Are You Saving Too Much?

Date: November 15, 2016

Conventional wisdom says that you should have at least six months’ living expenses tucked away in case of a financial emergency, but saving more than this can be a hedge against a disaster that may never come. Saving too much is not likely to help you get ahead, so you might consider other options when you reach that six-month threshold.

 

Saving vs. Paying Down Debt

Interest paid on savings accounts at some of the nation’s major banks ranges from .01 percent to 1 percent as of 2016. That’s a minimal rate of return, so putting more cash than necessary into such accounts makes little sense. Although the money is readily available in case of emergency, it’s essentially stagnating there if your goal is to raise your net worth.

You might want to pay down debt instead after you've reached the six-month emergency savings mark. If you’re paying 15 percent interest on a credit card and earning 1 percent on your savings, you’re 14 percent in the hole. You can always resort to those paid-off credit cards if an emergency strikes and you need more than six months’ worth of living expenses, although you’ll have to pay back the borrowed amount with interest, unlike money you take from a savings account.

 

Saving vs. Investing

Another option is to invest your money rather than stash significant amounts in a garden-variety bank account. However, higher returns typically mean increased risk, so the decision to invest your money, rather than simply saving it, depends to some extent on what you’re saving for. 

Date: November 15, 2016

If you’re going to need the money sooner rather than later – in a few years or so for a new home or your child’s education – you might not have all you need exactly when you need it. Investments that reflect fluctuations in the stock market can nosedive periodically, although they usually rebound over extended periods of time.

 

Saving vs. Buying a Home

Real estate is another long-term option for making your money grow. Consider buying a home, rather than renting, or venture into the business of real estate investment. If you put your savings into a down payment on a rental property, the tenants will effectively service your mortgage and other expenses over the years. Meanwhile, your mortgage is being whittled down and your net worth grows over time as the property appreciates. Owning real estate also provides some tax benefits, which represent savings. 

Real estate isn’t liquid if you need to tap into its value in an emergency, but — just like with taking on credit card debt — you can always take out a loan against the property’s equity. And, of course, if you’re buying a home to live in for the long term, it will probably be worth a lot more in 20 years than if you had let the down payment sit in a savings account.

 

Retirement Plans

Company retirement plans are an exception to the usual rules if your employer matches your contributions. This is another long-term investment, but you’ll effectively increase your savings each time you contribute. Bankrate suggests that you should always maximize your employer's match before putting money into traditional savings accounts or other types of investments.

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