Ramit Sethi Says We 'Can Over Save.' Is He Right?

Here's how to know if you're an over-saver.

Given that a lot of personal finance advice stresses the importance of saving money, you'd be forgiven for thinking there's no such thing as saving too much. Ramit Sethi, the man behind the ​​I Will Teach You To Be Rich book and website, thinks otherwise. He says people can (and do) get so tied up in saving for the future that they miss out on enjoying what they have.

Sethi recently tweeted that it's possible to over save. He highlighted a conversation with someone who'd got so into the habit of saving that they couldn't bring themselves to spend anything. "I recently spoke to a guy about his finances," posted Sethi. "He's saved and invested consistently, increased his salary, and managed his expenses. His problem: He can't bring himself to spend his money."

Is it possible to over save?

Many people struggle to save money, especially in the current inflationary environment where a dollar doesn't go as far as it used to. But for some people, the habit of saving has become so ingrained that they can't let go. Put simply, you can have too much of a good thing.

For example, let's say you have more than nine months' worth of living expenses in your emergency fund, and are more than on track with your retirement savings. If you're still nervous about spending money on, say, a vacation with your family or dinner out with a loved one, you may be overdoing it on the savings front.

Perhaps you're self-employed and often find yourself working late nights and weekends to put extra cash aside. That's understandable, especially if you like your work or aren't where you want to be financially. But if a fear of not having enough money in your bank account means you're always working, you might be heading for burnout rather than financial security. Especially if you're actually on top of your financial goals. 

Knowing where to draw the line

If some of the scenarios above ring a bell with you, congratulations. Being frugal isn't easy and it takes dedication to prioritize the needs of your future self over the things you might desire today. All the same, if you've already overshot your financial goals and are still making sacrifices, it might be time to re-evaluate your habits.

There's no hard and fast rule about how much you need to save. Everybody has a different idea of what constitutes financial security and how much they will need in retirement. Here are some questions to consider:

How big is your emergency fund? 

Many financial experts recommend having three to six months' worth of living expenses in a savings account as a cushion against the unexpected. With a potential recession looming, some have upped that amount to nine months or even a year. If you've got more than that, you may want to cut yourself some slack.

What are your retirement plans? 

It isn't easy to plan for old age, because we don't know how long we'll live, what our health situation might be, whether we'll be able to work for as long as we hope. Some people use the 4% rule, which says you can withdraw 4% of your portfolio's value in your first year of retirement and adjust it for inflation every year afterwards. The idea is that you'll be able to live that way for 30 years without running out of money.

It isn't a hard and fast rule, but it does give you an indication of how much you'll need to set aside before you retire. Let's say you have $1 million when you reach retirement age. That means you'd be able to take $40,000 in your first year of retirement and adjust that for inflation in the subsequent years. Sky-high inflation has undermined this idea a little recently. However, if you're on track to massively overshoot your target amount, you might be able to ease up on your contributions.

Bottom line

Like many things in life, extremes are rarely helpful. There's no point saving so much today that you don't have time to build any happy memories. Equally, spending more than you earn will mean you can't build wealth for the future. The trick is to strike a balance.