George, who has been reading Get Rich Slowly since it was a single entry on my personal blog, writes with a curious question. By adhering to sound personal finance practices, he’s reached the destination we’re all striving to reach. But he wonders if he might have gone too far.
If you’re just beginning your journey out of debt, saving too much may seem like a nice problem to have. You’d sure like to have all that money! But George’s problem highlights the need to maintain balance in your life. You can save too much. Here’s his story:
I’m 29, married with one child (and a second on the way), and work in an extremely stable job with an excellent pension plan. My wife has a similar income and also has an excellent pension plan. As we’re in Canada, we have excellent health coverage through the public system and through medical/dental plans from both of our employers. We each contribute equal amounts of our paycheques toward joint expenses.
I’ve followed the advice espoused on Get Rich Slowly, and as a result our family is in a very stable financial position. I have saved over $37,000 in my retirement account, put $6500 in an education savings account, and routinely contribute to an emergency fund (which now stands at $5000). Every two weeks I also put extra payments towards the principal on our mortgage, which has a current balance of around $135,000 on a house now worth about $380,000. At current interest rates and with our extra payments, we anticipate being mortgage-free in 12 years (when I’m 41). We have no other debts, and all credit card charges are paid off every month.
My take-home pay is around $1500 every two weeks, but after $200 to my retirement account, $300 to the mortgage (including the extra to the principal), $50 to the education fund, $200 to the emergency fund, $100 for groceries, $60 toward transportation costs, $215 toward child care, and $100 for utilities, I’m only left with about $275 for “discretionary” expenses like clothing, entertainment, dining out, and the like.
While I’m glad to be saving toward my long-term goals, I am starting to feel like I’m sacrificing too much in the present so that I can save for the future. By the time my next paycheque comes in, my bank account is usually hovering close to the zero mark. It feels like I’m living paycheque-to-paycheque, but I know that I’m not since I’m accumulating wealth and my net worth is increasing.
Am I saving too much? If so, where should I cut back on the savings: the funds for retirement, education, emergencies, or extra mortgage payments?
I’m impressed that George has made such outstanding progress at a young age. I hope to be in his position in a few years, by which time I’ll be over 40! Because I don’t have first-hand experience with his dilemma, I can only offer hypothetical answers.
For example, accelerating mortgage payments is great, but my opinion is that it’s “icing on the cake”. It’s something to strive toward. I don’t think making extra payments is worth sacrificing present happiness. If I were in George’s position, I’d stop the extra payments for now, but do so with the understanding that they’d resume with future salary increases.
Also, I don’t know how much George needs in his emergency fund. Each person has a different comfort level. Some people want twelve months of living expenses; others are happy with just a few weeks. I believe that $5,000 is a suitable amount at this point, and that George can probably afford to reduce contributions or to eliminate them for a while. Again, the emergency fund is something that can be increased in line with income.
Regardless, I would continue to make regular retirement contributions, and to add to the education fund. These accounts will realize enormous benefits from the power of compound returns, but only if the money is there for the magic to happen.
Do you have advice for George? How do you find a balance between spending and saving?
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Granted I’m in a much different position than George. I’m only 22, so my savings are limited to a single high-yield savings account.
But what I’ve taken to doing the past few months and what I will probably continue to do, is using a credit card for my “fun money” rather than my checking account. I’ve chosen a good rewards card, and I have all my automatic bills routed there. Each month, after paying my other credit cards and putting money in my savings, I transfer whatever’s left onto that credit card. All of that money is “fun money” but I also have the credit on that card as extra in case I want to have a little extra fun. And in most cases this never exceeds more than 50-100 dollars.
Not only does this allow me to have as much fun as I want (within reason) without over drawing my checking account, but it also provides me with rewards points for my purchases.
Don’t be afraid of a little credit card debt is my advice.
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My question would be, what about your wife’s money? Surely your combined incomes are more than 3K per month. What is she doing with her money?
