Oversaving (is That Even a Thing?)

stuffed-piggy-bankAre you saving too much money? First of all, for many folks, that seems like such a ridiculous question in the first place. Many folks aren’t saving at all and many more aren’t saving enough; but saving too much? Is that really a thing?

I absolutely think so. Saving shouldn’t just be something that you do– it should be something that you do with purpose. Like I’ve said countless times in regards to our financial lives, it’s important to have a plan. That includes how and why we are saving.

First of all, your savings account shouldn’t be thought of as an investment. Not with rates the way they are today. If the goal of your money is to grow through investing, then you should be actually investing it. Your savings account, primarily, should be used as curveball protection for the things life throws at you that are unexpected expenses.

Now, that being the case, does that give us a target number we should save to? Maybe. There’s a semi-common thought among financial counselors that says you should have six months’ worth of take-home pay saved up. That could cover a LOT of curveballs. I definitely like that as a goal. Another semi-common, similar suggestion is that you should save six months’ worth of your monthly bills, as opposed to your income. Either one of those is a good goal, I’d say. And one way to accomplish either of those goals might be setting a sub-goal to save up 10% of your take-home pay each month until you hit that target. (The math works out that it would take you exactly five years to save up six months’ worth of take-home pay at 10% savings per month. Obviously, if you could save more, you’d hit that goal faster, but five years is a decent time frame. In order to save the same amount in a year, you’d have to save 50% of your take-home pay, which is very likely impossible.)

Beyond hitting some type of goal like that, if you are still just continuing to save, I’d argue that you’re probably making a mistake (unless you are saving with other specific goals in mind, like a vacation or something.) Consider putting more money into your retirement, so compound interest can get to work for you. Consider paying off your home faster, which would improve your cash flow, allowing you to address your values. (In fact, if those were my only two choices, I’d put more money into my retirement before I paid off my home that much faster. I’m 25-26 years from paying off my house and I’m also probably 25-26 years from retirement. So I’d get compound interest on the bigger rate rolling for me, in that case. A gross generalization says that you’re more likely to see a bigger return, over time, by investing as opposed to paying off the house, depending on the rates. If a mortgage is at 4% and investments are accruing at 7%, it’s easy to see which one has a better return given a similar time period. But as with everything finance-related, your individual circumstances make up the basis of the right choice for you. Ask someone you can trust to help you figure out what the right move is.)

Another variable not to be lost in all of this is whatever other debt you might have. I prefer a “balanced attack” when it comes to personal finance, which means paying fairly equal attention to all areas of your financial picture: budgeted, month-to-month spending; savings; investing; and debt. They’re all important. If you have credit card debt, I’d recommend that you pay that down before you start worrying about making extra house payments.  If 10% of your take home pay is going to savings, I’d recommend that you make sure you are also applying some significant amount to get out of debt, too. You don’t want to save too much at .03% interest while your credit cards are cooking away at 25%– but you also don’t want to not save, at all, because you leave yourself open to one of life’s dreaded curveballs. Like I said: balanced attack and address your values.

I think the big point here behind everything is that you should do all financial things with a purpose. Save with a purpose. Spend with a purpose. Invest with a purpose. Pay off debt with a purpose. Purpose leads to motivation, motivation leads to change, and change leads to financial peace. I’m here to help.

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