How Aggressive is Too Aggressive When Trying to Save?
Trying to save more is a laudable goal. Financial advisors and commentators have advocated that, generally, more aggressive savings plans are a good thing. However, difficult as it may be to believe, there comes a point when over-saving does more harm than good. One can be too aggressive in trying to save money.
Cost Control – Generating Savings
When trying to save money, low-price products can cost more in the long run. For example, a discount pair of shoes may last one year, whereas a shoe selling for twice as much will endure for three years. In that kind of situation, the “cheaper” option ends up being more expensive because replacement costs add up more frequently. Saving aggressively means looking at aggregate costs. Line-item prices may be enticingly low because they ignore vital replacement or maintenance.
Savings – Liquidity and Cash
When trying to save, it is no vice to aim hard in gathering together an emergency fund. An emergency fund’s goal is to get someone through a rough patch or expense without undue hardship. An emergency fund should cover about six months of living expenses and be available at a moment’s notice. Liquidity and ease of access are primary concerns in an emergency fund. Interest that a fund may accrue is nice, but not a high priority.
Savings — Inflation
Inflation will eat away at real purchasing power of any funds that do not generate sufficient gains or interest, so be sure to augment nominal value of an emergency fund with something adjusted for inflation. Low risk or low/moderate risk securities go a long way with offsetting inflation-related losses. Increased risk tolerance and focus on capital gains should be a part of the tail end of an emergency fund. It is unlikely that a person will need the entirety of an emergency fund right away. If necessity demands, a saver will have enough warning to turn more ambitious investments like stocks into cash should the need arise.
Overall, an emergency fund should keep up with or slightly run ahead of inflation. Any stocks and bonds should be liquid, highly traded securities to enable quick conversion to cash if need be. Treasuries and low-spread defensive dividend stocks come to mind.
Investments – Ahead of Inflation
Someone saving too aggressively has the good problem of having more money than they know what to do with. Here is the domain of investing. If the emergency fund is filled to the brim and the bills are paid, an aggressive saver can invest for above-inflation gains that can be very rewarding. Small-cap stocks, high-yield bonds, even stock options and futures open up possibilities for an aggressive saver. At this point, capital gains are more important than immediate access to cash.
Speculative investments can generate returns many times the cost of credit. An ambitious saver may therefore hope to augment gains with borrowed funds. While trading with borrowed money can generate impressive gains, note that some types of credit such as a vehicle title loan are very expensive and place car ownership at potential peril.
Individual financial means and goals will vary. As such, prescribing a dollar amount or percentage that separates “enough” from “too much” in terms of savings is difficult. However, it is prudent to remind the reader of the key reasons as to why there is such a thing as being too aggressive in saving money:
1.The primary quality of savings is immediate access to cash and minimal risk of loss. This translates into increased purchasing power erosion and opportunity cost as more and more lucrative investment opportunities are passed up in favor of fool-proof savings accounts that yield trivial interest rates.
2.Overall, allocating funds to securities that have moderate appreciation potential will give greater results that can be funneled back into savings or other ventures.