Are You Saving Too Much?
“Spend less than you make and save and invest the difference” is still the best one-line personal finance advice out there, BUT what if you are saving too much?
Given the toll financial stress can take on people, saving is incredibly important.
But, as with all things: ~it’s about balance~
I wouldn’t recommend living outside and eating at food shelters just to save 99% of your income.
So, how do you find the optimal save rate between 0% and 100%?
And when you do, how do you confidently spend what’s left?
First, why do some of us have a lean towards saving?
From a conversation with ChatGPT the research I’ve done, a few reasons bubbled to the top:
- Matching how our parents saved money (or over-compensating for their lack of savings)
- Trying to prepare for legitimate, yet overestimated fears of future financial hardships
- Feeling guilty when we spend money, especially if we were raised in a frugal home
- Culturally, saving is the responsible, right thing to do
Whatever the reason, over-saving is out there and potentially more common than you’d think.
So how do we define enough?
For this section I originally spent time writing a detailed way to think through:
- Retirement
- Home buying
- Vacation planning
- Family Planning
- and then backing into a monthly savings number for each of those specific goals.
But I think that excessive detail plays right into the hands of the natural savers.
We crave that detail.
And I’m going to argue that for this exercise we don’t need it.
So here’s how I think we can think through this:
It’s About Percentages
If you overspend, you need to know the intricate details of your finances so you can fix them.
Over-savers don’t need to know the details.
They naturally have good habits which makes excessive tracking unnecessary.
So, let’s pick a percentage to save, automate that saving, then confidently spend the rest.
There will be two parts of your percentage: Retirement and Non-Retirement.
For retirement, the table below provides estimated timelines based on your post-tax savings rate.
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*Assumes 7% annualized return. Actual results will vary depending on market conditions. |
Next, pick your non-retirement save rate.
Non-retirement savings can include a home down payment, cars, vacations, helping friends/family, etc.
I don't know what that total savings percentage should be.
Everyone’s situation is vastly different and I hesitate to specifically recommend a percentage.
But here are some other people’s opinions for you to ponder:
- Most experts recommend saving a total of 20% of your post-tax income (post-tax is what you get when your paycheck hits your bank account). Nerd Wallet, Investopedia
- Studies suggest that extreme savers often struggle to transition into a spending mindset after years of frugal living.
- The book ‘Die With Zero’ argues that money should be used as a tool to create experiences, not just accumulated endlessly.
- Morning Brew’s Money With Katie does an in-depth thought exercise on this topic and believes that saving more than 35-40% is not worth the diminishing returns.
Do some reading from other thought leaders and think about the lifestyle you want to lead.
Once you have your savings automated, spend the rest confidently.
In general, people get more happiness spending on experiences with those they care about rather than spending on stuff. Prioritize those experiences.
Consider setting a percentage specifically for experiences that bring you joy.
Ironically, one of the most fulfilling ways to use money isn’t on yourself - it’s giving it away.
There is no shortage of need in our world.
Aligning your dollars with a cause you care deeply about is potentially the most rewarding investment you can make.
Overall, remember that money is a tool, not the goal itself.
It’s a tool to free up your time, enhance relationships, and create a meaningful impact.
If you’re watching yourself become an over-saver, you’re potentially hoarding a powerful tool rather than using it to build something valuable.
Whatever you choose to use that tool for, I hope this gives you something to think about!