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It’s an enviable dilemma. Good for him! I agree with your suggestion that he probably doesn’t need to keep putting money in the emergency fund and that he can lay off paying extra against the mortgage at his current salary. Definitely keep up with the retirement fund, you can increase education and live a little. Maybe start a “travel” fund if you want to start taking trips with your family – always a good thing in my opinion, seeing some of the rest of the world while you still can enjoy it. Or if travel isn’t your thing, put it towards saving for something else you might like to do, something relaxing. You can also just leave it in your checking account so you don’t feel so paycheck to paycheck. Contributing to charities is also extremely rewarding and can be a healthy reminder to be greatful for the bounty that we have, for being alive and healthy and able to contribute.
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There’s a line in the book “The Richest Man in Babylon” which hit home to me. It said something along the lines of “It is dangerous to save too little or too much.” I was glad that I read it because I have the same issue as you. I would sacrifice too much for the future without living in the present. Since that time I’ve felt much more relaxed with my money.
I can’t offer any suggestions on what savings to cut out. I think George needs to figure that out for himself. Probably the best way would be to prioritize his goals.
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I don’t know what type of eduction fund you’ve got going, or how old your 1st child is, but you might want to do the math on that and see how much the account would be worth by the time the child is in college, without putting more into it. Just for research purposes, of course. You might be able to significantly lower that contribution without sacrificing a good education down the line.
Also, it seems to me like your emergency fund is big enough right now. That depends on personal comfort levels, of course, but you might want to cut down contributions to, say, $50 a month or less. As long as it’s in accessible account with a decent interest rate, you should be okay.
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It really increasingly seems that the money-saving success stories on GRS have really measly mortgage payments. $600/mo on the mortgage? I presume there is someone else chipping in, but still, presuming equal contribution, $1200/mo mortgage (with surplus)? That’s under $200 more than my *apartment* rent and I live in a suburb! Is it possible that some of us are living in areas where housing and transportation costs (and incomes) make it a lot harder to save money than the average GRS poster-child success stories?
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My partner and I have had this type of discussion recently. We save a relatively high percentage of our dual income. We have only a couple of long term debts, mortgage and a student loan. We budget ourselves to the point of having about $200 for “fun” money each month, much like George. Our financial priorities mirror his.
We have decided to plan for taking a holiday from our high rate of savings a couple of times a year. We will use the funds that were directed towards “extra” savings or extra mortgage payments to be used for “fun money”. By allowing for a month of blowing extra money without any conditions is intended to give us a pat on the back for being disciplined the other months. This is similar plan to one we used to paid off over $12,000 of consumer debt
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It’s only too much if you don’t have enough money left over for necessities. Saving as much as you can as early as you can puts you in a VERY good position.
I am pleased so say my wife and I have been saving as much as we could from the time we got married. We are now 40 and have about $300K in savings. Using the rule of 72, I can easily imagine it quadrupling by the time we are 60, which would be very nice. For that reason, I have begun to let up on the savings a bit. Of course as we get older and our salaries go up the fixed expenses such as the mortgage get easier to handle.
George, keep saving as much as you can handle. It’s infinitely easier to let up later or if you have an emergency than to make up for lost time when you’re 50. Time is your single biggest ally in saving.
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No way….you are doing fine. $275 a month should be plenty, you don’t need extra ‘stuff’.
Keep it up!
(something unexpected could happen, and you will be happy you have saved plenty)
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First, I believe he’s asking the wrong question.
the question is, “what are my goals?”
If the answer is retired and cruising around the world in a yacht by the time I’m 35, the answer is he’s not saving enough.
If the answer is I love my job and plan on working until a normal retirement age, then he’s doing fine, and should be happy/thankful that he’s in a great position that he’s worked hard to be in.
If the answer is I want to be a millionaire by the time I’m 35, then he needs to be putting more and more into equities and savings.
But, the bigger question is “Am I happy?”
It’s hard to compete with the very soothing happiness of being completely financially independent. but, if you are nagged by the thought that every time you go to the movies you are wasting money that could be saved, that makes you unhappy because of your current “saving ways”
I like some of the ideas above of “blowing off” money month.
Just make sure you always pay yourself. If it makes you happiest to save, great. If it makes you happiest to get great superbowl tickets, by all means, spend the money if you have it.
