Does saving money for the future sometimes feel too restrictive?
Mainstream financial advice says that the average American should set aside 10% to 20% of their paycheck. Why? Because the age-old promise is that if you make sacrifices now, your wealth will grow and can be enjoyed later – someday when you’re retired.
Could it be that this philosophy is backwards?
Younger generations seem to think so. According to a report from the credit bureau Experian, 63% of Gen Z and 59% of millennials would rather spend their money now on “life experiences” like travel and concerts rather than setting it aside for when they’re older.
Hence, this is why the “save every penny” mindset is being challenged with a new mantra: soft saving. In this post, we’ll explore why this method is becoming so appealing, its advantages, and some important caveats to keep in mind.
What Is Soft Saving?
Soft saving is a flexible, lifestyle-centered approach to managing money that prioritizes experiences and quality of life today while still maintaining some level of financial responsibility for the future. Think of it as being somewhere in the middle ground between being a rigid saver and carefree spender.
The concept gained traction following the COVID-19 pandemic when many people witnessed firsthand the unpredictability of life. They began questioning the traditional saving narrative taking the attitude, “Why wait decades to enjoy your money when you could be missing out on the best years of your life right now?”
Even today, that same sentiment continues to be forefront – especially among younger adults. According to a poll by Credit Karma, nearly half Gen Z say planning for the future feels “pointless.”
Overall, soft saving embraces the idea that financial well-being isn’t just about “becoming rich” or having the most money in your 401(k). It’s about using money as a tool to build a fulfilling life right now.
How Does Soft Saving Work?
Soft saving blends responsible saving habits with intentional spending to achieve the best of both worlds: Enhancing your present happiness while still preparing for the future.
Here’s how this is done.
1. Think About What Brings You Joy
Begin by considering what currently makes you happy or adds value to your life. Maybe it’s:
- Spending time with friends or family
- Traveling
- Creative pursuits
- Healthy practices
- Etc.
Instead of limiting or depriving yourself of these indulgences, determine how much money it would take to do the ones that matter the most.
2. Review Your Budget
Next, consider your monthly cash flow.
- How much money do you currently earn?
- How many bills or necessary expenses do you have?
- After those are paid, how much is leftover?
Soft saving shouldn’t break your budget or put you into debt. Instead, it’s a reallocation of your discretionary income.
If you need help determining how much money is coming in and going out, it may be helpful to use an app like Buxfer. Or you could always manually go through your bank and credit card transactions to calculate these values.
3. Find a Balance
With numbers in mind, determine how you’d like to allocate money to both sets of goals.
For example, after paying all your bills for the month, suppose you have approximately $500 leftover. Rather than saving the full $500, perhaps you could put $250 of it towards a travel budget for a memorable trip this year.
In other words, shift the money you’re already saving. This gives your money a purpose that can be enjoyed both now and in the future.
What Are the Benefits of Soft Saving?
It’s easy to see why so many people are adopting this mantra. Here are just a few of the benefits that soft saving has to offer.
Enjoyment
Let’s start with the obvious: It’s fun to spend money!
Being able to treat yourself to dinner, concerts, vacation, etc. is a lot more enjoyable than locking it away for the next 30 years. Additionally, it can make work feel like less of a burden when there’s a direct reward connected to it that can be felt in the present.
Balance
Soft saving is giving yourself permission to do two things at once: Save for the future and enjoy yourself right now. Some may argue that this approach is healthier than striving for one extreme or the other.
The advantages could be reduced financial anxiety and preoccupation with money itself. You may even come to appreciate it as the tool it is rather than the end goal.
Flexibility
Unlike other budgeting systems, soft saving inherently makes it easier to respond to the dynamics of personal finance. For example, if your expenses are greater one month, you could use some of your discretionary income to cover the bills. Likewise, if you get a raise, then you could find a fulfilling way to enjoy it without feeling shame for not automatically stashing it away.
What Are the Risks and Drawbacks of Soft Saving?
While soft saving may have its advantages, there are still some critical pitfalls to keep in mind before adopting this financial philosophy.
Falling Behind on Your Savings Goals
Perhaps the biggest elephant in the room when it comes to soft saving is the possibility that you may not save enough money for the future – specifically retirement.
One of the simplest ways to build wealth is to gradually set aside a portion of your paycheck into an investment account or, even better, a tax-advantaged retirement account like a 401(k) or IRA. Because of the way compound interest works, the longer you save and the more money you contribute, the greater your balance may grow to become. Therefore, if you’re only saving some portion of what you could be, then logically the potential to grow will be less – and a lot more than you may think!
For example, take two identical retirement accounts with similar investments growing at an average annualized rate of 10% per year. After 30 years:
- A regular saver contributing $500 per month might see their balance grow to $986,982.
- However, someone who is practicing soft saving and only putting away $250 per month might only have $493,500.
The problem is that our decisions today with investing can amplify in the future. While a difference of $250 per month might not seem very significant now, it could mean almost half a million dollars later on.
Employer Matching
If you happen to work for an employer that offers 401(k) matching, then soft saving may put you in danger of leaving free money on the table.
For example, let’s say your employer matches you 50 cents for every dollar you contribute, up to 10% of your salary. If you earn about $80,000 per year, then this would be potentially an extra $4,000 for your 401(k).
However, someone who’s practicing soft saving might only choose to only save 6% of their salary. That would mean your employer would only kick in $2,400 in your account, and you’d miss out on $1,600 each year.
Again – compound interest is going to amplify this loss in the future. That missing $1,600 per year could potentially mean having $262,550 less in your portfolio after 30 years.
Lifestyle Inflation
While some people may see that the flexibility that soft saving offers appealing, this could also be a detriment.
Without a structured budget in place or a job for every dollar, it’s fairly easy to lose track of your spending. You’ll be more likely to make impulse purchases or rationalize every decision as a “need” when it’s really more of a “want”.
When left unchecked, this can quickly result in lifestyle inflation. Lifestyle inflation is when your expenses increase in tandem with your earnings, leaving little room for increased savings. Certain purchases that some might deem unnecessary may become a part of your monthly budget, taking precedence over more important initiatives like saving for the future or your children’s college.
Striking the Right Balance
If you’ve tried other methods of budgeting but found them to be too restrictive, then perhaps soft saving might be a good compromise. Its middle of the road approach lends itself to accomplishing two things at once – even if just partially.
For those that do adopt this philosophy, what’s crucial is to really be intentional with the money you plan to spend instead of saving. To say it another way, think big and really make those purchases count.
If nothing else, soft saving offers a refreshing alternative to the all-or-nothing mentality of traditional personal finance. It allows you to live meaningfully today while still building security for tomorrow.
Featured image credit: Unsplash
Buxfer Blog 