Are You Saving Too Much?
March 02, 2011When was the last time someone asked you if you thought they were saving too much? Someone recently asked me this question and at first I was taken aback. How is it that anyone could have money to save, let alone enough to wonder if they were saving too much? Didn’t we just go through a recession? Aren’t we all just swimming in debt, living paycheck to paycheck, desperately trying to make ends meet?
Well, without question some of us are, but more and more people that I talk to aren’t. According to our research, 64% of employees report having a handle on cash flow, and 82% indicate they are paying bills on time each month. Many have seen what “living beyond your means” will actually do to you and have chosen not to fall into the same traps. They are choosing to live below their means, renting instead of buying, buying used rather than new. They are asking whether it is better to pay off debt or to save more. Many have an emergency fund, and most are contributing to a retirement account.
So is it possible that they could be saving too much? In some cases, yes. Here are three instances where saving too much could be a problem:
Overfunding your emergency fund
Most financial professionals suggest having 6 – 12 month’s expenses in an emergency fund in case of any unexpected expenses. Having more than this amount could be costing you money, especially if you are also carrying high interest debt. Consider using your excess cash to pay down your debt, or look for investment opportunities outside of your emergency fund.
Overfunding your education
We all know that higher education is expensive, but saving too much for college could cost you as well. Using the very popular 529 plan to save for college has the benefit of tax-free earnings when the funds are used to pay for qualified expenses, but if Junior finishes school early and you still have money in the account, unless you find another beneficiary you may have to take a nonqualified distribution. If so, not only will your earnings be taxed, but they will also be subject to a 10% penalty.
Overfunding your tax-deferred retirement account
I can’t stress enough how important it is to save for retirement. According to the same research I referenced earlier, only 17% of employees are on track to meet their retirement goals. But that doesn’t mean that we should be throwing all of our retirement dollars into tax-deferred accounts. Remember, when you put money into a tax-deferred account that just means you’ll pay the income taxes later, when you take it out. This makes sense if you are in a high tax bracket today and expect to be in a lower tax bracket in retirement, but for many of us the opposite is true. If you’re just starting your career, or you qualify for a bunch of tax credits and/or deductions (I have four children under 13 so I get a nice Child Tax Credit each year – for a while anyway), you may be better off paying the income taxes now and accruing tax-free money for retirement in a Roth IRA. Definitely put enough into your retirement plan at work to receive the full amount of any company matching contributions, but above that consider if the Roth IRA is right for you.
So the next time you find yourself asking someone if they think YOU are saving too much just remember, it’s not how much you save, but how you save it that counts. 🙂