Because he’s asking the question, I would assume he’s not fully happy.
Spend some time of self introspection and decide what part doesn’t make him happy. It sounds like it’s the little left each month for entertainment. Now decide what area could be cut a little and put more towards entertainment, try it for 3 months, are you happier? try something else, are you happier?
And by all means, don’t let conventional wisdom disturb your happiness. Don’t feel guilty if you aren’t paying your mortgage down quicker, and having a bit more fun.
Brian
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I think George is on the right track. Before he can say that he’s sacrificing too much in the present, he needs to articulate what his goals are for the present. Until he does that, just socking away as much money as possible is the best approach. Better that than mindless spending.
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I agree – it’s about setting goals. My husband and I are 25 and 27, we have about 60k in retirement accounts, no debt other than our mortgage, and 15k in our “emergency fund” – which may seem a little bit high, but it is for a reason. We are planning to start a family in the next 2 years, and understand that our financial situation will change drastically when that happens. We are planning to go down to one income so I can stay home at that point. So, our frugal living, and high rate of savings will pay off so that we will be comfortable, and have a large cushion when that happens. That is what motivates us when we get the urge to spend. Also – our mortgage is quite a bit higher than 1,200 – we live in a suburb of a big city.
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George:
First, if you are making all of this progress without going below the zero point on your spending account, you are achieving something that most people never achieve: significant positive cash flow. The discomfort you are experiencing is temporary, and as you accumulate more in your emergency fund (thus earning more interest) and/or earn more at your jobs, this will all get easier (though in my experience, if you are a saver, your standards for how much savings is enough will rise with your income).
Because of compound interest, the earlier you achieve these savings goals, the more they are worth. And this is exponential, not linear.
However, if all of this saving is building up stress that might result in a binge of spending, loosen up just enough to get back into your comfort range. You don’t want to risk what you’ve worked so hard to achieve. Start with a small cutback of $25 to $50 per paycheck. This will probably be enough to “make the belt fit”.
Now, where should you reduce by $50? If retirement accounts are tax advantaged there as they are in the U.S., I would say that’s the one place you DON’T want to cut back, since it represents not just compound interest, but compound tax savings. Since your mortgage interest also compounds and the interest is weighted on the front end of the mortgage, the earlier you pay principle, the more that principle is worth. So I would say keep paying as much as you can into the mortgage too. As Leo says, the education accounts is another place where long-term compounding is key. So in my mind, the low-interest (I expect) emergency fund is where you should cut back, especially since you have accumulated a good start for emergencies.
I am not a professional financial planner, and this should not be construed as anything but friendly conversation, but were I in your shoes I might do the following:
Take a moment to relax and be thankful for the good fortune you’ve had so far.
Cut back the per-paycheck emergency fund contributions to $100.
Add $25 to the per-paycheck mortgage contributions.
Add $25 to the retirement contributions.
Use the remaining $50 per paycheck to ease the stress of being such a diligent saver.
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I think Daiko’s advice is pretty good (about what I was going to say). Except possibly not add the extra $25 to mortgage and have $75.
That’s assuming that he already has a decent emergency fund already.
And the points about goals which ppl have made are excellent. Where does he want to enrich his quality of life? A movie every 2 weeks? Lunch out more often? Funding hobbies?
Determining that might help George figure out how much extra money he’d like anyway.
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All investments for the future are not about direct financial returns. There may be some options to consider that make a difference in the future, and add enjoyment now.
George might consider investing in:
1. Improving the quality of his food and beverage, beneficial now in enjoyment, and in the future in health.
2. Buying back the time to play more.
3. His marriage, by liberating his wife from needing to work, allowing her find greater fulfillment in work she would rather be doing (unless, of course, she is in her dream job.)
4. His community, with finances, or bought back time, to maintain and improve his surroundings and the people who effect his quality of life.
5. His earning capacity, by acquiring knowledge and skills that could kick him into another income bracket.
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$275 every 2 weeks seems like plenty of “blow” money to me.
