Saving in itself is an important skill that many people struggle with. In fact statistics on Moneyfarm has it that in the UK, 40% of people aged 22-29years don’t have any savings. 10% have less than £3,000 saved and, only 25% have more than £6,000 saved.
The average saving for those
- aged 18-24 is £2481
- aged 25-34 is £3,544
- aged 35-44 is £5,995
- aged 45-54 is £11,013.
- Aged 55+ is £20,028.
So, if you are saving you are already taking a step in the right direction.
Why then are you reading this post?
Because you have identified that while it is important to not save too little. It is equally important not to save ‘too much’.
Save for a purpose.
Why Should You Save?
According to Poulomi Damany, at Credit Karma Money and Tax, “There are many reasons to build your savings, but financial security is at the heart of all of them”. We save to cover our fixed expenses and emergency needs and that in turn gives us the peace of mind to sleep better at night and sometimes take more risk with our financial investment decisions.
Why Should You Not Save Too Much?
While peace of mind is more valuable than money, you should still avoid saving too much because
1. The Opportunity Cost Is High
In a blog post I wrote on why the rich gets richer, I mentioned that the primary principle to getting richer and making wealth is making your money work for you.
By saving too much you are forgoing the possibility of your money making money which is a very high price to pay.
2. The Rate of Return On Your Savings Is Low
The average interest rate on a savings account in the UK is 0.35%, down 0.29% from last year.
This interest rate is too low to outpace inflation and what that means is the extra money in your account above and beyond what needs to be there is infact losing value.
This means your £100 saved could potentially be £98 in a matter of weeks if you just leave it sitting in a bank account.
3. Your Purchasing Power is Diminishing
Due to the rising cost of good and services, and the rising cost of living if your savings are not outpacing inflation then what you can buy with the same money today might not be possible tomorrow.
4. There Are Better Way To Make Money From Your Extra Money
Another reason why you shouldn’t save too much money is that there are ways to grow your wealth using that extra money in your bank account.
Rather than watch your money saved in a dwindling bank account lose its value, why not invest it and let it make you more money.
How Much Should You Have In Savings?
The golden rule of thumb is to have saved enough to cover your fixed expenses for at least three to six months.
Most suggest saving six months of fixed expenses for a dual income household and one year of expenses for a single income household.
The golden rule is however not law, it is an advice based on what works for the average person. The good news is you are not an average person so it is worth considering several factors that might impact how much you should save beyond the emergency rule of thumb. These includes;
- Your age
- Your current and ideal lifestyle
- Your profession – are there periods of seasonal high demand?
- Your job – are you on a permanent, fixed term, or contract job?
- Your health -after all health is wealth
- Your location – where you leave?
- Your responsibilities – kids? Pets?
5 Signs You Are Saving Too Much
1. Your Emergency Fund Is Overflowing
If you have more money in your savings account than what you need to cover your emergency expenses, then you are probably saving too much.
2. You Have Become Too Frugal
If you spend so much time worrying about spending on things you require and can reasonably afford such as food, then you might be a compulsive saver.
3. You Have No Investment
This is particularly true if your income has increased in the last year, your expenses have stayed the same, yet your investment has not increased.
If your net (income – expense) year on year continues to increase and you have not increased your investments or started investing, chances are you are saving too much.
4. You Are Not Contributing To Any ISA or Retirement Account
ISA and Retirement accounts provide stax free investment opportunities allowing you to enjoy your capital gains without paying any taxes. The Isa allowance as of 2022 is £20,000 and the SIPP allowance as of 2022 is £40,000. However, with the SIPP you can carry forward unused balance. You can read more about SIPP here.
If you have a large cash balance and are not contributing to these accounts then you are probably saving too much.
5. You Think You Might Have Saved Too Much
No one knows you better than you. If you feel that you are saving too much, then you probably are.
Why Should You Do Once You Have The Required Amount In Savings?
Invest.
To help you get started with investing I have written several blog posts which can help including
- How to get started investing with Vanguard
- All you need to know about investing in SIPPs
- 7 signs you are ready to invest
- Why you should start investing at an early age
I wish you all the best on this journey of taking your additional savings and putting your money to work for you.
Are you ready to start investing?
*This is not financial advice. Do not consider this blog to be a substitute for obtaining advice from a qualified investment advisor. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional *
