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Are you Saving Too Much Money?

Updated: Dec 1, 2018

No, this is not a trick question!

Proper wealth building and sustainability is not simply about how much money you make and how much money you save. It really comes down to how you use your money as a resource to work for YOU. If you're simply hoarding cash in a savings account, then you’re not building wealth in an efficient way.

A recent Fortune Magazine article noted that 1 in 6 millennials have over $100,000 in savings -- in this case savings was defined as money in checking and savings accounts, IRAs, 401(k)s, and other retirement or investment accounts. But how much is too much to have in just your savings account? That same article goes on to state that "wealthy millennials are saving their money rather than investing it." And the findings actually show that most millennials aren't investing because they can't they aren't investing because they simply don't want to. There is still much fear built up from the 2008 financial crisis. Understandable, but unwarranted.

For the record, the generic Savings rule is six months rainy day fund + any large cash purchase expected in the near future

The Savings rule: 6 months rainy day fund + Any large cash purchases expected in the near future

This means that your Rainy Day Fund should have six months of savings to cover your household and living expenses should you get fired or suddenly lose your current source of income. And your Special Occasion Savings should have enough stashed for a major purchase, or any particular purpose that would require a large sum of cash in the near future (up to 5 years) , i.e. saving for a down payment on a home or racking up for an elaborate wedding (*insert eye roll here*… the amount of money we spend on these exorbitant ceremonies is truly unbelievable, but I’ll save that topic for another day. Do you boo, I digress).

Once you have those bases covered -- and you're young and healthy -- you should definitely be putting your money to greater use and investing for better future returns.

In fact I highly recommend it.

If you have a long time horizon, safe investing (which btw, doesn't look anything like bitcoin) could be a significantly better alternative for the money you've been stockpiling in your savings account. Yes markets are volatile and investing could bring losses. But over the long term, you're likely to make out much better and reach your savings goals much faster. The S&P 500 index averages around 7% annual return. This basically means every dollar you invest in the market will double in 10 years. Now let's compare that to a savings account, where average rate of savings that banks offer today is <1% interest. If that isn't terrible enough and you really need convincing that you shouldn't be overly smug with flaunting around your supersized savings account, then check this out: that barely 1% interest rate you're getting is lower than the average inflation of 2% a year. So in theory, by the time you decide to spend your money later down the road, it's real value is already worth less than what you've put in. Sucks, right?!

There also seems to be a preconceived notion that saving and investing are mutual exclusive -- and it's somehow against the rules to invest money you're meant to be saving. I'd like to raise my hand and call BS on this hypothesis! Yes investing is risky, but that doesn't mean it can't be used as a tool to stockpile money faster. I also think most millennials believe they are doing themselves a favor by hoarding cash, and they likely consider themselves more responsible because of it. But that's quite the false narrative. For millennials of color, especially, just saving your money will do more harm than good toward making any progress to close the wealth gap. I mean, even your retirement "savings" doesn't just sit there. 401k accounts get invested in broad market stocks and bonds, or whatever you designate. So millennials should recognize that investing can be a great way of saving for long term plans.

So my challenge to you....

After you have fully filled your rainy day fund (always secure that bag first), you should probably consider investing while you save for that major purchase. If you have the ability and the risk appetite, you can still save for your significant purchase while investing cautiously, and that could actually be the "extra help" you need to achieve your savings goal faster!


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