What is it that you feel like you’re sacrificing in the present? What are somethings that you would like to do or have that financial constraints won’t allow? You could split your emergency fund contributions and start a separate pot of money for whatever you feel you’re denying yourself.
If the “sacrifice” is that your bank account is close to zero just before each paycheck, I think your concern is more of a psychological one than a financial one. Remember that your checking account is a temporary holding ground. It’s the clearinghouse of your finances and you didn’t set it up to grow.
If you really, really just want to feel like you have a cushion (so that you don’t overdraw by accident), then the next time you get paid, only put $100 towards your emergency savings and leave the other $100 in checking. Try to always have that $100 there– as each paycheck comes in, you can continue to budget out your money as you have been, and then your account will be hovering at $100 instead of $0. A word of caution: it is really easy to spend down your “cushion” when it’s in that same account. If you just want to link your checking to your savings account, that is a cleaner way to do it (because you won’t spend it if you don’t see it).
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Going way off on a radical tangent, I’d suggest reading Stop Working by Derek Foster (written more for Canadians than Americans although the ideas cross borders). Instead of worrying am I saving too much instead focus like he did on retiring as early as possible. In his case age 34. Can’t think of anything better than getting out of working at a young age. Since your on the right track it’s very possible you could retire before most people even think of saving for retirement.
his web site is http://www.stopwork.ca
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We can somewhat identify with George’s position. Our emergency fund is taken care of, our retirement savings are going full throttle and we are debt free. Being DINK we are considerably lighter in responsibilities.
Daiko’s last paragraph says it all. As young people we thank God for the grace that has been showered to us.
To strike a balance, we relax, listen to our hearts and give away a considerable portion of our current earnings to various charities.
Balance cannot be achieved intellectually through the head or chalking out an algorithm and sticking to it forever. Makes us feel claustrophobic.
The real joy in life lies in the heart. Our journey through life has taught us to listen to our hearts and act on its advice. Each time we have done that we have experience peace and joy within.
Perhaps simple pleasures like buying a rose for your beloved and watching the smile on his / her face will help strike the balance. When we feel like buying a rose from deep within our heart, lets go for it. At that moment perhaps it pays to stop thinking of savings for a while.
But the line is thin and subtle. Let not the heart’s voice be subdued by unnecessary wants which might lead debts and subsequent hardships.
The feeling of balance comes from within and we can strike it by listening in silence.
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Congrats, George! I agree with J.D. about reducing mortgage payments given your stable finances and habits. (Full disclosure: Assuming you have a good mortgage, I’m not a big fan of extra payments towards mortgage principal.)
However, $5,000 for emergency an emergency fund is not comfortable enough [for me] given the responsibilities of a child (and another on the way).
Also, it may be a good time to reexamine your insurance situation (particularly [term] life insurance, home/auto insurance) to make sure you are adequately covered.
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Thanks for all the comments and advice, everybody (and keep them coming). Some clarifications that might be of assistance:
-My wife and I both have our “ideal” jobs right now. We both work less than 40 hours per week, the pay is good, and we’re both in rewarding careers that we enjoy. My wife’s finances very closely mirror mine – her income is very similar, and she puts the same amounts toward joint savings and expenses.
-Our “base” mortgage payment is a little over $500 every two weeks, but we chip in an extra $100 (so it’s $300 for each of us). Our house has appreciated a huge amount in the past few years, along with the rest of the local real estate market.
-$275 may seem like a lot of “blow” money, but bear in mind that a lot of non-regular expenses are taken care of out of that $275. Annual expenses like house insurance, life insurance, car registration, and whatnot, along with other semi-regular expenses, all come out of that $275. In reality there’s probably only about $100 that’s truly “free” money every two weeks, which seems small to me.
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George,
I’m a Canadian, so I’m giving you Canadian advice. You’re in an excellent position for your age. But it is possible to save too much.
Is the $37k in the RRSP the amount in joint RRSPs? You and your wife should aim to have even amounts, so that, at retirement, you can pull out equal amounts and not have one of you pay more in tax. Although laws have changed a bit and may change more, it’s a good idea to have equal retirement accounts.
