U.S. Markets closed

Extreme frugality is a personal finance problem no one talks about—but it can be bad to save too much

·7 min read
DBenitostock—Getty Images

There is a lot of personal finance advice out there that focuses on budgeting and not overspending. The value of that advice is pretty clear: Living beyond your means can have costly financial consequences, especially when you find yourself without the savings you need to pay for an unexpected expense.

While there is value and peace of mind in saving and investing for the future and being prepared for potential emergencies, it is also possible to take it too far. On the opposite end of the financial spectrum is the issue of extreme frugality. Advice for overly frugal people who don't know how to spend money, sometimes at their own expense, is harder to find.

The American Psychiatric Association defines frugality as a symptom of obsessive-compulsive personality disorder (OCPD) when someone "adopts a miserly spending style toward both self and others." Extreme frugality is an amplified version of that, and it often involves viewing spending as a bad thing no matter how much money you have. Examples of extreme frugality include always choosing the cheaper option even when you can afford and benefit from the higher quality one or focusing on saving money at all costs no matter how much time you must sacrifice.

The issue with extreme frugality

There’s a difference between saving and investing money for the future and hoarding money with no goal in mind.

People who struggle with extreme frugality see money as a finite resource that they must hold on to at all costs. But when you are excessively frugal, you miss out on one of the critical things money can do for you: simplify some aspects of your life and give you access to things and experiences you care about.

Bill Perkins, a hedge fund manager and author of Die with Zero, found himself falling into extreme frugality after reading Your Money or Your Life by Vicki Robin and Joe Dominguez. The book, which describes money as a resource we trade our life energy for, helped him gain more clarity on the things he valued and how he wanted to spend his time.

But Perkins became so conscious about not wasting his money that he stopped spending altogether. Then, one day, as he proudly shared how much of his expenses he had cut to maximize his savings, his boss made him realize that the point of life wasn’t to save as much as possible to survive but to also live.

How does one stop squandering money without going extreme and starting oversaving? You don’t have to live at either end of these extremes. If you find yourself hoarding money, afraid to spend on things and experiences you care about, consider the following tips that can help encourage even the more extreme savers to find ways to spend for a more enjoyable life.

Know your survival number

Understanding how much you need to cover your living expenses is critical. Your survival number includes rent, bills, food, transportation, child care, and anything else you need for your day-to-day life. You can calculate this number by adding all your necessary monthly and annual expenses in a spreadsheet.

Once you know your monthly survival number, you can use an online calculator, or work with a financial planner to determine how much you need to have at retirement and how much you need to save and invest every month to hit that goal. Any money that you have leftover is disposable income.

Take the time to ask yourself the right questions

Once you are clear on your survival number and how much you need to set aside for your retirement or other financial goals like buying a home or paying for college, you are left with disposable income.

Ask yourself questions to help you decide how to utilize your money to make your life better.

What do I want to do? Do I want to travel? Do I want to renovate my home? Do I want to be able to support my parents in their old age? Do I want to send my kid to private school? Is there something I would love to do five years from now? What about 10 or 20 years from now?

"Many people have discretionary income, but they have a scarcity mindset that they won't be able to survive,” says Perkins. “So, they stay on autopilot, thinking I'll keep working and saving more just in case. But now you're becoming an insurance agent."

Get off autopilot

Most financial advisors will recommend you automate your money to make it easier to manage. Putting automatic transfers in place can make it easier to save and pay off your debt. But people who are extreme savers can take it too far.

Perkins highlights the importance of "getting off autopilot” and knowing what you are saving for. "Saving has its purpose. It's for future consumption.”

Once you know your survival number and have taken some time to figure out what you value, it’s important to focus on optimizing your life for increased fulfillment.

“Some people live it up too much in their current lives and waste away their future lives." Perkins says. But if you want to make the best of your life, you need to be clear on what you are saving for and consider the most appropriate age to enjoy some of the things you want to consume. Then make a savings plan that takes all of this into consideration.

"Our lives have seasons,” he says. “We go through different stages in life; whether it's college, marriage, or having kids—certain experiences are better had during certain seasons. So you should allocate your money toward your net fulfillment throughout your life and maximize your experience and memory dividends."

In other words, take time to make a clear plan for all your goals, whether that’s short-term (taking a family vacation this summer) or medium-term (upgrading to a bigger house in five years) or long-term (retiring somewhere warm). Then go about executing a plan to achieve them. But take extra care to make sure you have some in the short-term bucket so you’re not always pushing off having fun and spending money to the next stage of life.

Make it happen

Now that you have a game plan, you need to see it through. This can be the most difficult step. Breaking out of the habit of extreme saving can be hard. Take baby steps and keep your goals top of mind.

Think about what you gain from spending money on things you value. Think about the time you will get back, the good memories—or memory dividends as Perkins calls them—that you will be able to cherish forever when you spend money on things you care about. Focus on what you will gain, and if you’re still struggling with guilt, remind yourself of your plan.

What you leave behind

Perkins’ book focuses on maximizing your life experiences. That doesn’t mean you spend everything you have before you die and don’t worry about your kids or other dependents. The focus is on not delaying gratification so much into the future that you can't enjoy it as much as you should have because the best time to do it has passed. That also allows you to be more intentional about passing down assets to your heirs.

"You don't want to give a random amount of money to random people when you pass,” says Perkins. “You don't know which of your siblings or heirs or people you want to give money to will be alive after your passing. You want to be deliberate about this. If you're trying to make a maximum impact on the life of the people you truly care about, think about when the perfect time is to give them the money you want to give them."

"It's about being intentional and optimizing along the curve. You're trying to maximize the net fulfillment of your kids, yourself, your charity, or whatever it is. There is a way to think about these things that get you closer to maximum optimization and maximum impact, and get in touch with what you want out of the arc of your life."

This story was originally featured on Fortune.com