are you saving too much?

The following URL rehashes a New York Times published a couple weeks ago spotlighting some academic studies suggesting very vaguely that Americans might be saving too much. I'm including the Yahoo! article to avoid the annoying NYT request login and signup pages.

Rethinking Retirement Savings (or Not)

Apparently, this irked some individuals in the retirement planning business, who shot back some darting rebuke found here: Could You Really Save Too Much for Retirement?


My take:

If you'd read through the Yahoo! article in its entirety, you'll bump into the author attempting to raise a worthy debate, ranging from purported academics proclaiming the consequences of saving too aggressively, to rhetorical questions such as why more of the elderly can be found working after 70+ years of age, if saving too much is really what's occurring.

Understandably, the financial planning community's outrage in the second URL makes sense from their fiduciary standpoint for their clients. By answering a shocking article with their own shock-and-awe rebuttal, their intentions are good, even though the actual message, their concerns, are actually somewhat unjustified.

Beyond that, the national savings rate - the difference between after-tax income and expenditures - is actually negative, government statistics show. This is a fact.

According to "The Coming Generational Storm: What You Need to Know about America's Economic Future": (pg. 217)

What's our best bet? If you're saving less than 10 percent of your income, excluding any employer match, you're living dangerously. Twice that rate wouldn't be excessive - the worst that will happen is that you'll have the resources for an earlier retirement or expensive medical care.

Despite this attempt to stir up controversial debate after reading this material, I'm not swaying much from my own beliefs. Retirement savings will significantly determine your lifespan. Consider the ever-popular theory that Social Security and Medicare may not even exist anymore by the time today's twenty- and thirty-somethings retire. The amount of money you have when you retire will ultimately determine how much you'll have to spend for the necessities: housing, food, clothing, transportation, health care, medicines, etc. The less you have, the less you can afford these necessities, the more likely the catastrophic risk of running out of money before you run out of life, eating out of canned cat food.

It's a "pay me now or pay me later" scenario. Either we save like crazy when we can, or adapt to a much more frugal lifestyle in our golden years - you decide.

And on this note, frankly, I'd rather save more than be destitute, shivering in some back alley.

general principle #2 to retire sooner: never forget the costs (part i)

Just as the only things certain in life are death and taxes, investing also carries its own costs and consequences that are certain and inevitable with *any* investment strategy, albeit real estate, stocks, CD's, savings accounts, mutual funds, or an equity position in your friend's startup restaurant business.

There's simply no avoiding the following four investing costs, unless you commit fraud or achieve financial nirvana:

- Risk
- Fees
- Taxes
- Inflation (which could be lumped with "taxes", since inflation = currency tax)

Some people might say they're done with "investing" for what the term's popularly known for. They'd rather be conservative, and just "save." (To confuse you even more, by strict economic definition, almost all of us are really "saving", not "investing.")

No matter, because, really, any strategy or action with the intention of, at its minimum, equity preservation falls under investing.

However, what's traditionally considered conservative investment products and vehicles may in fact be hurt by any of the four cost aspects listed above and can even perform *more damage* than other investment vehicles traditionally *viewed and misunderstood* as riskier to your long-term financial goals.

Yes, you heard that right. Being conservative may be more hazardous to your financial well-being-- depending on a reasonable set of circumstances, which I'll delve into in the future.

As time goes by, I'll touch upon these 4 costs of investing. Hopefully you'll end up understanding why you should scrutinize every investment choice against these costs, and how I will use this knowledge as advantageously as possible.

general principle #1 to retire sooner: pay off consumer debt

Principle: Pay down all short-term consumer debt first, before even thinking about investing.

In fact, paying down consumer debt actually is "investing", in some sense, as we'll see later.

As guilty as I personally am of violating this particular principle, I can't stress it enough, even if my left hand is discplining my right hand for not behaving. That kind of deal.

What's short-term consumer debt? Basically, any account or balance whose interest is largely non-deductible, severely hinders equity growth or accumulation, and ultimately subtracts from your total asset is considered short-term debt.

The following are usually considered short-term consumer debt, in order of priority:
- Credit cards (which can be viewed as a "short-term loan")
- Personal loans
- Auto loans

Consumer debt encourages to borrow against your future earnings. You're short-term borrowing today, but you'll need to pay it back tomorrow. The later you pay back, the larger the interest penalty.

Obviously, the decision to draw these types of debt differs on a case-by-case basis. For example, if personal loans are secured to execute and start up a sound business plan, then the return (and its corresponding risk) of profits from that business more than offsets the risk incurred of accruing interest.

But, ultimately, think of paying off credit card debt as a way of earning indirect interest. If credit card interest is fixed at 15%, then paying off that credit card effectively yields a 15% interest *after-tax*, because you'd be using after-tax money to pay the balance. So, in a rather real and reasonable sense, paying down a credit card balance fixed at 15% interest is equivalent to the balance money actually earning *more* than 15% from stocks or mutual funds! That's impressive in its own right!

You may argue why car loans are considered short-term consumer debt. In many places in the world, a car serves pretty much as a necessity. However, it isn't *necessary* to buy the latest and greatest car that your bank account can stomach. Ideally, cars should be purchased in cash.

Additionally, there are many ways to trim the fat off your credit card balances, such as by balance transfers, or making mini aka micro aka partial-balance, intraperiod payments.

With balance transfers, however, do keep in mind the issuing bank's gotcha's such as promotional low or 0% APR's, transfer fees, balance transfer balance limits, overage fees, interest rate increase date, etc. Balance transfers only benefit if you discipline your financial house to pay off the balance transfer before the promotional APR's increase. Furthermore, if you find yourself sequentially conducting more than one balance transfer for a particular balance, take this as a red flag that perhaps your debt-to-income ratio, along with your spending habits, needs a good, hard look.

Regarding micro/mini/partial-balance payments, submitting multiple payments throughout the month to the credit card issuer before the monthly bill arrives reduces the finance charge / interest amount you would've ended up paying, even if the total amount of the micro-payments equals the one payment submitted at the end of a billing period. Since most credit cards nowadays allow you to either manually pay or set of periodic, scheduled payments online, micro-payments are one easy way to keep dollars in your wallet vs. giving them to a corporate bank.

That's it for Principle #1. Follow the included link to find out more ways to make your credit card debt more manageable, giving your better nights of sleep.

Please provide your comments and feedback on exactly how valuable, or how obvious and mundane, this post was for you.

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Next week will be a momentous one in my recent history: my credit card debt will finally decrease from 5 digits to 4! I'm so excited. Two weeks after that, I should witness nearly zero credit card debt for the first time in a year!