When your next child is born, you’ll receive another $100 a month in UCCB. You can put $50 of this toward the RESP. The $6500 you have saved now will, with 6% average annual returns, be worth $53k in 16 years, assuming you get the 20% annual grant and you move your payments up to $100 a month. Given 5% increases in tuition over the same period, tuition will be around $10,300 a year. So you’ll be able to cover 2.5 years for each kid. But your kids can probably earn money in the summers and you can still contribute to their tuition while they’re in school. So $100 a month should be fine.
If your wife is about to go on mat leave, I think you should stop topping up the mortgage. You’ve done a great job of paying it down. Wait till you have a bit more cash flow. If your kids are in childcare, you will have more money when they hit school.(If they work 20 hours a week for 4 months in the summers at inflation-adjusted minimum wage, they can bring in $4k each year just from that.)
Others will tell you to keep saving for retirement. I think you should cut back on retirement savings and top up your emergency fund. $5,000 is not a lot of money for a family of four. Yes, your jobs are stable. But you could still be in a car accident, have a sick child, have an illness, death in the family, broken down car, etc. That could force you to take time off without pay or to travel, buy medications, pay for physiotheraphy, etc. You should aim to build this fund up to cover 6 months of expenses. Also, many government and union jobs occasionally go through down-sizing. EI only gives you $1400 a month. So increasing your emergency fund is a wise idea.
I’m assuming your expenses are cut in half. You should be looking at the big picture, not just your own profile. In Canada, all moneys and debts acquired after marriage are pooled. And, to manage money as a family, you should be looking at all the variables. It’s hard to anyone to make recommendations if we have no idea what your wife is doing. I can’t tell if your wife also has an RRSP and whether you have another $6500 in an RESP. You say you only have $275 left for discretionary expenses, but perhaps your wife also has $275 and so you really have a total of $550.
Overall, you’ve done very well. But, for at least the next year, when your wife or you are on parental leave, your income(s) will drop. So it would make sense to step down retirement savings and increase your emergency fund. You can go gangbusters when your incomes are back to full-time and your kids are both in school.
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I’ve been very lucky recently. With a great job out of college, I’ve saved a lot of money. Now I don’t have enough income/spending streams to really delve into complicated income/spending algorithms, but I’ll say this: I pay for essentials (food, gas, etc) with my credit card, and non-essentials with my debit card.
My money can accrue income in a high interest savings account while my credit card (which I never have to pay fees on unless I’m late) is used for daily expenses.
I am now using earned savings account money to pay off my credit card every month!
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According to Wikipedia: “The average national monthly mortgage payment in the United States was $1,687 in mid 2006. By contrast the average rent was roughly $890.”
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This sounds like more of a prioritization issue than a money issue. George is better off than most, but still feels like he needs to have a little more left at the end of the month. Restructing your finances so you are comfortable with the numbers is important. I had my money spread out over too many savings vehicles in the past and it made me feel as if I had less than I really did. I prioritized each of those accounts and consolidated them which made me much more comfortable with how everything was organized. It made me feel better about my finances in general.
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Wow, great job George! I have a couple of thoughts.
(1) With baby #2 on the way I would keep saving especially if you or your wife might cut back on work or quit to stay at home.
(2) I would also keep savings so that you can fund the baby #2 education fund.
(3) I would cut back on the extra mortgage payments to every other month but I would keep at it. Owning your house free and clear is an especially wonderful goal.
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Andrea: The $37k (it’s actually now at $41k – it’s been a few months since I sent the question to J.D.) is just for my RRSP. My wife’s RRSP is currently just shy of $18k. Our contributions to the retirement accounts use up all of the available contribution room each year.
The RESP (education fund) has grown to about $8k, but there is only one “family” RESP account that will be used for both children.
Thanks for the reminder about the UCCB, Andrea – I had forgotten that we’ll be getting another $100/mo for the second child! (Info for American readers: the UCCB (Universal Child Care Benefit) is a $100/month payment given to the parents of each Canadian child until they reach age 6. Ostensibly, it’s to be used to offset the costs of child care, but it’s paid to all families whether the children are in any type of child care or not.
