At a party thrown by a billionaire on Shelter Island, author Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel, Catch-22, over its entire history. Heller responds, “Yes, but I have something he will never have…enough”.
The Big Question
The question of “Am I saving enough?” comes up often, particularly in an era where the national savings rate hovers in the mid-single digits, and more than half of Americans have less than $1,000 in their savings accounts. While the right amount to save is different for everyone, a quote from Jim Rohn’s father frames the issue nicely: “You can pay now and play later or play now and pay later. But either way, you are going to pay.” At its core, saving is a decision to postpone consumption to a future date.
It’s About Balance
We believe people should focus on finding the right balance between saving for tomorrow, while still enjoying today. As a financial planner, it’s easy to recommend working longer, saving more, or living well below your means. However, this advice can be difficult to follow for the young physician who already has lived conservatively for 8+ years of med school and residency and is now working 70-hour weeks. This is not to say go out and buy a $2 million home right away and live a lavish lifestyle, but recognize that you don’t have to fall at either extreme of the saving-spending spectrum. If you settle somewhere in between, you will likely strike the right balance between enjoying the present while preparing for the future.
That said, we encourage clients to establish good savings habits early because of the flexibility that comes with achieving financial independence. When starting your career, it’s easy to say you will work until age 65 to justify your current lifestyle, but should you be working at 65 because you need to or because you want to? There is a personal balancing act to undergo when deciding when you would like to be financially independent, knowing that the earlier you choose, the more sacrifices in current lifestyle you will have to make. In personal finance, as with many things in life, it’s all about tradeoffs.
How to Determine What’s Right for You
We recommend you walk through a process to determine what amount to save is right for you. First, decide on your goals (financial independence, college funding, charitable giving, etc.) so you can back into your target savings rate. Once you know this number, you must figure out if it’s a reasonable figure. Think of your annual cash flow as water in a pitcher and each of your goals as different glasses. You can only use as much water as you have in the pitcher, so if you can’t fill up all the glasses, you must prioritize which glasses to fill and with how much water.
Once your priorities are in place, you must ensure that you are saving in the most efficient manner with the correct accounts (e.g. don’t spill water when pouring from the pitcher). The final part of the process is often the hardest. It is to remain disciplined with your savings and adhere to a sound investment strategy. You should also recognize that your life is fluid and goals, incomes, and circumstances change over time. You must repeat this exercise periodically (annually is a good target) to track your progress and understand whether your priorities remain the same.
Keep Things in Perspective
And remember that “enough” for you may not be the same as “enough” for your neighbor. Money is relative. To some people, $100k feels like a fortune while others are concerned with “only” $3 million. There is an inherent tradeoff in saving and spending, and each person must weigh the life satisfaction of immediate consumption with fulfillment of future financial goals. We always remind clients that money is nothing more than a means to an end.
About MD Wealth Management: We are an Ann Arbor financial planner that specializes in providing financial planning for physicians and retirees. We are CERTIFIED FINANCIAL PLANNER™ professionals and fiduciary financial advisors who operate on a fee-only basis, which means we do not sell financial products or collect commissions. As an Ann Arbor financial advisor, we enjoy working with clients both locally and remotely.