Why Saving Money Can Actually Be a Bad Thing

There are two ways we think about saving money, and they’re both problematic in their own way. Let’s take a look at them.

Saving for a Rainy Day

We’re conditioned to save for the proverbial ‘rainy day,’ when something goes wrong and we need to rely on our savings. I’m a fan of saving enough money to cover sudden and unexpected expenses (in the form of an emergency fund), but I also have a couple of issues with the concept.

We’re Encouraged to Save Rather Than Invest

The traditional emergency fund is in an easily accessed account, which tends to offer low or no interest. This means there can be a high opportunity cost for those funds. They could be in a much higher earning investment option, but that might mean they’re less easily accessible.

There’s no easy answer to this one, and it’s advisable you consult a professional, if you can, to take a look at your own personal set of circumstances. As a general rule however, try and keep the minimum recommended amount (for your age and life stage) in emergency funds, and get into the habit of considering longer-term investments for everything else.

We’re Not Encouraged to Look at Other Ways to Protect Ourselves

Some emergencies that we dip into our emergency funds for aren’t emergencies at all, or at least they are situations that could be covered in other ways. When assessing how much to save (as opposed to invest) consider the following.

• Insurance – the right policies can cover you for everything from ill health and theft to car repairs and veterinary bills. In other words, many of the things we think of as emergencies.
• Worker’s benefits – the benefits offered by your employer aren’t just ‘nice to have’ extras. They should be a major consideration when job hunting and negotiating employment packages. Being laid off work because of illness or injury, for example, is a common reason cited for having an emergency fund, but workers’ compensation packages might cover you automatically.
• Expected expenses – some emergencies are actually foreseeable expenses. Things like a child deciding to go to college can see some parents dipping into an emergency fund, whereas a 529 savings plan might have covered the fees, and provided tax advantages. Be aware that kids can change their minds about things like college, sometimes with very little notice.

Saving Money on Purchases

We’re always trying to save money on the things we purchase, which is problematic on three counts.

We Persuade Ourselves that Spending Is Saving

You know this already, but I’m just going to go ahead and remind you. Buying something you don’t need or won’t use at 50% off does not constitute saving money. It’s simply spending. You didn’t save the 50% the item was reduced by. You spent the 50% they were still charging for it.

We Make False Economies

Saving money by buying cheap can be a false economy. There are some things worth spending more on because they’ll last longer, not need to be replaced, and even be safer. Check out the things money experts advise buying cheap, and always consider the amount of use something will get when considering whether to invest in quality.

We Use Valuable Time to Save Small Amounts of Money

If you’re one of those people who drives to another state to save a few cents on gas, or visits every store in the area to price compare, stop (unless of course you genuinely enjoy the drive, or the hunt). Spending a little extra to save yourself time and effort is often worth it.

Society tells us there’s virtue in saving money. Sometimes society is right. But sometimes not so much. Before you prioritize the act of saving money over all else, take a moment to look at the bigger picture and make an informed decision on what, how and where to save.