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As a follow up, now that I’ve read the comments. I would also agree with the folks that point out the bang for your buck when you are investing those dollars (or whatever canadians use as currency) when you are younger.
I didn’t really start working until my late 20s due to years spent in professional school. While I’m happy with the path I’ve taken I do wish I’d done a better job managing my finances (spending less and investing more) years ago. You can’t go back in time to invest.
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Put the $ you are putting now towards paying down your house into your “emergency fund”. You don’t gain anything by putting extra money towards your mortgage until you actually are able to pay your mortgage off in full.
Worse, you have no access whatsoever to the money you put towards the mortgage (unless, of course, you do a HELOC or home equity loan).
So, divert what you are putting now towards paying mortgage off early into “emergency fund”, and feel free to tap said “emergency fund” for extras that come up.
Or, consider giving yourself just $50 extra each paycheck cushion, assuming this could come from the extra you are putting towards principal every month.
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Thanks for the clarification on the $275 per 2 wks going to more than just eating out and entertainment. I didn’t get that from the original post, so I didn’t realize you have insurance payments, etc. coming out of that.
I am curious to know what you would like to spend money on so that you don’t feel like you are sacrificing the present. How much more money do you think you’d like free up and what would you want to do with it?
I’m like you, I live very close to the bone to save as much as possible. About 50% of my income (before taxes) goes into retirement savings and towards saving for a down payment on a house. So, it also feels like I’m living paycheck to paycheck even though I’m saving tons.
It’s hard to answer the question of whether you’re saving too much without knowing what it is you are sacrificing. It sounds like you and your wife love your jobs, don’t have too many hours, and are providing for your family.
What specifically would you like to spend more money on?
It’s hard for me to say to anyone that they should throw any money to the wind, no matter how wealthy they are. But if you have a passion that you would like to pursue, then it might make sense to spend money on that.
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By the way, kudos for having so many ducks in a row so early in life!!
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My first inclination would be to say that only George knows for sure.
Like George, I am a pretty agressive saver. Everything that I don’t spend on bills, rent, etc goes into a high-yield savings account.
I find that by putting so much into savings, I limit how much I have available to spend on small purchases that would add up and it forces me to think creatively when it comes to spending money. I learned a lot from years of abject poverty and its nice to be able to apply those lessons even though I have the money not to have to do that.
What it frees me up to do is to make big purchases without guilt. I usually think long and hard about them, but when I finally make the decision, I don’t feel remorse.
Like George, I have an emergency fund, which I keep stocked, and then I add excess funds to that for “large purchases” like plane tickets and cameras and crap like that.
I don’t believe that one can save too much. You are just saving for the right things.
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George, by my calculations, if you achieve a 6% return on your joint RRSPs and never contribute another cent again, you will have about $270k in the bank at age 55 or $480k at age 65. That’s without making another contribution. That will generate $13k to $24k a year for you. And I’ve been conservative with a 6% return and no further contributions.
Have you played with the Canadian government’s retirement calculator? http://www1.servicecanada.gc.ca/en/isp/common/cricinfo.shtml
You’ll most likely qualify for $6k a year each in Old Age Security.
Plus $10K in CPP from age 65 or $7k if you start at 60.
So you are each currently looking at at least $26k a year ($52k combined) PLUS whatever your pensions provide. That’s without contributing another cent to your RRSPs.
So you can scale back on the mortgage and RRSPs for a few years, if you want.
You might look at shifting family contributions to your wife’s RRSP until it’s the same as yours. You can do a spousal RRSP so that the person with the higher income gets the biggest tax refund.
Our contributions to the retirement accounts use up all of the available contribution room each year.
If you want to cover the bulk of your kids’ tuition, you might step up the RESP. I don’t know how long you have till you need it. But you sound like you’re in good shape there, unless your kids are going to have to go out of town for school and will thus need accommodation. However, they can work fairly modest summer hours and still cover the short fall.
On top of the UCCB, you may be getting more family allowance from the government. It might only be $20 a month or so, but it should be something. I have no idea, as I don’t qualify.
Your family will also qualify for the new tax incentive for families that have children. I think it adds $300 a year per child to your tax refund.
