Saving Too Much Is a Big Problem

The Idea that Saving Too Much Is Not a Problem Reveals a Deep Flaw in the Old Money Management Model.

Most people think of financial freedom as a number. “When I have x number of dollars saved, I can retire.”

Saving Too Much Is a Mistake

It doesn’t work like that. If it worked like that, the x number would be the same for all of us. That obviously is not how it is. Some of us feel that we need to save x to attain financial freedom, some of us feel that we need to save y, and some of us feel that we need to save z.

How do we come up with these numbers? We look at how much we are earning today and then we estimate how much we think we will be able to save by the time we want to retire. Whatever saving number it seems possible to achieve without too much strain is the number we choose as “required.”

There is no required amount. If you were willing to live in the way that people in third-world countries live, you could declare yourself financially free today. If you were to adopt Bill Gates’ retirement desires as your own, you would never be able to retire, even if you saved every penny until you reached 100 years of age.

The amount that you need to save to be able to retire is not a requirement imposed on you. It is a choice. You decide how much you need to save to attain financial freedom.

It’s a choice you make by weighing multiple variables. Your desire for a comfortable standard of living presses you to choose a big number. Your desire to save the amount chosen without too much struggle presses you to choose a low number. The number you choose is a compromise generated by a weighing of the pros and cons of choosing higher or lower numbers.

The purpose of this site is to help you make better-informed choices. It does not make sense to force particular choices. Discussions of force do not belong in articles posted to this site.

How do we evaluate whether you are spending too much each year or saving too much each year? By determining whether the choices you make are in line with your particular life goals and with your particular financial circumstances. Given the realities that prevail, there is an ideal amount of saving that applies for you. If you save less than that, you are saving too little. If you save more than that, you are saving too much. It is just as much a failure to manage your money well for you to save too much as it is for you to save too little. Both variations from the ideal cause a diminishment in the value proposition you obtain from the money you earn.

It's Spending That Makes You Rich!

The idea of saving too much is rarely discussed in the conventional literature. The old money management model (the Sacrifice Saving model) is all about forcing saving. In a force-based model, it is not possible to save too much. Saving is good and the more of that good that can be obtained, the better.

I reject the old model as unrealistic. The purpose of money management is not to induce saving. It is to induce a good balance of spending and saving.

Where you begin an analysis often determines where that analysis takes you. The old model begins with the idea that saving too much is not possible. I think it would be fair to say that that model has failed us. The purpose of this article is to explore how beginning with the fallacious idea that saving too much is not possible leads you to a bad place.

No One Is Fooled by the Idea that Saving Too Much Is Not a Problem.

The old money management model seeks to force us to save. It doesn’t work. You might have noticed.

Why doesn’t it work? Why is it that the advice we hear from hundreds of “experts” is so terribly ineffective?

It’s because the model does not make sense. Most of the saving advice we see in books and magazines and web sites does not make sense. It possesses surface plausibility. But it does not get the job done; it does not persuade many to save. What’s up with that?

What’s up is that people have learned to tune out the conventional saving advice. People are not dumb, people are smart. People know on a deep level (even though they rarely articulate the thought) that saving too much is a bad idea. There is a b.s. detector present in all of our brains that filters out saving advice rooted in the idea that saving too much is not possible. We know from our life experiences that this is nonsense and that causes us to be more than a little suspicious of any money management model that puts forward such an idea.

The experts say: “Saving good, saving good, saving good.” We think: “yeah sure, yeah sure, yeah sure.” We do not believe what we are told by most money advisors because we cannot make sense out of what we are being told by most money advisors.

Sacrifice Saving Doesn't Work

For saving advice to work, it must make sense. The idea that spending is bad and saving is good does not make sense, it does not line up with our personal life experience. The idea that there is a right amount to save, given our particular life goals and our particular financial circumstances, does make sense. Once you accept that saving too much is possible, all sorts of doors open to you.

Saving Too Much Means Passing Up Opportunities.

My favorite money management saying is: “It’s Spending that Makes You Rich!” Those six words get to the heart of why it is that saving too much can be such a terrible mistake.

If the goal of money management were to achieve the cheapest version of financial freedom possible, we all would do without just about everything, attain financial freedom at age 30, and live in huts the rest of our lives. The reality is that money management is life management. We want to live! We want to live more than we want to be financially free. Financial freedom appeals, but fortunately for us we are all too smart to fall for the idea that financial freedom comes first. We want financial freedom on our terms.

That’s why I say that financial freedom is a process, not a number. Say that you worked through some numbers this weekend and determined that you need $1,000,000 to declare yourself financially free. Then say that on Monday an angel came down from heaven and handed you the $1,000,000. Would you then be financially free?

Probably not. Once you had the $1,000,000 in hand, your idea of what financial freedom requires for someone in your circumstances would change. You would rework the numbers the following weekend. You would elect to pursue a higher level of financial freedom that would require savings not of $1,000,000 but of $1,500,000. The angel’s gift would have brought you closer to the goal. But it would not have taken you all the way home. The financial freedom goal is an ever-changing goal and the way in which the goal is pursued influences the future shaping of the goal.

