Kinetic Energy and the Pitfalls of Saving Too Aggressively
What do windmills and your personal finances have in common?
Answer: They are not perfectly efficient.
It is known to be windy here in the Tri-Cities, and there are numerous wind turbines around the area to capitalize on the local forecast. When the wind blows, air moves the turbine blades, and eventually, that wind energy is converted into electricity.
But how efficient are these fans?
In 1919, a German physicist named Albert Betz published a paper deriving the math behind this exact phenomenon. What he ultimately concluded was that a single turbine cannot capture more than 59.3% of the kinetic energy of the wind passing through it.
Many young and ambitious people want to be aggressive with their saving. They’ve been taught good financial habits and can be consumed by optimizing retirement contributions and saving as much as they possibly can. For some, it can reach the point where it becomes a stressor in their life. The windmill example above is just one way to show that maximum efficiency is not always possible.
It can be tempting to tuck away as much money as you can for retirement. However, problems can arise when you don’t have enough cash on hand to meet short-term financial obligations. Most people are aware that they should have an emergency fund of 3-6 months’ worth of expenses set aside in case of emergencies. This is the cornerstone of ensuring you have enough cash available to meet potential future obligations. It can be tempting to let funds sit in the bank as the stock market goes up and still tell yourself you are not saving enough toward retirement!
This is when your financial plan becomes key. We often think of budgeting and financial planning as tasks for those who fall on either end of the spectrum: those who are struggling to build wealth and those looking to preserve it. However, if you already have great savings habits in place, a sound financial plan can be the key to easing anxieties when it comes to creating a budget that fulfills both long- and short-term needs.
If you find yourself falling into this category, I encourage you to reach out to your financial advisor to create a plan tailored to your immediate financial obligations as well as your goals for the future.
Don’t have a financial advisor? Click here to find your perfect fit. (link to teams page of HFG site)
My final piece of advice is to not be blinded by ambition. Create a plan, stick to it as best you can, and enjoy life in the meantime.
Wealth Planner, HFG Trust