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Episode 3398:
Sam argues that the traditional 6–12 month emergency fund falls short, advocating instead for three years of accessible savings to better withstand economic shocks and avoid forced financial decisions. He also suggests that beyond 10–15 years of living expenses, especially after 40, saving more may become unnecessary, encouraging a shift toward using money for freedom and fulfillment rather than endless accumulation.
Read along with the original article(s) here: https://www.financialsamurai.com/how-much-savings-is-too-much/
Quotes to ponder:
"Never sell anything when you have to sell!"
"My initial belief is that no amount of savings is too much so long as you are happy."
"I say that saving anything more than 10-15 years worth of living expenses once you're over 40 years old is too much and totally unnecessary."
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[00:01:00] This is Optimal Health Daily. How Much Savings is Too Much by Sam of FinancialSamurai.com and I'm Dr. Neal Malik. Hey there and welcome back to the usual Sunday bonus episode. This is where I share an episode from another podcast in the Optimal Family. And today's comes from Optimal Finance Daily. You can find that show wherever you're listening to this. So with that, here's Diana reading for you and her commentary as we optimize your life.
[00:01:32] How Much Savings is Too Much by Sam of FinancialSamurai.com. Prodigious savers of the world unite! From the post, how to retire early and never have to work again, I mentioned I've saved roughly 15 to 18 years worth of living expenses after saving 55 to 75% of my after-tax income every year for the past 13 years.
[00:01:58] If you do the math and follow the chart in this post, you'll see how you too can save 15 to 18 years of expenses in 13 years' time. Conventional wisdom says to save 6 months to 1 year's worth of living expenses in case something happens to your main source of income, whether voluntarily or involuntarily. However, I don't know where this 6 to 12 months barometer came from because frankly, I think that's not very much.
[00:02:27] Goodness forbid you lose your job, don't get a severance, and have a major medical emergency. Even with health insurance, a 20% copay of something expensive is still a lot of money. The ideal amount of savings. Instead of saving 6 to 12 months worth of living expenses, I suggest you shoot for 36 months worth of total living expenses so you don't have to worry about a thing if something bad happens.
[00:02:54] I'm not saying you should have 36 months of living expenses sitting in your checking or money market account at 0.01 to 0.2%. Instead, I'm talking about having 36 months worth of living expenses spread out between savings, CDs, and trading accounts which are easily accessible. 6 months worth of liquid savings in your money market should suffice if you have 30 months worth of savings in other easy-to-access accounts.
[00:03:22] 3 years is a long enough time to weather the most brutal of downturns. Remember when the markets began to crumble in 2000 from the dot-com bubble? By the end of 2003 and early 2004, the economy had recovered quite nicely. Remember when Armageddon hit in the fourth quarter of 2008? It's now a normal market with unemployment down from the peak and the Dow back to 12,600 as of June 28, 2012.
[00:03:51] Amazing how far we've come in three short years. The worst thing you can do is sell assets when you really need to sell. Imagine all the people who sold when the S&P 500 was below 800. How about all the people who had to sell their properties in the past four years? The majority of people who sold stocks and real estate because they needed the money are kicking themselves now. Never sell anything when you have to sell.
[00:04:18] Having a three-year savings cushion will ensure that you financially don't self-destruct and run with the herd like a rabid hyena. How much savings is too much? Given I recommend three years or more of living expenses saved up in liquid to semi-liquid accounts, how much savings is too much? My initial belief is that no amount of savings is too much so long as you're happy.
[00:04:43] Even if you're super frugal with your money, so long as you're happy and the people around you are happy, then all's good. Despite my philosophical answer, we should all understand there's a backstop. Our lives are finite and the large majority of us will not live past 100. Working in reverse, we can calculate that most of us need about 18 years of education to begin working a real job. The first three years is hard to save given the lower level of income and potential debt repayment.
[00:05:13] At a 50% after-tax savings rate, it takes one year of work for one year of savings. By the time we're in our mid-40s, if we're saving 50% of our after-tax income, we can cruise on into retirement if we want. Based on where I'm at with my savings and the quick back-of-the-envelope calculation above, I say that saving anything more than 10 to 15 years worth of living expenses once you're over 40 years old is too much and totally unnecessary.
[00:05:41] I know people who have fantastic pensions and are still saving despite having 10 plus years worth of living expenses covered. Conclusion to saving Ever since I first graduated college, I've had a target to save 20 to 25 years worth of living expenses by age 40 so that I could have the option of retiring and doing whatever I want when the time comes. I realized that my current 15 to 18 years worth of savings is an overkill
[00:06:09] because there are so many things one can do to make money, such as teach, write, start a company, etc. Having an aggressive savings goal pushed me to work hard. I knew that the only way I could obtain my savings goal was to not settle for any old job either. The job had to be fulfilling. Otherwise, I would likely quit after a couple of years due to dissatisfaction. Having a savings goal also helped calibrate what I find to be a good lifestyle with the right amount of expenses.
[00:06:38] A large cushion also gives me the freedom to explore the unknown without fear. If you can treat savings like a game and challenge yourself to save more, I'm sure you'll have a much easier time. Set milestone targets in three-month increments and celebrate each step of the way. You just listened to the post titled, How Much Savings Is Too Much? by Sam of FinancialSamurai.com
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[00:08:02] I might actually agree with a Financial Samurai article today. I think the trouble when we talk about savings is that the terminology is all across the board. Some people refer to their investments as retirement savings and their cash as their emergency fund. Other people refer to their investments as their long-term savings and their emergency fund as their cash savings. What we're really talking about here is how much should you hold in cash and how much should you invest?
[00:08:32] All of your money that you are not spending on your current expenses is savings. The question is, where are you putting it? Are you throwing it at debt? Are you holding it as cash in a savings account or CD? Are you investing it for long-term growth? The question of how much to hold in cash is a very personal one because it depends on your situation.
[00:08:55] Most entrepreneurs, self-employed people, or those with highly variable incomes will probably want to have at least a year of expenses in cash. People who invest in real estate and so can't easily get their money out might consider the three years of cash or CD as recommended in this article.
[00:09:13] But if you're a salaried employee in good health with a decent amount of job security, maybe you're comfortable with three months of cash and the rest can go to fairly liquid investments like low-fee total market index funds. For me personally, my situation called for a year of expenses in cash and another year in an after-tax brokerage.
[00:09:34] While I anticipate not needing to touch the brokerage and to continue to let it grow, it does bring me comfort to know that it's there if I really needed it. But that should do it for another edition of Optimal Finance Daily. I'll be back tomorrow as usual. So I'll see you there in the Wednesday show where your optimal life awaits.