Oversaving is a real phenomenon. It’s commonly fueled by the financial industry who stands to profit from this. The average worker may not be aware of it but the drive to oversave is one of the primary shackles for the current wage slave.
Oversaving is supposed to cure fears, decrease risk, and potentially afford one a better lifestyle.
Financial institutions profit from you working longer and holding more assets with them. Oversaving means that you will:
- spend more years working
- spend more money
- have a larger savings account
- take on more debt
- invest more in a brokerage account
- take on more risks
Disadvantages of Oversaving
Before I discuss the advantages of oversaving, let me state the obvious: in order to save more than you need, you will have to trade more free time for more income.
If time autonomy isn’t a motivator for you, realize that the more you work the more risks you take on.
Work is associated with stress which can negatively affect your health.
There is the risk of lawsuits or accidents on the drive to work.
The longer you live a lifestyle reliant on a regular income, the worse off you’ll be should that income stop some day.
Even worse is the false sense of security afforded by having a large stash. In this new fickle economy plasticity is what matters. It’s better to diversify our skills rather than save more money.
The Concept Of Saving
We generate income and save it in cash equivalents which represents our purchasing power. If I spend all of my earnings during my working years then I can’t accumulate any savings. To save more I would need to budget more strictly.
The banks pulled a bait & switch on us when it comes to savings accounts. For decades we have learned to deposit our money in banks which were in charge of protecting our assets and helping them grow. It was a business transaction. The bank was fortunate to have willing clients who allowed them the use of their savings in order for the bank to turn a profit.
Once everyone bought into the banking idea as a standard, banks started taking advantage of our complacency. They made loads of money by selling high-risk debts and returned ever-lower returns on the money we parked in their accounts. All the while, they were making very healthy profits by lending out our money to others.
Read about how banks make their money.
Saving For Retirement
I see 2 methods for saving for retirement:
- saving enough cash to live off of until death (inefficient)
- living off of investment returns (efficient)
If you set aside $50,000 every year using the first method then you’ll have a cash savings account of $500,000 in 10 years. The money will have lost some value due to inflation over this time. This stash will not continue to grow unless you add more money to it.
Using the second method, you’ll potentially have $730,000 after 10 years of investing $50k annually. This money could then continue to grow until you retire. You could take a little off the top every year to cover your living expenses in retirement.
Inflation
Using the first method it’s likely that the healthcare professional would have a much smaller spending potential due to the effects of inflation. Oversaving in this situation would actually be wise. If you aren’t going to be efficiently invested in the market, oversaving would be advisable.
Even though their savings stash might be impressive, the buying power would be lower since money tends to lose value over time.
The same fast-food burger will cost $20, eventually.
Passive Income
Through a passive income method the balance of the portfolio will fluctuate with the market. However, you’ll continue to see it trend towards the positive as long as the securities market continues to exist.
Inflation won’t be an issue over the long-run since index funds tends to keep up with inflation. You can then spend from your assets by either living off of the dividend yields or combining that with selling some appreciated funds.
If you oversave for this method then you may have traded valuable free time for more income. However, I can make the argument that oversaving has some benefits if they are intentional; let’s discuss that now.
Reasons To Oversave
I am against the idea of oversaving when you are using a tried and true investment strategy for the purpose of having adequate funds in retirement. But if you want to leave a legacy behind or if you want the option of living a much more lavish lifestyle, then it can make sense.
1. Leaving Behind An Inheritance
I am struggling with how best to give back to the world now that I am retired and financially independent. I tried volunteering and it didn’t give me the satisfaction I was hoping for.
Before leaving Portland for Barcelona I decided that earning money and giving it to a good cause would most meaningful to me. Extrapolating that into the future, I would like to not have to touch my net worth so that I can do something even more meaningful with it later.
For my readers who have children, oversaving allows you to leave behind resources for the next generation.
2. Having Extra Money To Donate
I could assign my assets to be liquidated upon my death and dispersed to the causes I believe in.
Alternatively, I could create an empire of investments and businesses which can perpetually generate a solid ongoing income and donate that income to the causes I believe in.
The reason I favor this latter option is that it’s more in line with my passion for passive income. The asset would need to be managed. A competent financial adviser should be able to handle that and a lawyer can disperse the profits as instructed.
3. Aggressive Investment Style
If you are exposing your investment to high risk then you likely will need to save a little more to factor for your portfolio’s fluctuations.
High risk is not exactly the same as excess risk. The latter would be investing in junk bonds and trading options.
High risk investing could be done intelligently. The higher the risk the more fluctuance the portfolio will have. Of course that also means that the returns will be higher.
4. Lack Of Investment Experience
Personal finance hobbyists are adamant that you don’t need a financial adviser. It’s believed that paying for a financial adviser is a waste of time.
If you are an expert investor and know exactly what mistakes to avoid when it comes to your finances then you may not need a financial adviser. However, the road to wealth is treacherous. Having someone guide you might be worth a lot more than the couple hundred dollars you spend on them a month.
5. You Plan On Never Working Again
I think it’s incredibly rare that a high-achieving healthcare professional will never engage in income-generating work.
However, if you are planning on never working again and hiding under your blanket polishing off 40 ouncers then it might be wise to save a little extra. Having that extra cushion will get you through even the longest bear markets.
6. Others Will Get Off Your Back
I assure you that no matter how much you save and invest others will say it’s not enough. At the least the higher your net worth the more ridiculous their reasons will become.
“$1M? Nah dude! You’re a doctor, you can’t retire off of that!”
“Yea $2M is great but what you gonna do if you get cancer tomorrow and need a $1M experimental therapy?”
“$8M? Yea I mean it’s good but with that much money you’re like every lawyer’s target. What if you get sued?”
7. Curb Your Own Fears
I’ve pulled the plug on traditional employment and I have less than $1M saved up. There are panic moments when I think that $1M is not even close to enough.
Having more can help you feel more secure. Sometimes the feeling of security is hard to justify but incredibly worthwhile emotionally.