I’ve recently been thinking about the concept of setting a personal “savings ceiling.” In other words, figuring out how much I need to live a happy, fulfilling life, and then giving the rest away. Now, before you start thinking that I’ve lost my mind, I want to say a few things…
For starters, it’s important to recognize that everyone is different, and that you need to do what make the most sense for you. Admittedly, the idea of capping your savings is probably not for everyone. Also, even if you agree with my view that you really only need “so much money, ” your target amount will most likely differ from mine, and that’s fine.
The backstory
A few months ago, J.D. Roth published an article entitled “What Next? The Third Stage of Personal Finance.” My article today was written partly in response to J.D.’s question, though I go beyond simply answering the question to propose a general financial practice.
In J.D.’s post, he said:
“Despite my increased wealth, I am not happy. I love what I do — I love writing every day and interacting with readers — but I do too much of it. I spend about 60 hours each week working on this site. I’m neglecting other parts of my life.
I’ve reached a place of financial security. My income is good. I save and invest. I don’t spend frivolously. Now I find myself in the enviable position of having to decide: Should I decrease my workload, or should I use some of my income to invest in the things that make me happy?
…
The entire reason I paid off my debt, increased savings, quit my job, and built a business was so that I could live a pastoral lifestyle. But I’m not living it. In fact, I’m working harder than I ever have before.
I love this job. It’s a joy and a privilege to do what I do. But I wonder: Am I burning myself out? Am I sacrificing time for money? Maybe thereÃs some middle ground. Or maybe it’s time to move to a new stage of personal finance.”
This “new stage of personal finance” is my challenge for the day.
A personal savings ceiling
In a recent video I saw, a credit expert shared this single best piece of advice for saving more money:
“Figure out why you want to save. What is your goal? What is the intention for you to save money? Once you figure that out it makes it easier to save because you have something you’re reaching towards.”
Until about six months ago, these questions had never really resonated with me. Now that I’ve set a goal of complete financial freedom, I’ve given these sorts of things a great deal of thought. What most people fail to examine, however, is the question of “How much is enough?”
The idea that it’s possible to have “enough” has led me to the concept of a personal savings ceiling. In other words, as long as I have enough to lead a happy life, why not give away the excess?
For background…
- My goal is to build a substantive nest egg, and then live off my investment income, supplemented by income from my part-time, self-paced, passion-chasing hobbies
- I am already freely giving a portion of my time and my finances to worthy causes, and I consider this sort of giving to be one of the most valuable things I do in life
Now that I’ve formulated a solid plan for getting out of debt, living frugally, and saving/investing my money, I’m well on my way to reaching my goals. Yes, I still have a long ways to go, but that hasn’t stopped me from thinking ahead and working to define how much is enough.
Give it away
Anyone who has ever given to a worthy cause knows that it truly is more blessed to give than to receive. In the many comments left by readers in response to J.D.’s article, there were around ten mentions of giving. Most of the people who advised J.D. to focus on giving were already happily giving themselves, and were thus speaking from experience.
I intend to take this advice to heart, and have thus committed to giving away not just some, but all of my excess. I also intend to give of my time. If I’m successful in achieving my goals, then I won’t have to work a 40+ hour work week, and will have free time to do as I please.
I plan to continue on my current path of giving not only my money, but also my time. If I do not have to work a 40+ hour work week I will be free to do as I please. I plan to pursue my passions, to help myself, and to help others.
What do you think of my proposal? Have I indeed lost my mind?
When you get to the point that you have more than enough to live on, you might look into the option of a charitable remainder trust. Many people use them in order to give but still be able to live off the interest of their investments while they are still alive (or so their spouses/children can live off the interest after they are gone but they can ensure the principal goes to xyz foundation or charity).
@Debbie: Thank you very much! That is the nicest thing I have had someone say to me yet today!
Yes, it is true…freedom from debt give us true freedom indeed. Honestly, I am a firm believer in the fact that if you are not debt free, you are not really free.
Being debt free allows you so many options in life. Matt, the world needs more people like you.
@Rosa: Great question! I suppose if someone is able to save these amounts of money it is also a reasonable assumption they could have health insurance; so that is one answer.
Another thing is, you would definitely want to factor these concerns into the decision of “how much is enough”. Everyone’s amount would of course be tailored to their specific situation.
