Question:
Is it possible to save too much?

We are a young married couple and earn R30 000 net income a month. We only spend about R12 000 and thus save about R18 000 a month.

Should one try to spend more? What is a healthy balance between income, expenses and savings?

Answer:
Firstly, let me congratulate you on the discipline you have shown in saving in such a structured way. This is by far the most difficult financial hurdle for most of us.

With regards to your question of whether it is possible to save too much, well it depends. Instead of answering this question with a 'yes' or a 'no', I think it is important for us to explore the consequences of saving aggressively. Based on how you feel about the outcome, you can then decide how you want to proceed.

Most of us have two different sources of funds that support our lifestyle needs. The first is our business assets. For many of us this is not a physical business, but rather the skills we have that allow us to earn an income (i.e. our income earning ability). As long as we rely on our work — or our business — to provide for our lifestyle needs, we have to invest the time and effort our work requires to be financially secure. Many people rely only on their business assets to fund their lifestyle needs and we often find that that they never become financially secure. They keep working all their lives because they have to.

Our second source of funds can be referred to as our lifetime assets. These are the assets that will support our lifestyle needs once our business assets no longer support our needs. This can happen in case of retirement or when we no longer want to work. Once we have enough lifetime assets to provide us with the money we’ll need for the rest of our lives, we will no longer need to work in order to be financially secure. Typically these assets comprise our savings, which in turn are made up mainly of our retirement funds and our own discretionary investments. Some people further contribute to these assets when they retire by selling their businesses or by moving into a cheaper home and saving the proceeds. So, the money you are saving at the moment should be going into your lifetime asset pool. As a rule, you need to ensure that your chosen investment strategy will outperform inflation over time. You also need to understand and accept the risks associated with your investment strategy so that you will not make poor decisions based on emotional reactions.

Now on to the consequences of possibly saving too much. By saving aggressively, our lifetime assets grow at a much faster rate. This means that you should arrive at the point of not needing to work and being able to do what you want to do at a much earlier stage in your life. You will notice that I use the word ‘should’. When we look at our lifetime assets, it is a bit like looking at our funds as an imaginary bank account. How much money we end up having is determined by three things: how much we save, how much we spend and how much growth we get.

If you do not spend aggressively — and at the moment it seems you aren’t — there will be more money left to grow. A properly qualified and competent financial planner (preferably a certified financial planner) should be able to tell you at exactly what point you will have enough to support your chosen lifestyle. She or he will also help you ensure that your investment strategy will beat inflation over time at a level of risk you’re comfortable with.

So what could happen if you continue to save aggressively? The consequences are as follows:

1. You will be able to stop working at a much earlier stage of your life. This means that you will be able to start doing what you want without needing to earn an income.

2. Once your lifetime assets meet your needs, your time will be your own. You will now be able to spend all the time you want with your kids or doing something that makes you happy.

3. If you want to work for longer, you will be able to draw more money out of your imaginary bank account and increase your standard of living. Typically, starting a family makes this happen by default. A word of caution on this though: Before you choose to spend more money, please have a financial planner run the numbers to see that you don’t go too far.

4. You will be able to invest your money in something that does not need to be exposed to more risk than you are comfortable with because you will not need very high returns to fill your lifetime asset pool.

I hope that the above answers your question. Whichever way you look at it, it seems that you are much closer than most of us to being able to live the life you want to live. May your good discipline continue to make your journey a pleasant one.

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