The Cost of Saving Money

the cost of saving moneyI love saving money. Ask my wife, she’d be the first to tell you. She thinks I’m a tightwad and that I wrote the book on skinning a flint. I like to think she is maybe a bit facetious. Maybe.

But then again, I am mature enough to see the grain of truth in such statements (even if they are larger than I would like). And so I’ve been thinking about the ways in which saving money may cost us more than we gain. So here are 3 ways I’ve seen saving money cost people more than they saved.

The corrosion of Inflation

Your mattress is a bad place to stash your savings. Not just because someone may grab it when you aren’t looking, but because the effect of inflation will eat away at your money’s buying power. Over the long term, your working life for instance, a savings account at a bank is only slightly better than a mattress. Most brick and mortar banks pay criminally low interest. You’ll actually lose money (when inflation is taken into account) after a lifetime in a traditional bank savings account. If your money earns 1% interest but inflation runs 3%, you’re losing 2% of your money per year. For example, if you had $1,000 in a bank with no interest in 1975 it would have the same buying power in 2007 as $247.05. Ouch! Online, high yield, savings banks are better but still not enough over a working lifetime to beat inflation.

Money markets are better, though many high yield savings banks are comparable to a money market rate. CDs are better still, but you have to buy at the right time, or you could be locking your money up at a low rate before rates (and inflation) rise. Bonds are good, but may also lag inflation at times, and the recent manic-depressive swings in the stock market show how volatile (read risky) the stock market can be.

So what’s a poor saver to do (especially if he doesn’t want to be poor!)?

If you put all your money in the bank, you’ll be safe from the capricious stock market, but have either little gain or little left over after inflation takes its toll. If you put all of your savings in the stock market, you could lose it all with a wild market swing too close to your retirement date to make it all back.

The closest thing to a simple solution is a diversified portfolio of stocks and bonds. That’s the best chance to outrun inflation over your working life, but what about the risky nature of the stock market? That’s where savings, money markets accounts and CDs come into play. You should absolutely keep saving money in these types of accounts – but for the short term, not for the long term. Cash savings should be for emergencies, new car purchases, and to fill in the gaps in retirement caused when your stock market investments suffer losses. Investments are for growth and outpacing inflation.

Psychological Resistance

Being a tightwad can lead to repressed spending, which can become overindulgence when released. The more we try to suppress a human reaction or behavior, the greater the eventual outburst when all that pent up pressure is released. Don’t get me wrong, if you’re happy living the frugal lifestyle and don’t mind washing and reusing zip lock bags, then more power to you. But if you strive to live that lifestyle with too much haste and you do not possess a natural temperament toward such things, you’ll likely set yourself up for failure.

Think of it as the binge-and-purge approach to finances. I’ve seen people do a truly remarkable job of cutting expenses in the hopes of generating excess savings to pay off debt, only to finally crack under the pressure of having denied themselves any splurge whatsoever. And so that morning espresso they slashed from their daily spending comes back as a PC game or even a flat screen television. It’s not about frugality or savings, it’s about moderation and consistency.

The Missed Moments of Life

Perhaps the most insidious and costly effects of saving too aggressively is all those lost moments of our lives that we pass by because they seem too expensive, but in hindsight leave us only with regrets. Too much cost cutting and scrimping may mean you are always saving for a rainy day and miss out on the things that make life worth living.

It’s really about balance. We need to put money in our savings to avoid debt, and we need to invest to provide for our future. All the while, remembering to splurge a little and enjoy the opportunities life brings our way.

Image courtesy of Mr & Mrs Stickyfingers

This entry was posted in Personal Finance, Saving Money and tagged , , . Bookmark the permalink.

2 Responses to The Cost of Saving Money

  1. Jeremy Day says:

    Hi Joe,

    I have to agree. Have a small emergency fund of 1 to 3 months expenses in cash and invest the rest for the long term. Have a system like saving 10% off the top and just enjoy your life. Life is too short to worry too much about money issues.


  2. Carol says:

    Good article. I want to make wise saving decisions without having to resort to making my own baby wipes or laundry soap like some of thes frugalite web sites preach. Balance is the key, not feeling guilty or agonizing over every purchase. And no, I’m not a free-spending credit card junkie either.

Leave a Reply

Your email address will not be published. Required fields are marked *