Are You Saving Too Much?
Let me first state, I have no issues about living frugally. My wife and I aren't big spenders. I typically don't wear expensive clothes. I have one expensive watch (which, ironically, I rarely wear). I don't go out shopping that often, nor do I like to shop.
Our cars are nothing fancy. We own a 2007 Honda Odyssey and a 2010 Hyundai Genesis. The book I just reviewed, “Stop Acting Rich” , says the most popular car among millionaires is the Toyota Avalon. Assuming the car will be able to stop, that is the car we were looking to purchase.
In many ways we fit Thomas Stanley's “The Millionaire Next Door” profile. I think it's great that Thomas details the life of an average millionaire and differentiates them from the glittering rich. Last year we saved over 30% of net income (that's before taxes).
I suspect the audience that reads my blog saves at least 15% of their net income per year. If you aren't, you should be doing this at a minimum to ensure a decent retirement. From the research I've done, if you save 30% of your net income you'll be pretty set. Of course it's relative to your net income. For most people, it's easier to save 30% out of $250k net income than out of $50k a year.
How Much Is Too Much?
When it comes to saving, is there such a thing as being too frugal? Is it possible to save too much per year? At what point are you saving too much? One way I've looked at it is saving should have an end goal in mind. What's the purpose of saving?
After all, it makes no sense to be the richest man in the graveyard. When you die, you can't take it with you. I'm not saying you shouldn't leave money to your children, relatives and your favorite charity. But wouldn't it be better, while you are alive, to give a portion of your money to these people?
Unfortunately, you never really know when your number is up. Today you could get hit by the proverbial bus while crossing the street, and your savings will be for naught. Shouldn't we plan for tomorrow because in most cases tomorrow will come? In addition, shouldn't we also live for today — the here and now?
This is something I've wrestled with for many years and come to the conclusion, like most things in life, it's about balance. I should save and set specific goals yet also not be afraid when I hit specific targets to buy some material things.
We have set up savings goals for some of the material things we would like to have in our life. If you work hard and make sacrifices, shouldn't you be rewarded in the end? We aren't doing it to impress our neighbors or friends. We are doing it for ourselves.
For example, I've always wanted a nice big-screen TV for the media room in our basement. In 2009, I setup a goal of how much income we needed to make and how much we needed to save for the year. We hit both marks and rewarded ourselves by buying the TV.
The TV wasn't cheap and came to $5,000. Could I have taken the money and saved it instead? Could I have invested the money into some stock, bond or business? Of course, yes, but how much do I want sacrifice in my life?
The classic saying, “You can't take it with you,” is something that should always be considered. We met our yearly goals and rewarded ourselves in the process. In Thomas Stanley's latest book “Stop Acting Rich and Start Living Like a Real Millionaire” (which I just recently reviewed) he states:
I don't mean to suggest that one live like a miser; the occasional guilty pleasure is perfectly acceptable. If you work hard and save accordingly, you should enjoy a treat from time to time. The problem is people have come to enjoy the guilty pleasure every day to the exclusion of working for a financially independent future.
My recommendation is paradoxical: plan for tomorrow, but live for today. You never know when your number is up. This applies not only to money, but any aspect of your life.
Readers, what do you think about being frugal? Is it possible to save too much?
Nothing wrong with rewarding yourself. My wife and I worked hard to pay off over 100k of debt (and saved for retirement at the same time). Afterwards we bought a timeshare. We have a favorite vacation spot and it was something i had my sites on for years. We used it for the first time last year and it was so satisfying. It was a celebration, a reminder of years of frugal living.
“Last year we saved over 30% of net income (that’s before taxes).”
You mean gross I’m assuming?
Yeah, you're not alone. I think (and have blogged, sometimes in morbid detail! 😉 ) often.
Unlike most people I find it very easy to save, and to delay gratification. It's in my genes I suppose. You sound similar, Investor Junkie.
Your strategy of having a specific saving target for 'fun' things is a good idea. I generally thinking budgets are pointless faffing that don't work (unless you're falling into debt and don't know why/how you're spending, and even then I'd often advise simply cutting off all the taps and eating beans until you turn +ve, then start adding things back).
A general 'fun fund' though — might help for me. Something to consider!
Personally I don't think you can save too much, but you can not spend enough. What?
If you save so much that you are not enjoying life, you never have fun then why bother. If you can save 80% and still find enjoyment, even if it means living in an RV and cooking all your food from scratch, go for it!
Investor Junkie, you have found your balance. You deserve kudos for achieving your goal and living life. That's where we all need to be. But what you did right that so many do wrong is you sacrificed first. You worked and saved first, then you enjoyed!