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Piccolina writes: I am curious to know what you would like to spend money on so that you don’t feel like you are sacrificing the present. How much more money do you think you’d like free up and what would you want to do with it?
I think Piccolina’s question crystallizes my dilemma. There isn’t anything in particular that I want to spend money on but can’t – I just have a generalized feeling that I’m depriving myself somehow.
I agree with the comments that this is probably more psychological than financial, but I honestly think it fits squarely in the realm of the “personal” side of personal finance.
Based on everybody’s comments, I’ll probably cut down on the extra mortgage payments for the time being, and use the $100 every two weeks for generalized “play money” so that my wife and I can eat out or go to a few movies.
Thanks so much to the GRS readers for their advice. If anybody else has anything to add, I’d be happy to read it.
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If you have to use some of the $275 “fun”
money on recurring expenses such as house
insurance, car insurance, etc …start a
“sinking” fund for these. Skip the extra
amounts you’re currently paying on your mortgage and use this money to fund a
separate accouht for these recurring items.
Once you have the account built up a bit you
will only have to replenish them with small
amounts each month to keep it going so that you have enough in this account for whatever
insurance payment, etc comes up. Then you’ll be able to use the $275 for yourself and some fun and entertainment and not have to dip into it for other things that come up.
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> It feels like I’m living paycheque-to-paycheque, but I know that I’m not
HEY! YNAB taught me how to fix that feeling. Keep one months buffer of pay in that checking account and never let it go below that one month pay mark but that will alleviate the feeling of living check to check when in fact you are not. You have enough in your emergency account to take out $2000 to use as a buffer in your checking. Consider 2000 the new Zero.
(ynab is at youneedabudget.com)
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I’m in a similar position financially, and live in Canada too (except I’m 32, so George is winning). Our balance is close to zero on our checking account at the end of the pay period. It bugs my wife, but I am fine with it. I just remind her to look at our savings and she is ok for another few days. My feeling about how much to save is that you need to decide on what your long term goals are. If you want to retire in five years, then you aren’t saving enough. If you think you will retire at 65, then you can probably slow down. once you know your long term goals, then you can work out how much you need to save.
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George, you’re doing a great job. Keep it up!
It’s always easier to ease up later, than it is to pick it up later. Plus the time value of money’s on your side. You’ll be happy you did when one of you decides to stay at home with the kids, or when it’s time for the minivan, new roof, new furnace, etc. I see many of these in your future.
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“I had my money spread out over too many savings vehicles in the past and it made me feel as if I had less than I really did. I prioritized each of those accounts and consolidated them which made me much more comfortable with how everything was organized. It made me feel better about my finances in general.”
I’m the opposite. I like to keep my money spread around so that I don’t feel “rich” and will instead keep building up my savings. When I had 13,000 in my savings account I saved much less than when I put $10,000 in a one-year GIC and my savings account balance was $3,000. Even though my total savings was the same.
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Andrea writes: “…if you achieve a 6% return on your joint RRSPs and never contribute another cent again, you will have about $270k in the bank at age 55…”
I agree that the current amount will compound nicely over the next 25 years or so. Problem is, I know that $270k when I’m 55 won’t be worth what it is today. In 25 years, $270k will be worth about $126k in today’s dollars (assuming 3% inflation). It’s still a lot of money, but not a huge sum if it’s going to be drawn upon for 30+ years – it’d only provide an income of $5000 (in today’s dollars) each year.
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Dave writes: “…it’s time for the minivan, new roof, new furnace, etc. I see many of these in your future.”
Well, we just replaced our vehicle with a bigger one (for 2 kids) a few months ago, and our furnace is only a year old, so I think we’re set for the time being. Oddly enough, though, we are planning on replacing the roof next summer…
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George you are doing great! I would continue to do just what you are doing. If you feel you need more money one month, just cut back on the extra mortgage principal for that month.
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Leave inflation out of a 6% return George, because 6% is an incredibly low annual return, and probably a stand-in for a more realistic 9%.
On the other hand, if your long term investments are only averaging 6%, then you might need to take on more risk.
