Are you saving too much: where is your ‘enough’?

I know, I know! In a realm where saving is a major virtue – bordering on dogma – this question may sound as heresy. Nevertheless, it keeps popping up in my mind lately: can we be saving too much? Surprisingly, or not, my answer is: yes, we can be saving too much and some of us are. In fact we can be saving too much in two different ways – as a result e.g. we can have too much savings, or as a process in that we can be saving so much that we are making our lives less abundant and our spirits poor. I’ll discuss these two aspect of saving too much in two articles and this is the first of these.

Let me emphasise from the outset that I believe saving to be a virtue. However, as Socrates would say, moderation in all things is an even higher virtue. So, I am not questioning whether we should save or not, or whether we should have some savings or not. My point is entirely different; it is to make you, my readers, think about how much is your ‘enough’ and whether you can have a life of plenty (but not a life of waste) whilst squirreling away some of your income.

Let me now tell you what do I mean by having too much. I believe that we ought to introduce here two different situations: a) having too much savings generally; and b) having too much savings as in ‘dead’ money, e.g. money that is not working for you but only gathers dust (figuratively speaking) in a savings bank account. Whilst I believe that the latter is very important issue – how to decide how much of our wealth we keep as easy access, liquid savings and how much we invest or lock in – I believe that it is so important that it deserves a separate article (and it is on its way, I can assure you).

Hence the emphasis here is on whether you have too much savings generally.

Naturally, the first question to ask is:

What does it mean to have too much?

I believe, that one has too much when they have stored away more than they may need to live the rest of their lives as they wish to.

Sounds a bit abstract? Not really, this only means that to work out your ‘enough’ you need to ask yourself the following questions.

Do you believe in inheritance?

My parents did and I am certain that quite a few amongst my friends and acquaintances believe in leaving inheritance as well. My experience with this one is not that positive, I am afraid. My parents saved all their lives and probably didn’t experience life to the full. Why? Because they wanted to leave something behind and had decided that this is inheritance. They had money in the bank – the inflation (and devaluation) of the early 1990s completely wiped this away. They had real estate and land: now we, their heirs are still trying to sell it all without much success.

I believe in leaving a legacy not inheritance; this is why we have been helping our sons get education and begin their independent lives (well, we have another one with us but we will do the same for him). After all, money has value only to enable life and I would rather do that when my sons need it than leave inheritance.

If, however, you believe in leaving inheritance you will have to factor this in your calculations. And let’s face it, if you answer yes to this question you may as well stop reading – you cannot have too much.

How old are you?

Whether or not you have too much depends on how old are you. If you are in your 30s and want to become financially independent, putting away 1 million is not going to cut it. In fact, even putting away 3 million is not going to cut it but this will depend on the lifestyle your want for yourself and on how well this money is invested; if it is in a savings account you should be very careful with your hopes.

On the other hand, if you are 75 and have 1 million – liquid and easy access – it is likely that you will be OK. which brings me to my next point.

Do you think of retirement income or money to live on?

When thinking about the time when we don’t sell our labour any longer (are not in paid employment) – be it because we have decided that we’ve done this long enough or because we have become too elderly and infirm to do it – most of us think about retirement income. This presupposes some kind of investments – be it private investments or investments in pension funds.

Tell me about it! I have been worrying about my pension – my retirement income – for the last decade or so. Not that I have any real reason to worry about it or that worrying brings some benefit. Still, I only calmed down when I realised that thinking like this is inherently faulty.

For at least some part of our lives – at least for the very last 10-15 years of it – we don’t need income but we need money to live on. This happens to coincide with our Winter  – this is when we are likely not to be able to be productive any longer.

Put in a different way, in the Winter of our lives we can liquidate our assets and live on them. After all, I have not heard about anyone successfully taking their assets and investments in the after-life (if there is such thing at all).

What is the life you want to live?

This is a key question if one is to decide where is their enough; e.g. if one is to make sure that they don’t have too much. At the same time, this is a question that each of us can answer for ourselves. There is only one general thing people should watch for when envisaging their life:

What is possible in your life is likely to change dramatically depending on how far down it you are.

If you see yourselves going on cruises and living life in the high lane this is OK. But remember that there are not too many 80 year olds in the fast lane. Of course there are exceptions.

Are you ready to work out how much you really need using these assumptions? Please do tell – I will spill on Friday.