, $210 a month, or $2520 a year.

If we use that same thought process and cut your monthly spending in half, your income will last twice as long. Makes sense, right?

Well, it’s not quite that simple. This evaluation is not incorrect; however, it is incomplete. Penny pinching does add up in the short-term, but the long-term payoff is probably more significant than you realize. This is a result of the time value of money, aka interest. If you invest the money you save, you’ll be stretching that money into something more as it includes interest over time.

For example, instead of just saving $2520 a year making coffee at home, you’re saving $2520 a year plus any interest you’d earn in investing those dollars in a money market or retirement account. That simple $7 coffee could eventually be worth an untold amount. Would you give up that coffee for $10, $20, or $50 in the future?

Time Value of Money

Perhaps saving $50 per trip to see your favorite barista seems like a lot to you right now, and perhaps not. However, it’s worth evaluating how valuable frugality now will be for you in the future. Lowering or cutting your current expenses to save more and utilize interest gains could be the advantage your future self needs to pay cash for an automobile, have a down payment on a home, take that dream vacation, or pay college tuition.

Frugality adds up for retirement, too. Let’s say you have $500,000 in an investment account when you retire. You spend $75,000 a year and have a 5% return. The money will last seven years. However, if you cut your savings to $50,000, the money will last 13 years. But, if you can slash your spending in half to $25,000, you’ll see your money last 62 years! Simply reducing your expenses in half lengthens the time you can live off your initial amount by nearly five times.

It’s also worth noting that a 5% return on your investment is relatively conservative. The average return for the S&P 500 (an index fund made of the 500 largest companies in the United States) over the past decade was around 13.6%. If we factor in a 1-3% inflation rate, your money will still see a sizable increase in value.

If you need to keep your annual retirement expenses at $75,000, you’ll need to save quite a bit more than $500,000. You must decide if you can live on less and save more now for your retirement (possibly even early retirement) or live on less during retirement to stretch your money.

Scrimp to Save?

This concept applies to any monetary goal that could see a benefit from the runaway of time. The money you save now, for the future, is worth more than the cost of what you’re sacrificing today.

It is not a requirement to get as close to zero spending as possible. The choice is yours to stretch your dollar, or not, as you see fit. It is crucial to evaluate the future costs of your everyday spending habits and consider how a few frugal living habits could significantly benefit you. Instead of a penny saved is a penny earned, a penny saved could be a nickel, a dime, a quarter, or possibly even a dollar or more down the road.