Ask the Readers: Can One Save Too Much Money?

A new thread on Canadian Money Forum involves a question that got me thinking –  “Can You Save Too Much Money?” which originated from a Globe Investor case study article.  In the case study, Lucinda has well paying job, she is a  big saver, and has a lucrative defined benefit pension.  A financial advisor crunched the numbers, and determined that Lucinda will have a significant nest egg by the time she is 90.

By the time she is age 90, the planner calculates, Lucinda’s investments will total $3.3-million – and she’ll still have her condo as well.

So the question is, with so much capital remaining at the end of Lucinda’s life, is it possible that she’s saving too much money?  It’s challenging to quantify “too much” as it’s subjective with everyone having their own opinion.  The fact of the matter is that people form habits that are hard to break.  Frugal people will naturally save money and spending the extra money will be foreign to them, even challenging.   Whereas people who are more liberal with their money would consider Lucinda to have a mental condition as they cannot imagine holding onto so much money without buying the next greatest thing.

It could be that Lucinda lives within her means, buys whatever she needs, and her income happens to be significantly greater than her required expenses. Or it could be an extreme, where she is a miser who puts saving money in front of all of life’s enjoyments.  More than likely, it’s somewhere in the middle.  But even so, is it wrong to accumulate that much capital just for the sake of accumulating?  Or should one spend the extra money just because it’s available?

As the title of this blog suggests, we are focused on building wealth (and likely you as well) through saving and investing.  I’m frugal, use many saving strategies, and a capitalist at the same time. As a result, we have surplus cash equal to a large percentage of our take home pay which is directed towards increasing our net worth.  We may occasionally buy things that are slightly greater than our needs, but overall, we keep spending in check.   Do we save too much money?  Perhaps to some, but to me, it’s about living a balanced today while working towards a financially free tomorrow. Having money means security and buying certain freedoms.  For accumulators, in the end, the money can be used as a legacy for the next generation.

So back to the question, can one save too much money?   It’s a tough one to generalize, but I’ll give it a shot. My thoughts are that if someone is already frugal, saving too much is when they sacrifice the happiness of themselves and/or others for the sake of keeping more money in their pocket.

What are your thoughts?  Is it possible to save too much money?  What is your definition of saving too much?

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Frugal Trader

FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Jake Long
7 years ago

It’s good to save, but sometimes you have to realize that using that extra money can provide more opportunities to enjoy life. Having enough extra money to invite the extended family to a beach house is a great way to get people together and have some fun. I think it all comes down to a balance on a personal level. And by personal I mean the individual and their loved ones.

Jen @ Master the Art of Saving
9 years ago

It’s quite likely that she won’t live to 90, maybe her reasoning is to leave the money to an heir. It does kind of seem that she might be missing out on life and all the fun stuff she could be doing while she’s younger.

I think “saving too much” is when you don’t allow yourself to enjoy life now because you’re too focused on saving for retirement. Just my opinion though. :-)

Sustainable PF
9 years ago

I think it is impossible to define “too much”.

For us, we have a plan which we execute. Excess is used any way we want to use it.

Gordon Hughes
9 years ago

Many of our generation (Boomers) wasted our marriages, family relationshios, and even our health chasing symbols of success.
Many have accumul;ated way more money than they need.
Still others have squandered more than they could afford buying tose symbols of success.
Real success is having a well rounded life.
A great read was ‘Bring About What You Think About’ by Eddie LeMaoine

Satish
9 years ago

I think there needs to be a balance. Often we hear stories about someone who just passed away with millions of dollars in savings but lived like a poor lonely person with no family. If being a miser alienates your friends and family, then you will need to re-evaluate if you are saving money for the sake of a target number or for achieving happiness and financial freedom.

RJ
9 years ago

I contribute to a company pension (DC), my own RRSP and my own TFSA.
My wife contributes to her DB pension (Ontario Teachers).

Including the employer contributions of those pensions (5% and 3 or 4% respectively), we save 36% of after-tax. I always used to think teachers had the easy-street pension but 10% of the contributions are right off their paycheques.

I’m 29 and she is 27. We have a 5 month old and daycare costs will likely put a dent in this once she returns to work in January.

I find this rate of savings very difficult to maintain. The active savings (vs. passive pension savings) is all me. Her only savings are in the pension. We do live below our means and the bank accounts tend to grow over time a bit but that 36% is our retirement-devoted savings.

Leigh
9 years ago

@Splitsec I live in a state with no state income tax, which puts me in the 28% marginal federal bracket. Some of that total savings amount is from my retirement contributions. I live off of $36,000 per year after taxes and savings. My housing expenses are more than half of that because I live by myself in a high cost of living area. Living in a lower cost of living area would probably halve my housing costs, but then I’d probably also end up with a huge commute or a lower salary.

You might think I’m saving too much, but I’m spending more than enough money on the things that matter to me, investing for retirement, and saving towards buying a house in a few years. I doubt I will be able to save that much of my income when there are renovations to do on a house or children to feed an clothe, so I’d rather save more now. Spending $3,000 per month as a single person isn’t a small chump of change as far as I’m concerned.

Kanwal Sarai - Simply Investing
9 years ago

I agree with @My Own Advisor, life is for the living and you only get one shot. I don’t see the point of saving so much money that you end up living in a cardboard box. There is also no point in living like a millionaire on a middle class salary. Life is all about balance.

Sarlock
9 years ago

Given that this result of $3.3m at age 90 was a financial projection based on current circumstances, job earnings, expected retirement age, estimated return on investments, future inflation rate, etc, it’s a pretty subjective debate. There are a lot of “ifs” with those estimations and one would assume that as she gets closer to retirement, she can re-evaluate her financial situation and choose to retire earlier, save less, etc… and probably not end up with said $3.3m at age 90.
But, ultimately, it just means that her retirement portfolio will be sufficient size that it will slowly grow through her retirement years instead of shrink. If she retires with $2m in investments at age 60, earns 6%, has an expected inflation rate of 3%, she will earn $60,000 per year from her investment portfolio (eliminating the impact of inflation eroding the purchasing power of her portfolio). If she only spends $40,000 per year in retirement (above her CPP/OAS), this means that her investment portfolio will grow by $20,000 per year. Times 30 years, plus compound growth, we roughly arrive at the value determined by her financial advisor.
I wouldn’t say $2m in retirement funds at age 60 is a huge stretch and $40,000 per year + CPP/OAS isn’t an extravagant retirement income.
Adjust a few of those above parameters, investment yield down from 6% to 5%, inflation up from 3% to 4% (right now, you can’t even MAKE the inflation rate with a GIC or government bond), expected retirement expeditures and we’ll find that her retirement portfolio will have instead have shrunk by age 90.
Having $1-2 million in retirement funds is pretty much par for the course as far as I am concerned, if you want to retire at age 60. You *can* retire at 60 with less, but you have to be prepared for the financial consequences of the type of retirement they have chosen (and many are quite fine with that).

Andrew2
9 years ago

@Splitec

Even by your calculations, $1917 / month is quite a bit of money to live on if you spend it wisely. I don’t think it is that unlikely.

@Paul Meane

Ed Rempel is a financial advisor who makes his living off of encouraging others to invest in specific things. As well intentioned as he may be, his profession puts a bias on the advice he gives.