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When are you saving too much?

Darius Foroux wrote a good piece about some financial advice that he has gotten from his dentist. His dentist died from a motorcycle accident not too long ago.

He has a great relationship with his dentist and over time they have conversations not only about his teeth.

The biggest financial advice that his dentist gave to him was that it is likely he will make the majority of his money in his 40s and 50s and he doesn’t have to save all his money today and enjoy life.

Context is important.

The dentist started investing in his thirties and acquired substantial wealth in his life.

Darius’ piece explores where is the boundary of saving too much versus not saving to your best potential.

Saving too much can be seen as a happy first world problem that others do not have the privilege to enjoy.

But it may also be a horrible feeling if you wake up one day and realize that you saved all this money and have not lived life more.

How do we figure out how much is too much?

Darius provides some guidelines:

  1. If you are constantly asking about the price of everything, you are probably not in a healthy position.
  2. If you are constantly living paycheck to paycheck, that is not very healthy either.
  3. There are no clear guidelines. We cannot say $1 million or $6 million is enough (recently, this $6 million number seem to pop up more and more.
  4. There are a few questions that you should explore to find out if you are not putting your money and spending it in an efficient manner
    1. What do you value in life?
    2. What is your desired lifestyle?
    3. Do you enjoy your career?
    4. Would you like to live in another place?
    5. What are the odds you would work until you’re old?
    6. Do you have a support system?

Exploring these questions could possibly recalibrate how you think about how you allocate your money.

And above all else, we want to allocate our wealth in exchange for what we value the most.

If you allocate more to saving for financial independence, then you value safety and optionality more. If you allocate more to spend today, then you value living a rich life today.

Personally, I would caution that not everyone has the same job security or insecurity such that the same piece of advice applies to everyone.

You may work in a field where there is less internal fulfilment, bring in a lot of money, and be harder to sustain physically and mentally.

The same scheme of living does not apply:

  1. Retiring first, working later may be an option
  2. Coasting financial independence may be an option

Recently, someone asked this question on the Singapore financial independence subreddit that he or she is struggling to go closer to a 70% savings rate. Sometimes, even in the pursuit of a niche area, there is a certain set of societal norms that influences us.

The Retirement Grid

The savings/surplus rate is the main barometer to measure your pace towards FI. The investment rate of return is another.

But if you do push it to the extreme, then you run the chance of getting somewhere fast and not knowing what to retire to.

For those of you that would like a more quantitative guide, here is my rule of thumb to find your sweet spot:

Visualize that you have the potential to save 100% of your take-home pay. This is a weird way of looking at things. Most of us struggle to even go up to a 20% savings rate.

But in a way, this post speaks more to that frugal couple or individual that have that luxury of dialling up their savings rate LOWER instead of higher.

If you want to be on track for financial independence in most of your life decisions, aim for a 35-60% take-home savings or surplus rate.

This is level 1.

At level 1, I would encourage you to aim for 60% if possible. The reason is that if you look at my savings rate to investment return table above if you save 60% consistently, you will roughly accumulate what you need between 8 to 15 years regardless of your investment rate of return.

Doing that keeps you on track for traditional financial independence ALL ELSE BEING EQUAL (and this is a big caveat because I can assure you, most of your individual situations are different haha)

Beyond that, if you have the ability to save more than 60% up to 90%, you should seriously ask yourself whether delaying your spending and saving is seriously depriving you of something today.

You might need to speak with someone else or do some serious introspection.

The appeal of this 2 level system is that it is pretty flat and simple.

Most people I know dunno what the fxxk they are pursuing financial independence for.

Most likely it is for financial security. And the way I look at it, you really don’t need a perpetual stream of income to feel financial security.

So a level 1 35-60% take home savings rate allows you to grow and find your personal reason to pursue financial independence.

If you find a reason, dial up the savings rate or dial down the savings rate.

There are exceptions to this rule.

We have people in my Singapore Financial Telegram group that have a 90-95% savings rate and still live a good life. We don’t have to worry that he does not think about this “are you saving too much” stuff enough because there is enough introspection there.

But that is rare.

We often save money to buy something we felt highly anticipated and the experience we have afterwards is less than stellar. This happens to us again and again.

So how can we be so sure about our life decisions such as our fervent pursuit of financial independence, or living for the moment?

Remember to reflect more and dial up and dial down accordingly.

If you enjoy articles like this, you can read my Building Wealth Foundation series below.

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