Everybody knows they should be saving for the future and investing their savings so the money grows into a plump nest egg in time for retirement. Likewise, we know we should have a rainy-day fund, too, even if millions of Americans who, either out of necessity or sheer carelessness, live paycheck to paycheck.
But consider the flip side: overly prudent savers who end up saving up more than they’ll ever need in retirement, and at a high cost to their present selves. Maybe you’re one of them.
The extra money you save isn’t free. First, it comes from somewhere (usually your hard work). Second, assuming you would have worked for that money anyway, you could have spent it much more intelligently and enjoyably. Put another way, the “extra” money represents fun, fulfilling, and memorable experiences you could have had but didn’t.
We will all die—so would you rather die with tens of thousands of dollars to your name, or die with zero after having spent the money on additional adventures or generous gifts during your lifetime?
Put that way, most people would pick option No. 2—even the thoughtful, self-disciplined people I am calling overly prudent.
When I first moved to New York City after college, I was like that, too, taking pride in how much money I was managing to squirrel away on my meager salary as a peon on Wall Street.
Luckily, my older and much wiser boss set me straight. In the unvarnished language of Wall Street, he explained why I must be the worst kind of idiot to be saving that money. I was on track to earn much more in the coming years, so it was stupid to rob my poor young self to give that money to my older, richer self, he said.
This slap in the face was one of the biggest turning points in my relationship to money.
Even if you doubt that your future income will be higher than it is now, being overly prudent sets you up for living a life of unnecessary levels of personal sacrifice. Sure, it’s smart to save some money now so you can enjoy more in the future—but past that point, delay amounts to diminished gratification and missed opportunities.
Regrets that can’t be undone
For example, in my 20s, before I fully saw the light, I passed up a chance to backpack through Europe with my roommate, who traveled for two months and had the adventure of a lifetime. Missing out on that trip is one of my greatest regrets. Yes, I’ve traveled in Europe since, but there was no re-creating my friend’s trip; as a middle-aged guy, I’m too old and too bougie to enjoy staying in youth hostels even if they’d let me!
If you have similar regrets of experiences missed, you know that delaying gratification can mean no gratification at all. At the extreme, if you save your whole life for a dream trip to Paris, you might find yourself too frail to actually travel to Paris, or to enjoy the great city at all once you’re there.
The ultra-rich, who you may not think of depriving themselves, nonetheless suffer from the consequences of over-saving. No matter how generous they are, they are bypassing opportunities for doing even more good in the world—unless they plan to give all their wealth away while they’re alive. What’s more, if they continue to exchange their time for even more money, they are foolishly depriving themselves of many wonderful experiences they could be having with the money they already have.
Being overly prudent isn’t a problem for just the ultra-rich, of course. Americans’ median net worth keeps climbing into their 70s. (Some may say they are saving for unexpected medical costs, a nursing home, and the possibility of a very long life, but that makes them an insurance company with a client of one—a needlessly costly way to manage risk, considering alternatives that include annuities, long-term care insurance, and the various safety nets your tax dollars pay for.)
So it’s no surprise that a large percentage of Americans die with far more than zero, as we can see from inheritance data. The median inheritance is more than $60,000. That’s some serious over-saving, particularly because the median age of getting an inheritance is 60. Is it really wise to save so you can give money to a 60-year-old?
I’m determined to die with zero, or as close to it as humanly possible, so any money I want to give to my loved ones I’ve either already given them, continue to give them, or put into a trust for them to get at an age when they’re young enough to get the most out of it.
So how do you avoid the pitfall of over-saving without leaving yourself high and dry in your old age? My best suggestion is to know what you need to save for necessities. I’m talking about the basics you need for survival: groceries, not restaurant meals, for example, and a decent roof over your head, not a mansion on the beach.
This isn’t to say you can’t and shouldn’t save more for a better lifestyle; it’s just that the whole point of figuring out how much you’ll need to survive on is to know what it takes to avoid the worst-case scenario and to allay your direst fears about old age. Once you’ve got those basics covered, you can start adding money for what you actually want.
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Go beyond a bucket list
What do you actually want? This is a huge question that most people don’t give nearly enough thought to. You might have a bucket list full of experiences you want to have before you die, but have you thought about when you’ll have each of those experiences? Do you want to take that trip to Paris in your 40s, or your 60s? Do you want to learn to tango in your 20s, or your 50s?
I urge everyone to think about their life experiences in terms of such time buckets. Doing that helps you get more out of life in two crucial ways.
First, you wake up to the reality that timing matters. Because everyone’s health declines with age and because tastes change over time, the optimal times for many experiences are sooner than we’d like to imagine. This gets even easier to see when you look back on your past. Do you remember what you used to love doing as a kid? Whether it was playing hide-and-seek, collecting Matchbox cars, or swinging high on playground swings, the odds are good that you’ve moved on to other interests.
I’ve learned my lesson not to keep postponing certain experiences. And my growing daughters, who no longer want to watch the children’s movies we used to love watching together, are a frequent reminder of how quickly windows of opportunity for certain experiences close. I now time-bucket my life, and re-bucket it when circumstances change.
Slotting experiences into time buckets also forces you to plan your earning and your saving with purpose.
The last thing you want when you reach the end of your days on this planet is an account full of money yet a life short on the wonderful experiences you wanted to have but failed to plan for.
Bill Perkins is a hedge-fund manager, high-stakes poker player and the author of “Die with Zero: Getting All You Can from Your Money and Your Life”. Follow him on Twitter @bp22.