For many people, saving too little is the problem. However, for others, it’s the exact opposite because they are saving too much. Too much of anything can be dangerous, including stashing excess cash in a savings account or under a mattress.
But how do know if you’re putting too much cash toward savings? To help, consider these five signs that indicate your savings balance is out of control and learn how you can start being smarter with your money.
Why Is It Bad To Have Too Much Excess Cash?
“Cash is king except when rates earned on cash are low and the cost of goods you pay for are rising,” said Michele Lee Fine, RICP, founder and CEO of Cornerstone Wealth Advisory. “The world around you is getting more expensive, but your saved capital remains flat. Being in ‘too much excess cash’ has a cost called opportunity cost. You may be wealthy today sitting on a lot of cash, but as your cash balances remain level, they are not outpacing inflation and actually losing value. Inflation is a stealth tax, and if your savings don’t earn more than the inflation rate, your savings and its purchasing power is actually diminishing.”
Learn More: 50 Ways To Live the Big Life on a Small Budget
Chris Kampitsis, from The SKG Team at Barnum Financial Group, agrees:
“If you keep all of your nest egg in conservative cash — it is near certain that it will lose some spending power every single year,” he said. “Think of the cost of a mid-sized sedan now versus thirty years ago. If you kept that cash in the bank the last thirty years, would you still be able to afford the same car?”
But people who are hoarding cash also need to think about why they feel the need to sustain this behavior. “What is this really about?” said Lisa M. Dieter, CFP(r), founder and wealth advisor, EmberHouse. “Do you need the cash to feel secure? Do you feel unworthy of bigger-ticket expenditures? What is in your money history that could explain the need for so much cash?”
Now that you know that having too much excess cash can be to your financial detriment, here are five signs you are saving too much.
You’ve Become Too Frugal
“Small spending can indicate compulsive savings,” said Hutch Ashoo, founder and CEO of Pillar Wealth Management, LLC. “If you have plenty of cash, yet spend minutes pondering whether to pay a dollar more for huge chips or medium-sized, your spending worry may be obsessive. While being frugal is admirable, don’t sweat the small stuff.”
Your Emergency Savings Fund Is Overflowing
Once you have at least three to six months of fixed expenses saved in your bank account, any more than that is unnecessary,” said Blaine Thiederman, CFP and the founder of Progress Wealth Management. “If you feel uncomfortable for whatever reason, you probably should contact a financial advisor (preferably a fee-only, fiduciary).”
If three to six months of emergency savings doesn’t seem like it will be enough, consider this helpful hint from Kampitsis:
“One rule of thumb is six months expenses for a dual income household and one year of expenses for a single income household.”
You Aren’t Contributing to a Brokerage or Retirement Account
“If you have a large cash balance in your bank account and aren’t contributing to a brokerage account or a retirement account, such as a 401(k) or IRA, you might be a compulsive saver,” said Laura Adams, MBA, and personal finance expert with Finder.com. “There’s nothing wrong with saving aggressively; however, if your funds earmarked for long-term goals aren’t earning a return that significantly exceeds the inflation rate, you’ll come up short.
“If investing makes you feel uncomfortable, remember that keeping it in the bank earning very little is risky, too. Most people will probably need more for retirement than they think because we’re living longer and could have reduced Social Security benefits in the future.”
You Deny Yourself Things That You Shouldn’t
“If compulsive saving gets too extreme, people can actually stop socializing because they don’t want to spend money going out,” said Matt Sexton, a small-business finance analyst and writer at Fit Small Business. “If it keeps getting more extreme, those people can deny themselves the essential items they need to survive in order to save. Those people should consider professional help as it has crossed over into a psychological issue from a strictly financial one.”
You Overthink or Over-Research Every Purchase
When you clearly have enough money to afford things you want but don’t need, yet you won’t allow yourself to purchase them without weeks or months of over-analyzing the purchase, you may be saving too much.
“For example, an attorney who bills at $300 per hour and spends weeks waiting on sales before buying a $200 handbag,” Dieter said. “When asked the question of ‘how much do you need in savings in order to safe/secure?’, the answer is either exactly how much they have today or never enough.”
What Are Some Investment Strategies To Consider?
Once you’ve established an emergency fund, it’s time to start investing. Here are some strategies to consider.
“For most, investing no less than 10% to 15% of your gross income in a diversified portfolio is the best strategy,” Adams said. “First, max out a tax-advantaged account to save the most in current or future taxes. Then if you still have more to invest, use a regular, taxable brokerage account.
“If you’re relatively young with a long time horizon before you plan to retire or spend down your investments, having a stock-heavy portfolio may be wise. Stock investments are relatively risky but offer higher potential returns. However, you can substantially reduce your investment risk by owning a diversified portfolio, where you spread it out over multiple investments, such as bonds, real estate and cryptocurrency, in addition to stocks and cash. That way, if one investment is a loser, you have other winners to count on.”
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