Photo by Alexander Kaunas | Unsplash
By Neil Godsey, CFA, CFP
The headline may sound counterintuitive, and for many, it is. Every year a Federal Reserve study reveals the unfortunate reality of most Americans’ savings shortfall. In the latest report, 25% of non-retirees have zero retirement savings, and less than 40% feel that their savings are on track. Perhaps even more alarming is that nearly 40% of the adult population in the U.S. would struggle to cover a $400 unexpected expense.
And yet, the headline is not a typo. There is a subset of the population that is struggling with a different sort of problem: They’re over saving at the expense of truly living. They have amassed great financial success by anyone’s definition, yet they still suffer anxiety about running out of money despite there being essentially zero chance of doing so.
I’ve seen the retired couple, who grew up with Depression-era parents, constantly on guard against the next wipeout that’s “right around the bend.” There’s the seven-figure earner who gets upset that his wife bought expensive shoes, which basically amount to pocket change. I’ve met with a “top 1%” couple where one is clipping coupons while the other is buying fancy cars, creating a constant source of needless friction between them. I’ve seen couples struggle with taking dream vacations even though the math is a no-brainer.
Don’t get me wrong. I’m not saying people should spend more just because they can. Many families accumulated their wealth by being commendably efficient – even frugal – with their money in the first place. But there comes a point when saving for or worrying about your future can become detrimental to your present.
What is “Over Saving” As a rough rule of thumb in our industry, many people are often advised to save 10% to 20% of their pretax income during their working years to maintain their lifestyle in retirement. Saving more can provide a cushion or perhaps open up unforeseen options in the future.
The question of “over saving and under living” is often more qualitative than quantitative. An experienced financial advisor can model a client’s financial future based on a few assumptions in a matter of an hour or so. Simply walking a client through a spreadsheet that “proves” everything will be alright, however, doesn’t always have the desired effect.
People who “over save” to the detriment of their current happiness often do so out of deep- seated and unfounded fear. While such fear may be irrational, it’s nonetheless very real. A good advisor must address it with more than just colorful charts and graphs showing upward sloping curves.
Understanding Your “Story of Origin” Around Money I occasionally talk shop at the dinner table with my wife, who has a doctorate in psychology. We’re both interested in the strong connection between money and emotional health. Despite being a quant geek who enjoys studying “macro” topics like stock market history and Fed policy, the “micro” study of an individual’s psychological relationship with their own financial resources is just as interesting to me.
Money is one of the most emotionally charged areas of our lives. Financial issues are a primary driver behind couples seeking therapy or divorce. More than one-third of married couples aged 55 to 64 have said money causes arguments in their marriage.
It’s tough to be entirely rational when it comes to money. Our relationship with it is complex and primal. Money is really just a gauge to measure one’s own general safety, which we all crave at the most primal level.
There’s a good chance your relationship with money was shaped in your childhood. How was money treated in your family? Was it a source of stress? Embarrassment? Pride? Discord? Happiness? Was it discussed openly or in hushed voices? Was there trauma associated with it – perhaps a big financial setback that shook up a childhood, or an absent workaholic parent stressed out about family finances?
When you evaluate your financial life, remember to take an emotional inventory too. Explore your reactions to money. Do they truly reflect your circumstances? Why or why not? Are you living in fear and “under living” as a result? What would it mean for your happiness if you could let all that go?
Practical Advice to Right-Size Your Spending and Saving A practical, real-world step that might help tame fears, rationalize decision-making, and build the life you want while sleeping well at night is to create a comprehensive financial plan. It would preferably be with an advisor who’s disconnected from your personal history and can provide a voice of reason where needed. As the saying goes, those who fail to plan, plan to fail. Fear of failure can drive bad decision-making around both savings and spending.
Instead of planning, many people just accumulate a hodgepodge of financial products over the years, and that becomes their “plan” by default. Sound familiar? Think of how stressful it would be to try to drive somewhere when you don’t know the speed limit, travel distance, directions, road conditions, or even exactly where you want to go.
I recommend undertaking a personal financial discovery process with a trusted advisor to understand what you have, where you want to go, and how you’re going to get there. This process will take time – plan on multiple discussions over the course of several weeks or perhaps longer to get it right. When coupled with gaining emotional intelligence around your saving and spending, the financial planning process can help you make decisions more rationally and confidently. It will enable you to strike the right balance between preparing for the future while still living in the now.
Once the plan has been created, it must be implemented and monitored. This process can include portfolio reallocation, right-sizing a spending/savings plan, restructuring insurance policies, refinancing debt, and updating legacy plans as your life stage and finances change over time. Your advisor can help you keep on track, measure results, redirect when necessary, and keep your emotions in check.
The peace of mind that comes with a holistic financial planning process that balances the rational with the emotional will bring with it greater confidence in your financial life. It can help ensure that you are not “over saving” and “under living.”