It is impossible to save your way into retirement and despite this I still, sadly, hear the phrase “save enough for your retirement” all too often.
Everyone knows what saving is: putting money away today so that you can use it tomorrow. Or, put money away today to use in your retirement, as many believe. But as I explain throughout this article, money devalues. $1 today will not be worth $1 next year, and definitely not be worth $1 in 30 years.
So you have to flip the script and look at saving in a different light. Yes you need to save for tomorrow, but once you have saved enough to cover tomorrow’s expenses you need to stop saving!
Rather than saving in perpetuity, try asking yourself what you are saving for. If you don’t have an answer other than “for my retirement” then you should probably stop saving. You will, in fact, have probably already saved enough a long time ago and any excess savings you have are just losing value.
To start, let’s explore my first statement.
You cannot save for retirement
When thinking of our long term financial planning and future, we need to consider all aspects of personal finance: income, spending, saving, investing and protection (risk). Saving is a big factor in guaranteeing our financial success, but saving should not be our long-term retirement plan. At some point you have to stop saving, and start investing.
How inflation impacts your savings
A lot of personal finance professionals beat the inflation drum loudly and proudly. It’s a boring topic and we all already know what it is – but do we? Please bear with me while I dive into it, too. It’s important!
Broadly, inflation is defined as the slow and steady increase in prices of goods and services in an economy. Essentially everything will continue to get more expensive. You may have heard someone say that if you don’t get a 2% pay increase every year, then inflation is beating you. This is because if the prices of, for example, bread increases by 2%, but you didn’t get a pay rise to match, you are in effect working for less money than you did the year before because you can’t buy as much bread.
Fairly straightforward.
Let’s take this one step further. The common inflation you usually hear about is something called Consumer Price Index (CPI), or more recently CPIH in the UK. This index takes into account the price of a bunch of goods and services bought by households (a figurative representative basket), weighs them percentage-wise and spits out an average number. This number is then compared to the same number of the CPI the year before which ultimately shows how much the prices on average goods have increased. The table below shows the increases in UK inflation over the last 11 years from 2011 to 2021, both years inclusive.
| Year | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Inflation | 5.20% | 3.20% | 3% | 2.40% | 1% | 1.80% | 3.60% | 3.30% | 2.60% | 1.50% | 4.10% |
I won’t take a step further into describing how the CPI is inherently flawed as I’m already on the verge of diving too far into macroeconomics. However, if you think about it closely I’m sure you will quickly identify examples in your daily life where the things you buy have increased more year on year than the CPI table above indicates. For example, I live in Vietnam as many of you know and the coffee I buy around the corner was 40,000 VND last year, but is 50,000 VND today. Seemingly not a lot by many standards, but still an increase of 25%.
But how does inflation, with a side of flawed macroeconomics, relate to personal finance and your saving habits? Because inflation is the main reason why you can never save enough. All of your saved money gets chiseled away over time by inflation so that when it comes to retirement, the purchasing power of your savings will be much less than when it was initially saved it.
Slightly confusing I know, but I hope this quick example using the above 10 year UK inflation chart, and considering you are lucky enough to have a bank account savings interest rate of 1% (which is incredibly generous) helps.
If you had £100,000.00 saved in a bank account paying 1% interest per year in 2010, that £100k saved would only have the purchasing power of £81,678.60 in 2021 due to inflation, as you can see in the table below.
| Year | Value of £100k |
| 2011 | £96,007.60 |
| 2012 | £93,960.90 |
| 2013 | £92,136.40 |
| 2014 | £90,876.70 |
| 2015 | £90,876.70 |
| 2016 | £90,162.50 |
| 2017 | £87,899.70 |
| 2018 | £85,942.60 |
| 2019 | £84,602.40 |
| 2020 | £84,185.60 |
| 2021 | £81,678.60 |
Your savings would still look like £100k in your savings account (or rather £111,566.84 due to the 1% interest year on year), but it would be worth significantly less because the prices of your normal services and goods have continued to increase. Inflation is essentially beating your savings into submission. Imagine if this continues for another 30 years. Come retirement, your saved money won’t be worth a whole lot.
Now you know why you need to stop saving. But when can you stop saving safely?
How do I know when I have saved enough?
I had a conversation with a friend a week or so ago and we stumbled upon the topic of personal finance. We got into savings and he made a comment along the lines of “no one can know when you’ve saved enough”.
Enough savings – rule of thumb
My friend’s statement above is true, in part. No one rule can tell YOU when YOU have saved enough because personal finance is inherently personal. We all have our own goals, targets and deadlines to contend with. Last year, for example, I was saving for:
- Holiday trip to the US to visit family and my newborn niece
- An engagement ring
- Christmas presents
- A new laptop
- A new phone; and
- A new motorbike
This year I’ll be saving for:
- A new motorbike (didn’t achieve my goal last year as I had to spend my motorbike savings on fixing my current bike)
- A wedding – she said yes!
