Simple Debt-Free Finance

I love to save money, but sometimes saving money can actually cost you money. Here are 3 ways you may end up losing more than you save.

Inflation.

People often sacrifice for what they perceive as safety – especially in uncertain times. The news seems awash in stories of people so terrified by the stock market crash and recession that they pulled their entire retirement savings out of their investment portfolios and kept it in cash. I even know people who cashed out their 401k and kept the cash in a safe – in their home – under the illusion of safety.

The fact is, your mattress is a bad place to stash your savings. Period.

Many brick-and-mortar banks already pay criminally low interest in the best of times, but your mattress pays zero. It may only be 2 or 3%, but it adds up over time. Even so, it’s not enough to outpace inflation over your working life.

Consider this…

If you put your savings in the bank and earn an average of 2% interest over ten years, but inflation runs 4%, you’ve actually lost 2% of your money per year.

Here’s an historical example: if you had $1,000 in a bank with no interest in 1975 it would have the same buying power in 2007 as $247.05. Ouch!

Online, high yield, savings accounts and CDs are the best place to store emergency savings, but they’re financial suicide for retirement savings – because they just can’t keep up with inflation.

The only way to beat inflation over a working lifetime is to invest in a mix of stocks and bonds, probably mutual funds if you’re one who panics easily. Just don’t confuse that with your emergency savings, and you’ll be fine.

Psychological repression.

The reason most people fail at budgeting as well as saving is that they over compensate. I’m ignoring the lazy people who never try in the first place, because they never got far enough along to fail. I’m talking about people who try to squeeze every last penny of savings from their paycheck only to finally crack under the pressure of living like a pauper and splurge on something so pricey that they lose any ground they made during their penny pinching.

Repressed spending builds pressure like a kink in a house, and when that pressure is finally released it can lead to overindulgence and spendthrift ways.

I think the frugal lifestyle is worth living, but there has to be a balance. Reward yourself a little at a time when you achieve a new success. Set milestones for yourself and when you reach them, treat yourself to a small something. Letting go of some of that repressed spending in a controlled manner will prevent the Vesuvius like explosion that can lead to ruin.

Once again; spending, saving and budgeting is a lot like dieting. You want to indulge a little every once in a while, and avoid the binge-and-purge approach.

Missing moments of life.

This is perhaps the worst way in which saving money can cost you because what you lose may be lost for ever.

I bet if you stop and think about it for a minute, you can come up with a person who sacrifices personal time or family time in the pursuit of money or the perfect career. It’s easy to get caught up in saving for that rainy day, only to never enjoy the sunny days along the way.

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