Are We Putting too Much of Our Income Towards the Wrong Goals?

A new book suggests we should be making smaller debt payments and putting less in our retirement accounts.

I really want to break down this Bloomberg Businessweek story line by line—no, not the Dilbert story, although I’d love to do a close analysis there too—but it’s bad form to repost an entire article, so I’ll just hit a few of the highlights.

The Case for Saving Less for Retirement

First of all: yes, I absolutely clicked on this because of the headline. We could save less for retirement and still be okay? Tell me more!

The Value of Debt contains several nuggets of pithy advice: Aim to save at least 15 percent of your income. Also, “the best way to feel rich is to live in a less expensive home than you can afford.”

Okay, um… for some of us, saving 15 percent of our income is more, not less than what we’re currently doing, and if there were a less expensive home than we could afford we would probably buy it.

But I get that Thomas J. Anderson’s The Value of Debt in Building Wealth—a new book that builds upon the ideas in his 2013 bestseller The Value of Debt—might not apply to everybody. The larger point Anderson is making here, and the point of the “save less for retirement” headline, is that we’re putting too much of our income towards debt repayment and non-liquid savings/investment vehicles.

Filling out the book’s worksheets, I was surprised to learn I’m woefully short of cash, with less than half of the money recommended. Most surprising was seeing that I had in my 401(k) and individual retirement accounts three times what Anderson recommends.

[…]

Liquidity, the ability to access your money when you absolutely need it, is a key concept for Anderson. A thousand dollars in the bank is more useful than $1,000 tied up in a retirement account that charges a penalty for withdrawals — or in collectible figurines.

I think we’ve all asked ourselves these kinds of questions, regardless of whether or not we’re trying to “build wealth:” Do I pay down debt or build up my emergency fund? Save for retirement or save for a down payment? Buy that figurine I really want or keep the $30 in case I need it someday?

Anderson’s argument, at least as stated in this piece—and yes, I just put a library hold on The Value of Debt in Building Wealth so I could read the entire book—is that liquid cash is more valuable than the interest you’re paying on debt, and it’s also more valuable than the interest you might be earning in a retirement account. There are a lot of assumptions baked into this, such as “your debt is not on a store credit card charging 22 percent APR,” and “you’re putting your liquid cash in a place where it is earning more than the 1 percent APY you’d get from a bank.” (Also: the assumption that you have enough extra cash to make choices about how you use it. When you read the whole Bloomberg article, you’ll learn exactly how much extra cash this requires.)

But if you have enough liquid cash, you can use it to buy a house when real estate markets hit record lows—or spend six months, post-layoff, looking for the perfect job. (Again, a lot of assumptions here, such as “you have the type of career where a six-month gap between jobs is expected.”)

A lot of us save up our cash so we can use it to pay something off, or to put it in a place where we can’t touch it for 30 years. Maybe we should be saving up our cash so we can use it to buy something that will add to our net worth, or make a career investment that will earn us a higher salary.

That’s the theory, anyway. I’m excited to read the book and see if it holds up.

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