Five signs that you are saving too much

If your emergency fund is overflowing, you have no investments and are not paying down debt, then you are saving more than required, experts say

Financial advisers recommend investing your money as soon as you have saved for your emergency fund and paid down debt. Getty

The Covid-19 pandemic resulted in a sharp increase in savings globally as government stimulus cheques, strong stock market performance and spending cutbacks during movement restrictions resulted in more disposable income for a majority of households.

Many people created a financial safety net to protect themselves from the economic consequences of the pandemic, leading to a huge spike in funds held in savings accounts.

When asked how much money they need to save to consider themselves financially healthy, Americans put the number at $516,433 (Dh1.89 million), on average, a July 2021 report by financial services company Personal Capital showed. About 20 per cent said they would need more than $1m.

We asked personal finance experts to share five key signs that might indicate a person in saving too much.

1. Your emergency fund is overflowing

If the size of your emergency fund is too large, it means that you are saving more than is required, says Vijay Valecha, chief investment officer at Century Financial in Dubai.

“By definition, an emergency fund is supposed to have three to six months’ worth of expenses in a liquid, high-yield savings account. So, if the fund size is large, the person is missing out on good investment opportunities,” Mr Valecha says.

If three to six months’ worth of emergency savings does not seem like it will be enough, another rule of thumb is six months’ expenses for a dual-income household and one year of expenses for a single-income household, says Sophia Bhatti, a partner at Hoxton Capital Management.

“People tend to keep a lot of cash on the side just in case for a rainy day,” says Ramzi Khleif, general manager at digital wealth manager StashAway Mena. “However, all you need is six to nine months’ worth of essential expenses to put aside.”

“Once you have that, the rest can be invested. If you prefer to have liquidity at any time, make sure your investments are in liquid funds such as stocks or exchange-traded funds, so you have access to them quickly.”

2. You have stacked savings but no investments

If you’re debt-free, have money constantly going into your savings account and an emergency fund but have nothing invested, that’s a problem, Ms Bhatti says.

“Investing is one of the best ways to build wealth, but people often avoid it because they’re scared or don’t know where to start. The good news is that it doesn’t take much to get started with investing,” she says.

“All or a portion of the money you currently have going to savings can be reallocated to investments. You’ll find that investing can be more fulfilling and exhilarating than regular savings. Your money makes so much more when it’s invested.”

There have been occasions when a person saving too much in a bank account forgets to contribute to a retirement or investment account, Mr Valecha says.

“This can lead to serious consequences, especially for young people. At a young age, a person is supposed to invest more in risky assets like stocks and mutual funds,” he adds.

“Parking funds in a savings account with below-par interest rate results in the person not having sufficient funds at retirement age to cover living expenses.”

If you think hoarding cash under the pillow or in your savings account sets you up for retirement, you are wrong, says StashAway’s Mr Khleif.

On average, you lose about 2 per cent of your cash value due to inflation, he says.

“Any time your savings don’t grow at the same rate as inflation, you will effectively lose money. Hence, a retirement fund should be invested in for the long run to secure yourself the lifestyle you want at the age of retirement,” Mr Khleif adds.

3. You’re saving but not focusing on paying down debt

Finance experts recommend having some money saved before aggressively paying down debt, but it doesn’t need to be a large amount.

If you have more than $1,000 in your savings and are still putting money in but have debt, especially credit card debt, then you’re saving too much money, Ms Bhatti suggests.

“You’re likely spending more on interest with your credit cards than gaining interest on the money in your savings account,” she says.

“Get $500 to $1,000 saved and then shift your focus to paying down debt. You can get further by focusing on one goal at a time.”

4. When you deny yourself social activities

Some people save but at the expense of their social life, Mr Khleif says. They stop socialising and avoid going out so as not to spend money, he adds.

“However, you can live a balanced lifestyle by budgeting every month and allocating a certain amount to your leisure spending. Consider using the 50:30:20 rule,” he says.

Under this model, 50 per cent of your income goes to necessary expenses (such as food, transport and rent), 30 per cent towards personal expenses (such as entertainment and travel) and 20 per cent towards saving.

“Include fun spending in your budget, so you know you can afford it and it’s already planned out,” Ms Bhatti says.

“Even if you reduce your savings slightly to ensure you can have some fun, it will be worth it in the long run. You work hard for your money, so you should be able to enjoy it.”

If a person is unwilling to give any funds to charity, it also indicates that they find it too painful to part with money, Mr Valecha says.

“Having too much money doesn’t increase happiness. Beyond a point, the act of giving boosts our joy,” he adds.

5. You’re saving money just to take it right back

If you’re constantly pulling money out of your savings, especially to cover bills and general spending, it is an indicator that you are saving too much, Ms Bhatti says.

“Take a step back and review your budget. After all your bills and expenses are covered, what amount do you have left? From that amount, allocate money to enjoy yourself and the remaining into savings,” she recommends.

“The amount that’s allocated to savings is what should be going into savings. Anything more, and you’re doing it at the expense of other bills and spending.”