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?
This article is about Ask the Readers, Choices, Planning
SEARCH FOR RECENT ARTICLES
I have been asking myself this question recently, and I have come to reflect on Proverbs 13:12: “Hope deferred makes the heart sick, but a longing fulfilled is a tree of life.”
In our current situation, my wife & I are living on 2/3 of our gross income, using the rest to make extra payments on our few remaining debts (outside of the primary mortgage, that is 1x college loan, 1x car loan, and 1x 2nd mortgage), and to increase savings. Our situation will change in about a month, when she quits work in preparation for the birth of our first child.
I have a hard time spending money on myself – buying things I might like (for example, an iPhone, an Apple TV, an HDTV, etc.), even when I have the cash to pay for it. We’re on the poverty cable package ($13/month), and I have a hard time spending the extra to get standard cable.
I think a couple of iPhones (his + hers) might be a tree of life for us.
loading....
If you don’t know what you could be spending any extra money on that would make you happier, why don’t you try allowing yourselves extra money, see what you do with it, and how it makes you feel.
loading....
As an older person who saved like this in the 70′s and am now enjoying the fruits of our savings I can say that doing without material things was not a barrier to having fun. For example, riding the public transportation for a day with our child was a break and an adventure. Going to a different part of our city and walking around was interesting and stimulating. Hosting an exchange student was little extra cost and introduced us to other lands and other cultures. Setting a low limit on having a party made it a creative activity (for example hosting a murder mystery dinner for 12 where each guest brought one of the dinner courses was great). Sometimes cruising a book store to look at the picture books and dream of things to come could be an escape and reinvigorate the reason we were watching our spending so closely. Setting a goal of a larger purchase and making a game of getting that much money saved from pennies and dimes because a challenge with a big thermometer posted like the TV telethons was a challenge. My particular goal was an expensive set of china that I just loved and over 2 years was finally able to purchase. Developing low cost hobbies – I love art but could hardly afford to collect it so I joined a post card club which had cards for sale for 25 cents where I could indulge myself buying 10 cards and only spend $2.50 felt like a real treat. Saving for inevitable expenses like tires, refrigerators, washing machines etc went into a separate savings account before we ever got a paycheck so it helped to know that when they eventually gave out there would be money there to pay for new/used ones also helped to let the $2 or $3 I spent a month not feel like too great an indulgence. Fun does not have to cost money and it sounds like you could use some more fun in your life. Enjoy!!
loading....
I read every comment above mine, and I have to say, as a Canadian, I’m thrilled to finally read Canadian-specific advice!
Andrea: For me, a bit more info on the spousal RRSP is needed.. My husband doesn’t work, and I considered a spousal RRSP as I own $12k in my name now from the past year and a half (I’m 24) and he has nothing – and he’s 25. I know my contributions to the spousal RRSP will come out of my RRSP contribution room… but how does that work in terms of being taxed less later?
It’s safe to assume that I’ll probably continue making double, if not triple what my husband can bring in, in later years unless he starts his own business or something, and I just wanted to make sure I didn’t make a mistake early on.
George: I think you’re doing a fine job. I agree with Andrea – getting a healthier emergency fund should be a priority for you, not your mortgage payments because as she said, a family of 4 needs more EM (emergency money) than two. Especially since your kids cannot work to make up for the slack if anything happens. Other than that, sounds like a great plan. I hope to get to the same position by the time I’m your age
loading....
George, I am thrilled to hear you used cloth diapers. We used cloth with our first child and used the “savings” to set up the RESP. However, we were in a car accident when he was 15 months old and we could no longer manage doing so much laundry, given the whiplash. Suddenly, we had an extra expense (not to mention physio, loss of earnings, etc). Hence my insistence on a big emergency fund. We were lucky to have enough cash flow to cover the expense of diapers (although I suppose we will need years of therapy for the guilt). We are planning to now switch our elder child back to cloth and to use cloth with the new baby.
Sorry for misunderstanding the cost of groceries. But, again, you may see that cost rise.
I am setting up a spousal RRSP thread in the forum. http://www.getrichslowly.org/forum/viewtopic.php?p=7246#7246
loading....
George, isn’t this more fun the spending on extra dinners out and movies?
loading....
Sorry, there is now too much comments to read, I did not take time to read them. But I wanted to share experience:
From George : “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 $275 for “discretionary” expenses like clothing, entertainment, dining out, and the like.”