Lately, I am neither too frugal or saving too much. Thanks, I needed an article to help me regain focus. 😉
I think you made a wise decision with your TV purchase. You made a goal, hit it and bought it. I think there needs to be a common ground to spending your money as much as saving. I mean, we work work work… we should be able to savor our earnings a bit. 😉
Yea that's the point I'm trying to get across. Believe it or not I researched the hell out of the TV and was really on the fence to buy it. I was debating to save the money instead. If not I would had to buy a picture to replace the empty spot on the wall 😉 I'm glad I did as we are using it on a daily basis.
Hmmmm…. my father drives a 1998 Toyota Avalon!! Oh my gosh, maybe he's secretly filthy wealthy! Thanks IJ! I might have to retire now.
So does buying the car make you rich? It comes with one million in the trunk! 😉
Most of the families have a lot more goals than just saving for retirement, i.e. kids college fund, the next big home improvement project, the next ultimate vacation. The list goes on and on and on. So there will be short,mid and long term saving goals. If you look at all of these goals, 30% is really not that much trying to achieve everything. The Key is to have specific numbers in mind and work from there..
Long term retirement goal is 3 million in 30 years
Mid term college fund goal is $250K in 15 years
Short term home improvement goal is $50K in 3 years
Then, work backwards to figure how much to save right now. and how to allocate the money in different funds depending on its time horizon..
Hi Kayla, Yea have an end goal in mind is really what's important and silly me I don't mention that 😉 You are correct it's not as simple as I mention in the post.
Plan for tomorrow but live for today is exactly what I do. I’ve had the experience of seeing family members die young, which emphasizes to me that I should make sure to do the things I enjoy now, and not wait for some distant future that may never come. On the other hand, I also have family members that made it into their 90s, so I see the importance of plannng for a faraway future as well. Happy mediums are nicer anyway.
To answer your question though, while I do believe it’s possible to save too much, most people have the opposite problem.
Definitely, it possible to save too much! I think it's a matter of plotting out a financial plan and following it through.
Hmmm, I just read the comment chain starting with Evan, and I'm in total agreement with both of you! You're only young once and if you have the means (or offense) to still save the proper amount (use a spreadsheet), spend the money to enjoy life while now. Nobody want's to go skydiving or go motorcycling when they are 80 years old. 😉
Exactly, so why spend most of your waking time on the job, when you're young? Weekends are not enough for me.
Do what you love and the money will follow. If you aren't liking the job you are at, find another one. In your case, can I ask why you started looking for a job? I assume it's because you want a purpose and not income. Hence there are other reasons to having a job.
I think there is a difference between being frugal and saving too much. Some are frugal so they can invest – check out Extreme Early Retirement's Blog for an example of this.
Hi Evan, Though my point is when does it become saving too much? I'm frugal too. I know John Templeton at one point saved 50%, but had a specific goal in mind.
I just checked out:
Hmm not what I was thinking in terms of frugal. In fact I think way too frugal, at least to have decent lifestyle. Living on 9k yearly is not the type of lifestyle I want. Just as people spend too much and go into debt, I believe the other way is not good either.
Isn't he nuts?! That is not my style either, but it is really interesting to see a different person's point of view. I am all about 7m7y (he is on your fav blogs). Just an amazing insight into a really wealthy guy.
I'll take the best offense (grow income) and defense (be frugal) to grow my wealth. Not live like a hermit. IMHO that's not living either.
And then there are people who spend too much and go to work 😉 I don't. Lifestyle is not necessarily correlated with consumption or spending money for all people. I do admit this is the case for most Americans, but there are other lifestyles. For instance, I get up and go to bed when I want, I read about 3 books a week, I sail (yacht racing) once a week and practice martial arts three times a week, I'm writing a book and I am on the board of directors for a think tank. I would not have time for that if I lived the work-spend lifestyle with 40 or 60 hours on the job, so I decided early on to have money work for me rather than working for money, hence the large savings rate. However, saving more money now would not make much sense, hence I'm not working anymore. In summary, I saved as much as many people do over a lifetime. I just did it in 5 years instead of 30.
Hi ER, thanks for visiting. I'm not dissing your lifestyle, it's yours and you can choose to live it how you wish. It's just not for me, nor I suspect most people. Different strokes for different folks. When owning your own business you should be doing what you love and in the process are getting paid for it! I prefer that method instead.
In addition, if I read correctly the amount you have saved ($250k?), I would rather move to another country that has a much lower standard of living so that amount would go further. I think you would agree living with under $10k is not a reality for most people If you stated 50k, is a more reasonable amount.
I also agree on the amount you saved in 5 years, many don't save in 30 years. I commend you on that! I think that also shows a sad fact about our nation as a whole.