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I agree with your feedback. Also — is he happy or comfortable with the level of spending he currently has? If he is, there’s no reason not to keep saving. What is he denying himself in order to save this much? How much would it take to not feel denied?
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Beanspants is right. That’s why I used 6%.
Also, note that it would be $280k for your retirement at 55. If you wait till 65, it will be $480k.
Since you said you both had good pensions, I assumed this meant you could retire at 55 and take 60% of your current incomes. If you’re grossing $60k now, the pension should work out to $36k a year, only it will be adjusted for inflation, I hope, and you’ll end up with $77k. (Perhaps more if your income goes up.)
So $13k from government, $14k from RRSPs and $77k from your pension. That’s up to $104k each, assuming you retire early-ish. In present value, that’s $48k a year EACH.
Now, when you retire, your mortgage will be paid off. Your kids will be in their 20s and finished school. You won’t need to save for retirement. And you’ll have a household income equivalent to $100k a year. Good stuff.
So $36k+
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Andrea: Thanks for the follow-up – you’re quite right, it does look like I might be putting aside a little too much for retirement, given the pension and CPP/OAS.
That said, as others have noted, I’m not desperate to spend too much money on too many things right now. I’ll probably cut down on the savings for a few months and let some cash accumulate in my bank account, and then consider that to be the “new zero”.
Thanks again for everybody’s advice!
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Are you kidding? There is no such thing as saving too much.
Assuming that nothing in the world changes…such as your salary, the general economy, one of your abilities to work or your child stays healthy… at your rate of savings you will be able to stop saving at all at 41. Compound interest will take care of your savings for the next 20 or 25 years.
You could slow down a bit by doing those extra mortgage payments every other month but I would first raise my emergency fund to at least 6 months of income before I partied.
Not being sure what you would want to do with a bit of disposable income,
speaking from experience, I can assure you that money in the bank in 10 years will be more satisfying than the gourmet dinner or big screen TV does today. Interesting travel is an exception in my book.
cheers
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What do you think you are really missing? What does it mean to be deprived? Use your current habits to enable you both to enjoy your family. Do you really think you’re missing a lot if you don’t go out and blow a wad? My mom was a saver and my dad was a spender so between the two of them they managed good family vacations (6 kids, one income) great homes, and lots of happy memories. I would take some time to focus on creating those with your family! Zoo passes and park passes (I did Heritage Park in Calgary for years and the Zoo) and we have great memories.
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Do I understand correctly that when George says, “I’m only left with about $275 for ‘discretionary’ expenses like clothing, entertainment, dining out, and the like” that this is the amount he has EVERY TWO WEEKS?
And this isn’t enough?
I am gobsmacked. I have a discretionary part of my budget, but it is very small. That $275 would be the amount I would spend in about four to six months! Most of my entertainment is free — walks and picnics in the park, art/botanical/natural history museums, inexpensive or free music recitals, potlucks with friends. And I buy good quality clothing that lasts, supplemented with a few thrift store purchases.
Look for ways to spend time with your family that do not involve spending a lot of money. You will feel more fulfilled, and you won’t end up with too much stuff.
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At his current rate of savings, he’s living on a pretty modest budget. $200 a month isn’t going to cut it for groceries once his new baby starts eating. I’m assuming the other child is also small and likely to start eating more soon. They could easily be spending $400 a month on groceries and diapers by the end of the year. Since they are currently spending $200 on groceries, they will have to take $200 out of the $550 ($275×2) they currently spend on clothing, entertainment, dining out, etc.
That leaves $350/mo. But they will have to pay for car insurance, house insurance, etc. I don’t see a line item here for life insurance, which is likely around $100 a month for a joint plan. (If you do not have life insurance, get it before you turn 30, so you can save on premiums.) So they’re saving too much, given the shift ahead in their family status.
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Andrea: Both my wife and I set aside about $100 per pay for groceries, totaling about $400 each month.
We use cloth diapers (that were purchased for our first child) so diapering costs for child #2 will be quite modest.
Life insurance isn’t in the monthly budget, as we pay for it once yearly.
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