- More holiday fun (probably a honeymoon too); and
- Christmas presents (I save for this every year as I’d rather set aside $50-$100/month than use $600-$1,200 from my November/December paycheck)
Depending on the total cost of the above, I know exactly how much I need to save until I have enough. In addition, I also have a saved emergency fund.
Saving for an Emergency Fund
A quick subtopic of saving, but worth touching upon is an emergency fund. It is important when discussing personal finance and savings because this should be money that you have ear-marked specifically for an emergency. It is money that you set aside to stop yourself having to take on debt.
The emergency fund should not be mistaken as savings for upcoming known expenses, examples of which I gave above, but should be held separately. In addition, the size of your emergency fund is completely specific to you, your finances, and how risk averse you are as a person.
Every financial planner recommends a different amount. Normally I recommend that someone has an emergency fund size of between 3-6x their combined monthly expenses – depending on their financial situation, of course. If you’re a fairly cautious individual (aka risk averse) and worry that another unforeseen COVID-type disaster will affect your job or income, then you can even have an emergency fund pot to cover 9-12x monthly expenses, although this might be a bit excessive.
By calculating an EF size using your monthly expenses, you will know exactly how many months you can survive on just your EF savings if you lose your job.
Any clearer?
From the above you should now have a solid idea of when you can stop saving! Once you are saving towards, or have successfully saved enough for each of your target goals, in addition to having enough savings in an emergency fund, you can stop saving and start investing. Any more money sitting in a savings account will simply be wasted as it loses value due to inflation.
How to save your savings, before you can stop saving
Similar to the above emergency fund, how you should be saving is also specific to you as a person. As this is a whole article on its own however, I will only touch upon it briefly here.
In short, how you save and when you should stop saving comes down to how much money you currently have, what liabilities you have, and all your known upcoming expenses. Please take the below as a rough guide and not financial advice as each financial plan should be tailored to your specific situation.
If you’ve already got a large sum of money sitting in your bank doing nothing, then open a quick spreadsheet and separate your savings in the following order:
- Emergency fund with 3-6x monthly outgoings
- Dedicate and actually use savings to clear all short term debt and liabilities (credit cards, store debt, personal loans etc.)
- Start a known short-term upcoming expenses fund – holidays, new electronics and other “fun money” (not just rough figures, but exact values)
- Create a known long-term upcoming expenses fund – house/apartment deposit, new car etc.
That’s it. By doing the above you now know how much money you need to have access to (aka liquid cash) and when you can stop saving, or at least slow down. The money left over and any extra you make from here on out can and should be invested safely towards your financial future.
If, on the other hand, you don’t have a lot of money stockpiled, then you will want to gradually put money away until you get to the point where you can stop saving. As a very loose rule of thumb you can:
- Put money aside every month to reach an emergency fund 3x your monthly expenses, while making minimum payments on debt (if any); then,
- Dedicate all spare cash into clearing all short term debt
- In equal weighting save towards known upcoming expenses while also increasing your emergency fund to 6x monthly expenses
- Focus on long-term upcoming expenses
Again, once you’ve reached this point in your personal finance journey you will be safe in knowing that you can stop saving (or at least slow down) and instead start investing towards your future retirement and financial freedom. Saving any more just for the sake of having money in your bank will simply mean that more of your money is losing to inflation.
It has to be said again that the above is a very general representation and simplistic approach to saving money. You should always seek professional financial advice so that you get a plan specific to your situation. But at least now you should know why and how to save, and also hopefully the real purpose of saving.
I’m going to round off by linking to this fantastic Yahoo Finance article written by Cynthia Meason – 5 Signs You’re Saving Too Much.
Don’t be an over saver
I would argue that for every person who spends too much, there is a person who saves too much. Just like life, personal finance is a balance. You don’t want to spend, save, invest or risk too much, and, while most people think there isn’t such a thing as having too much income, you definitely don’t want to work yourself into the ground for it.
As the 5 Signs You’re Saving Too Much article above dips into, saving more than you should doesn’t always come down to financial illiteracy and not knowing what to do with money; often it is linked to financial habits. If you find that you are a habitual, or even compulsive saver, it may be worth taking a step back and looking at the bigger picture.
Why are you saving? What are you saving for?
If your answer is for retirement or that you simply don’t know, then this article has hopefully been perfect for you. Maybe it has helped you realise that you’re saving solely because you don’t know what else to do with your money, or that you need to take a step further with your financial literacy and planning. Remember that the end goal is to be financially free – so that you can work because you want to, not because you have to – and every step you take in your personal finance journey should be towards this goal.