What I do, is that I do not pay extra to the capital in mortgage expense (with the reasoning that inflation make the mortgage paying less and less hurting). And for emergency fund, 2 month salary is enough. As I now reach that, I do not put any additional money on it.
George, it is about 250$…
loading....
i’m not a big fan of paying mortgage off early, and not a fan of sitting on all that relatively useless/tapless equity as a retirement plan. yeah, it looks nice on paper, but the question is whether you can afford to sell the house, whether you will be able to get a HELOC, or whether the house will appreciate when you are retired. there are many people who cannot get a HELOC even though their house is paid off at retirement (no job=no income ability to pay off loan). plus, instead of actually being your cash, you would have to pay interest to access the equity. moreover, if your house isn’t appreciating, then your equity is depreciating due to inflation. if you are expecting your house to appreciate a lot, then you also have to figure that you may not be able to afford higher taxes on the house. last, downsizing upon retirement may not be possible. houses in the area may be to high or same cost as the equity in your home upon retirement. There has been a lot written about this lately, and I agree. I would rather have the equity in something that is definitely more liquid.
so i’d be doing something else rather than doubling up on mortgage payments. you said your take home pay is $1500 biweekly. does this include your wife’s similar pay? as someone else posted, your goals are what will drive whether you are saving too much. so first thing’s first, re-establish your goals, adjusting for a second child now.
I think you probably aren’t saving enough in the right areas. you have a second child on the way. you should be expecting higher costs associated with raising two kids rather than one (child care, medical care etc). i’d be beefing up on your emergency cushion rather than padding your mortgage payments. what would suck is having to tap your current home equity at a higher interest rate than your current mortgage in order to pay for higher child expenses.
$550/month discretionary is pretty decent. if that is from one pay, then that means you have a household $1100/month discretionary amount. I’m not seeing where the crunch is.
loading....
I read with interest the many contributions to your dilemma. There seems to be a void that is yearning to be filled. If you kept $500.00 per month for extra spending and you see $200.00 in your checking account balance at the end of the month,(arbitrary figures)that gnawing void will still be present, I believe. For me as a Physician, that void was filled when I gave my life to Jesus and His Spirit more than adequately satisfies that yearning for more of “things” I pray that you will have a similar experience. Be blessed as you do
loading....
I’m a 22 year old recent college graduate and my parents never had an education fund for me or my siblings. We went to good public schools and received scholarships and grants that covered 70-90% of tuition/fees. I graduated with just 5k student loans. It’s not a crippling amount. I don’t mind paying for it. I don’t have any ill-feelings towards my parents for not having funds for us. They just couldn’t affort it.
My point is, why do some people harp on having school paid off for their children? Let the kid get a dose of reality by taking on the challenge of paying his/her way through college. It’s not the worst thing that could happen.
Just my opinion and something I may consider doing for my children when I have them.
loading....
Marvelous comments. I have read through them all and learned a lot about how other people think of budgeting and saving priorities. Thanks, George, for asking the question, and everyone else for answering…
It’s especially interesting to see how widespread it seems to be to shun early paydown of a mortgage. Yes: if there are no other liquid savings and no way to create liquid savings, it is a problem, but George has a respectable start on liquid savings (with a promise of more).
Has anyone done the math on this? I know most financial planners advise against putting additional money into housing (using reasoning similar to Tim’s), but I have a feeling that is because they earn more on your money if you invest it with them. I do know that with a traditional, U.S., fixed-rate mortgage the early principle payments return much more than the rate on the loan, but I would like to know how much…
_________________________
Wishing you a prosperous future,
Daiko
loading....
You are doing a remarkable job at saving for the future. Keep in mind that the costs of education are increasing at a faster pace than inflation. It is not unheard of to pay $25,000 to $30,000 per year in tuitiion, room and board at many four year colleges today. That will likely be considerably higher. Your current fund at a 7.5% rate of return will only be a little over $17,000 in 16 years when your first child begins school. In order to reach $300,000 or roughly $150,000 per child in 16 years you should be investing approximately $370 every two weeks. I would recommend that you put the extra principal payments toward education. Good Luck
loading....
[...] Rich Slowly asked whether one can save too much. My answer would be “Yes, it can [...]
loading....