Your particular amount could include a large “emergency fund” on top of your investments…whatever you need really. You had said, “That’s the part that trips me up – I have a dollar figure in my head for what we need to live on if nothing goes wrong, but is there any way to plan for disaster?” If you were to consider giving away your overage amounts you would want to make sure that you indeed had overage amounts! 🙂
Also, if you need to make adjustments, you just lower your giving back down for a few months…
Well, aside from debt, there’s health costs – and they go up as you get older. How can you even estimate the possible future costs of private health insurance, or a decent nursing home?
That’s the part that trips me up – I have a dollar figure in my head for what we need to live on if nothing goes wrong, but is there any way to plan for disaster?
@GregFox: That is something I hadn’t thought of, investing in socially responsible mutual funds even if your rate of return is less. Nice tip.
@Dave: I love your quote, “Money is only good to be saved for future needs and wants, to be spent now, or to be given away.” That is very true, but easy for us to loose sight of if we’re not diligently planning our finances. All the more reason to exercise responsible stewardship!
@Rosa: Presumably if you were to reach such a point, according to the article you would have no debt, so you living expenses would be minimal. Depending on your situation, you may only need as much as $20,000 to live on. If that is the case then if you calculate a low end interest rate on your investments of 6% you would need to have around $350,000 saved.
I’m totally in favor of a savings ceiling, but I have a hard time imagining what kind of number it might be. We already have a kind of “how much can we manage to spend” ceiling – for a long time our spending rose just a little slower than our income, but now we’ve hit the point where spending any more money is actually kind of difficult. (among other things, it just about gives my partner hives to hire someone to do something he could do himself.)
You don’t want to lowball it, and end up penniless in your last years. But you don’t want to turn into a crazy miser either.
If you are on track to eradicate your debt, save X% to fund your retirement in your old age and have enough in your emergency fund, then who cares what you do with the rest of your money? In David Chilton’s book “The Wealthy Barber”, one of the characters says that as long as you are meeting those above needs, then so what if you do all your grocery shopping at the 7-11 and then blow the rest of your money on trinkets. You’ve got the important stuff covered. Money is only good to be saved for future needs and wants, to be spent now, or to be given away. If you are meeting your goals and objectives (so that no other individual or society supports you), than giving money away is a fine choice.
I, for one, heartily agree. And I think it’s worth noting that there’s some middle ground options, too. Say you’ve got as much money as you comfortably need and are approaching a ‘savings ceiling’. But you just can’t bring yourself to give huge chunks of money away. Why not put it to work for a good cause? Take a bunch of your investments and transfer them over to socially responsible mutual funds, or funds that invest in good companies like Infosys in developing countries. Sure, you might lose a percent off your portfolio growth, but it’s doing so much more good than it was before (and this isn’t really the point, but I should note that my socially responsible fund is currently outperforming my others).
@Baker: I could not agree more! Setting savings goals is ESSENTIAL! This is how my wife & I currently have our savings goals divvied up. Before setting the goals we did NOT save as much. After setting the goals we automated the savings to watch each goal balance grow…& now we love that concept which just adds fuel to the fire!
Great post, Matt. The part about giving your savings a name so that you are saving “for” something is so true.
Once my wife and I decided we were saving “for” Australia all the sudden we saved 10x anything we had ever done before in less than a year’s time. It’s the same concept of giving your money a name in regards to a budget.
Having talked to you in the past, I have no doubt you will be extremely succesful in your mission with such clear and passionate goals!
Rock on!
@AG: Focused giving is 100% the only way to go, that is a very important point. Thank you.
Hey Nickel,
This is my first post on your blog but you have been on my blogroll for a long time 🙂
Definitely Matt has not lost his mind. Once we feel that we have saved enough for ourself and family, one of the relieving things is to give it away for noble causes. But I’m a proponent of keeping a little giving a little. If it’s be a good idea, one may want to explore the possiblities of a start-up 😉
Whenever it comes to giving/donating/charity, I always think that people giving away their money shouldn’t just give it away to anyone but rather AT LEAST attempt to give it to those who are in real need of it. Being a recent graduate one such act might be to start a college tuition waiver fund for a student who fulfills some criterion, pre-decided by the donor.
This is just one suggestion there are many other deserving ways to donate … I would like to know what do you think of it!