The problem for many people is that they save too little. Some, however, are saving too much because they are wasting too much money. Having too much cash can be problematic…
Saving money is always good, but when you have a lot of it, there may come a time when you need to think about how much you should save and where that money should go.
We have written this guide to give you everything you need to know about saving and whether you are saving too much.
Why Is Saving Too Much Bad?
The king of money is cash except when cash interest rates are lower or when prices go up. The cost of living is rising, but your savings remain flat.
The opportunity cost of having a lot of extra cash is high. Your cash balances may be large today, but if they stay the same, they will not outpace inflation and will actually devalue.
Savings that do not earn more than inflation are actually losing purchasing power because inflation is a stealth tax.
It is nearly certain that you will lose a certain amount of purchasing strength every year if you keep all of your nest egg in conservative cash.
Consider the price of a family sedan today compared to thirty years ago. Would you still be able to buy that car if you had kept that cash in a bank for the past thirty years?
It is also important for people hoarding cash to consider the reasons for their actions. What are they trying to accomplish?
Are you intimidated by big-ticket expenditures? Why do you need so much cash when you have such a poor money history? Knowing that too much cash can be detrimental to your monetary security.
When Saving Goes Wrong?
Saving money is always a smart idea. However, if you put too much money into an emergency fund, you might lose money to inflation.
Overstuffed emergency funds usually aren’t worth it. Investing money in other accounts, such as retirement accounts, can make sense.
If you have a large amount of cash sitting around, you may want to consider what you would do with it if your job were suddenly eliminated.
How much could you live on for 6 months without working? This is called your “emergency fund” – the amount you’d need to get by if something happened to your income.
If you have a large sum of money saved, you may want to take a look at your investments. Are they performing well? Do you have any stocks that are down significantly?
If you have a lot of money invested in one stock, then you could potentially lose a lot of money if that company goes under.
Credit And Investing
You should never use credit cards for purchases over $500. That way, you won’t incur any fees or interest charges. Also, don’t charge anything unless you’re sure you’ll pay off the entire balance each month.
You should set aside some money for taxes. When you file your taxes, you’ll have to include how much you paid for things like health insurance premiums and charitable donations.
These items are deductible from your taxable income. The IRS allows taxpayers to deduct these payments from their taxable income.
The best way to avoid paying extra interest on loans is to pay them off early. Paying off a loan before its due date will help you avoid incurring additional interest.
The most common mistake that savers make is putting everything into CDs. While CDs are great for short term needs, they offer little return.
They are not good long term investment vehicles. CDs are safe but they are not very profitable.
Are You Contributing To A Fund?
You might be a compulsive saver if you have a large cash balance in your account and do not contribute to a brokerage account or retirement account, such as a 401(k) or IRA.
Even if you save aggressively for your long-term goals, you won’t benefit if your funds don’t earn a return that outpaces inflation.
Keeping it in a bank earning very little is also risky, if investing makes you feel uncomfortable.
We’re living longer and could have reduced Social Security benefits in the future, so most people will need more money for retirement than they think.
Overthinking
Having enough money to afford things you want but don’t need, but not allowing yourself to purchase them without weeks or months of over-analyzing the purchase, may indicate you’re saving too much.
Suppose an attorney bills at $300 per hour and waits weeks for sales before purchasing a $200 purse. What is the minimum amount of savings you need to secure your future?
They either have exactly what they have today, or they never have enough.
When Saving Is Good?
IRAs are great for saving money. You can put as much as $6000 a year into one.
Your employer might offer matching dollars on your 401K, but if you aren’t contributing enough to earn the match, then this is a priority number one.
If you don’t already have a 401K, you should consider getting one. If you do have a 401K, make sure you are contributing enough to earn the maximum match.
If you decide to go with a Roth instead of a traditional IRA, you’ll have extra flexibility when it comes to tapping your account.
Summary
Save as much as possible while working. When you retire, you’ll still want to save money, but you won’t need to withdraw any of what you’ve saved. You’ll also need less money than if you’d spent more now.
Retirement planning should be based on what you want out of life. You need to know how much money you’ll need to retire comfortably and what you’d like to do when you’re retired.
Your adviser should help you figure this out. It is possible to save too much but that all depends on your financial position.
Financial Disclaimer
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