Tim: I’m really confused about why it should matter if I can get a HELOC when I retire. My retirement income will come from pensions, my retirement fund, and (at age 60) the Canada Pension Plan. If all goes well, I shouldn’t have any need to get a HELOC, nor should I need to sell my home to tap into the equity. My goal in paying the mortgage early is to free up some cash flow once it’s paid off, and to minimize interest payments over the course of the loan. Bear in mind that here in Canada, mortgage interest is not tax-deductible.
As to the comments about the emergency fund, aside from the cash-on-hand, I do have a line of credit of around $17k available should I need to use it. It’s there as an extra cushion if, for whatever reason, the emergency fund gets tapped dry.
Dane Silcox: I’d be shocked to need that much money for my children’s education in the future. Current tuition at most Canadian universities is around $7000 per year. There’s a good university in the city where I live, so the kids should be able to stay at home unless they need to move away to attend a specialized program. I like the idea of assisting my kids with their education funding, but not necessarily paying for every possible expense. That said, I’d rather have more funds available than not enough.
loading....
Wow! I wish I could save that much all I have is a measley $500 in the bank. Now you see why I like this site so much, I need to change my financial ways, so to speak.
loading....
“By the time my next paycheque comes in, my bank account is usually hovering close to the zero mark.”
One thing that keeps me feeling okay is that we always have at least $1500 in the bank. We were forced to do this because TD’s chequing account has a $1000 minimum before they waive charges, but it gives a sense of wealth to know we aren’t ever close to zero.
Also, we haven’t budgeted all of our income. Expenses are rounded up, salaries are rounded down, and every couple of months we move a few hundred dollars out of the main account into the house account. You are giving yourself a buffer in other ways, consider giving one to yourself in your day to day life as well.
loading....
Brian’s point is excellent. You’ll never know if you are saving too much or not enough, or just enough, if you don’t know what your goals are. I just wrote a post on that same subject today for anyone who is interested: http://blog.boulevardr.com/2007/09/17/balancing-your-life-with-your-retirement-vision/
loading....
George, you are doing so well, I guess the fear is if you start spending opposed to saving, you will fall of the wagon (not sure you get American slang). I think you’ve shown you’re remarkably responsible with money–but I also understand that while a lot of us can live off of $275 bi weekly for “fun” expenses, sometimes saying no to going out to eat or buying the latest gadget does feel like depriving, especially because so many of our peers have the cool gadgets and/or clothes–and eat out a lot. But I see that a lot of them are using credit cards and going into debt. And suddenly it’s not fun keeping up with the Jonses (another American idiom). I guess my point is I agree with posters here who say you could stop paying extra on the mortgage, but only do so if you want the extra money for yourself, not because of what others seem to have. I’d also like to add that although spending money is fun, so is learning to live frugally–it’s a challenge.
loading....
Hey George,
Keep up the good work.
The anxious feelings you’re having when your checking account is close to zero should be manageable.
You need to remind yourself that the money you have set aside in your savings account can be easily accessed and in effect, your bank balance isn’t close to zero every month!
You are only saving too much if you have to dip into your savings account to pay for day to day things.
If you are able to go from paycheck to paycheck and not have to borrow from your savings, then you’re o.k.
Cheers!
/r
loading....
[...] Rich Slowly has a nice post where a reader asks if he is saving too much. In a nutshell, this reader is in a very nice position since he is saving a large percent of his [...]
loading....
George and others:
You guys are not saving too much…..You are in a very similar position to what I have lived for the last 20+ years in the US, with savings that are unheard of in the common community. Around age 30, I used to have $100K in the bank, $65K in IRA/401(k) and savings very similar to your (minus inflation). Today, the approach you are talking about George, is what has brought me to have more than $1M (do not want to disclose true assets). But, YET, I buy stuff from eBay, Craigslist and other Clearance bins in ‘plenty’ all the time.
It is a good life, but a life filled with sacrifices, but yet, am taking vacations every year that take me to exotic places, have plentiful of toys and a life with kids/family/extra-car etc.
ALL of THAT was only possible with sacrifices from 20-50 (currently 50).
So, if you want what I have achieved, DO NOT LISTEN to anyone about blowing off the $275 or the $100 that you reiterated, and save EVEN more. Drink water instead of coke or coffee at a restaurant, carry your own home-made-lunch, and eat out only once a week.
Enjoy……Beat the SYSTEM, and BUILD A LIFE!
Kenny
loading....