To achieve peak performance athletes need to train. Train too little and they risk lacking the fitness and skills to achieve their full potential. Train too much though, and they risk fatigue and injury. A balance needs to be found in order for the athlete to succeed.
When thinking about money and finances, the typical goal is finding ways to save more. But saving involves forgoing spending today, for benefits in the future. And whilst some level of saving is unquestionably wise, just as with the athlete who over-trains, it is possible to over-save, wasting opportunities to enjoy today, only to end up with far more wealth later in life than is necessary.
I can recall speaking with a guy many years ago who was extremely frugal to the point where it led to his marriage breakdown. His wife was no longer prepared to live an unnecessarily bland existence on the promise of some Nirvana in the future.
This week then, I wanted to explore over-saving. What is it, how to identify if it’s a camp you’re residing in, and how we can go about finding an appropriate balance between spending and saving.
How to define over-saving
Let’s begin by defining over-saving. We don’t know how long we are going to live, and we don’t know what our health will look like in our final years and therefore what sort of care expenses might be needed. For most people, with these considerations in mind, they’d like to know that there’s no significant prospect of them running out of savings prior to reaching age 100. Distinct from our savings, we typically own our home, which provides a secondary form of financial security, particularly in the event of needing to go into aged care.
My definition of over saving then, is when projections indicate you will have significant wealth, over and above your home, at age 100.
Now it could be that a particular goal of yours is to pass on significant wealth to the next generation, and if that’s the case then you may well wish to see an expectation of meaningful assets at the end of your life. But in most cases I would suggest that if your goal is to support future generations, you are likely better off achieving that through funding education expenses, perhaps helping out with the deposit on a home, or gifts, rather than delaying all that assistance until after you’ve passed away.
Are you over-saving?
One way to test if you are over-saving is to run projections based on your current level of savings, and determine whether you are on track to have an unnecessarily large amount of wealth at the end of your life.
It’s not uncommon for us to find when we do this work for our clients, that their superannuation contributions, on top of the compounding effect of their existing assets, is comfortably enough to achieve their goals.
The first lesson then is to crunch your numbers.
The next thing to explore is whether your underlying goals make sense.
Recently I was working with a couple who identified their goal as being to have $100,000 a year of passive income. Now that’s a challenging goal. To accumulate enough investment assets to throw off $100,000 per year would require many many years of savings for most workers. And they had a mortgage to pay off.
When we dug into why that was a goal, and in particular why that level of income was the target, we found that it was unnecessarily high in their case. One aspect we identified was that if they could get the mortgage paid off on their home, then that element of current spending would be eliminated. With the mortgage gone they could achieve their financial independence goal on considerably less investment income, and therefore the sacrifices that would have been required to achieve their initial goal were unnecessary.
I’ve also come across instances of over-saving that was the result of feeling the need to conform, or live up to expectations. Sometimes those expectations can come from family, and other times from the social community you interact with. Reflect on whether this is your driver. Are your goals a reflection of what you want, of what will make you happy? Or have those goals been arrived at under a sense of pressure to get the approval of someone in your life?
Strategies
We want to save enough to ensure we are financially secure throughout the entirety of our lives, and can achieve our goals along the way. So how do we go about finding a balance between spending today, versus saving for the future?
Start by interrogating your goals and ensure that they truly reflect what you want to happen. I find that sometimes people’s goals are determined more by what they think they should aspire to, rather than what actually makes sense to them.
Next, crunch your numbers. How are you looking long term? If you’re savvy with a spreadsheet and your situation is fairly simple, you can probably get a reasonable approximation yourself. If you want to dial that in, or just gain the confidence of having a fresh set of eyes test your thinking, then of course reach out for external help.
A final filter to help you identify potential over-saving is to reflect on what you are sacrificing today to achieve the savings regime that you are currently adhering to. For example if saving 50% of your wage is resulting in you being unable to socialise with your friends on the weekend, perhaps you give some thought to dialing that savings rate back to a level that enables you to enjoy your life, even whilst being financially sensible.
Money is an enabler. Happiness is our goal. Taking a few months to travel around Australia with your kids, backpacking in Europe in your 20’s, or paying for childcare or a cleaner to give you some de-stressing time. These will all dent your savings. But their value can’t be measured in dollars.
You might find this of interest: Can I spend $20,000 every second year on travel and still retire at 60?
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