It’s a process. You finish school. You make note that you need to pay rent each month to be able to sleep in a nice apartment. You apply for a job, and secure one. You earn more than you need just to pay for the apartment. You put a down-payment on a house. You get a raise. You ask a Cool Girl to marry you. You have snoopsters. You fall deeply in love with them. You work harder. You get another raise. And so on and so forth, forever and ever, Amen.

That’s reality. That’s how it happens in the real world. It’s a mistake to think of working and saving and investing as entirely different subjects. They are related. Earning more makes saving easier. Saving more makes investing more important. Investing well eases the pressure on you to earn by working. It’s a circle of life/money management. Consider any of the numbers generated at any of the points on the circle out of context with the others, and you make a muddle of things.

Spending Generates Compounding Returns Too

Saving doesn’t just buy freedom. It also buys opportunity. Fail to spend on a nice suit when you go to that job interview, and you pass up the opportunity to do more rewarding (both financially and otherwise) work. Fail to spend on a nice ring for the Cool Girl, and she might need a day to think over your proposal (not because she’s a gold digger, because she doesn’t want to wake up one morning and find herself in bed with the Grinch). Fail to spend on Legos for those snoopsters and they’ll never give you a minute’s peace when you’re trying to do all that dumb stuff that Dad does on his computer.

Saving buys opportunities. Saving too much means passing up opportunities. Saving too much hurts you in serious ways.

Saving Too Much on the Wrong Things Discourages Saving the Right Amount on the Right Things.

Your friend asks you to join him on a trip to see the Orioles. You say “no” on grounds that the money is not in your budget. It ends up being a boring Sunday. Somewhere in the back of your mind you begin wondering if this saving business is all that it is cracked up to be.

Effective saving is life-affirming. Effective saving is fun. If your saving effort is generating doubts as to the wisdom of saving, you are going about it wrong. When you are going about it right, each new act of saving makes you thirst after more opportunities to turn on the juice. Saving should beget saving. If saving is begetting regret, you need to change the way you save.

I’ve said “no” to Orioles games. I’ve said “yes” to Orioles games. The idea is to say “yes” when the value proposition is there and to say “no” when the value proposition is stronger elsewhere. How do you learn how to assess value propositions effectively? Through experience. You learn by doing.

If you are following a saving model in which saving is forced, you are not comparing value propositions. You are not learning how to make good choices. This is the most important of money management skills. You must develop this skill to attain financial freedom early in life.

If you accept the idea that there is no such thing as saving too much, you are not comparing value propositions. You are deciding up front (as part of your choice of a money management philosophy) that saving is superior to spending. You are cutting out the comparison of value propositions that otherwise would over time turn you into one of the world’s great savers. Don’t do it!

Maximizing Fun Units

I’ve give you an example of the sort of thing that you might learn by comparing value propositions. You might learn that you get a major kick out of going to one Orioles game per Summer, but that the value proposition heads south after that. If that’s so for you, then you are leaving life enhancement on the table to attend fewer than one Orioles game per Summer or more than one Orioles game per Summer. For you, failing to spend the money required to attend one Orioles game per summer is saving too much.

Saving Too Much and Spending Too Much Are Two Sides of a Single Coin.

People often criticize “mindless spending.” How often do you hear people find fault with “mindless saving?”

The two phenomena are different sides of a single coin. It is not spending that is bad, but mindlessness that can make it bad. Mindlessness can make saving bad too.

I received an e-mail today from a community member who is seeking to turn things around and become an effective saver for the first time in her life. She asked me for some suggestions on what to do. I pointed out that many saving experts would give her a list of tips with a call to get working on them. I said that that sort of thing does not produce results, in my experience. My suggestion was that she make a promise to herself to revisit the site on four future occasions and to spend one hour reading the articles posted at it on each of these occasions.

Why the low-key suggestion? Because what matters is one’s attitude toward money questions. There are no steps that you can take in a short amount of time that are going to make a big difference in the long run. It’s how you think about spending and saving that makes a big difference in the long run. Small changes in attitude can amount to large amounts of accumulated wealth, given a bit of time to work their magic.

The Dollar Value of Desire

Did you ever see someone trying to lose weight become a fanatic for a week or two or three, eating no snacks whatsoever? It doesn’t work. The person following the strict diet gets sick of it in time and gains the weight back. But there are people who succeed at long-term weight loss. They do it through changes in attitude about eating and exercise. When their new ideas become habits, they have the game won.

To become an effective saver, you need to come to love saving as much as you love spending. You don’t do that by saving too much. You do that by becoming more thoughtful about the trade-offs involved in choosing either spending or saving and by developing the skills needed to save just enough.

Ineffective money management is a vicious cycle. You can bounce from saving too little to saving too much and back again dozens of time. You don’t want to do that. You want to spend just the right amount and save just the right amount. The opposite of spending too much is not saving too much. The opposite of spending too much is saving and spending just the right amount.