'Saver's Paralysis': Why Having Too Many Options Is Keeping You From Growing Your Wealth
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Having a ton of options isn’t always a good thing. Some aspiring savers feel overwhelmed about choosing where to put their money. High-yield savings accounts (HYSAs), certificates of deposit (CDs), brokerage apps, robo-advisors and retirement plans are all financial tools in our toolbelt — and choosing the right one determines a careful assessment of your goals, risk tolerance, time horizon and other preferences.
Throw in Treasury bills and money market funds and it makes sense why you may feel overwhelmed, and end up with “saver’s paralysis.”
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What 'saver's paralysis' is — and why it happens
It’s possible to get hung up on the idea of making the perfect choice so much so that you avoid making a decision entirely. This “saver’s paralysis” phenomenon, like analysis paralysis, results in money that doesn’t grow. It can be better to save money imperfectly than not to save money at all.
Not making a choice can feel safer than making the “wrong” choice, and this causes people to miss out on long-term returns.
How inaction can hurt your money
It’s not just about the amount of positive returns you are losing due to inaction. Each year, the money sitting idly in your low-yield checking or savings account loses purchasing power due to inflation. If you are not actively putting your money into accounts that grow over time, you won’t have as much financial flexibility by the time you retire.
That doesn’t mean you should invest every single dollar you own. If you do, you may have to sell assets to cover an emergency expense, and that may result in you selling equities where they’ve fallen, and locking in losses as a result. However, keeping too much money on the sidelines can hurt your long-term financial plan.
Financial advisors tend to recommend having an emergency fund that can cover three to six months of living expenses in case of surprises. You likely also want to keep money you’re saving for short-term goals in a more liquid account, and not in the stock market.
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How to break saver's paralysis with a simple money framework
Simple money frameworks make it easier to deal with complex decisions and know how to allocate every dollar. One approach is to break your money into three categories based on how soon you will need it.
Any cash that you will need over the next month can go into a checking account. A HYSA that lets you make unlimited withdrawals without incurring any fees is also a viable option.
Funds that you will not need for the next year to three years can go into a HYSA, CD with a one-year term length, money market account or Treasury bills. Savings accounts and money market accounts are more accessible, while CDs and Treasury bills lock in a specific annual percentage yield (APY) until maturity.
Any cash that you will not need for multiple years can be invested. It’s important to save for retirement via a 401(k) or similar retirement savings account and/or an individual retirement account (IRA). You can also invest in a taxable brokerage account, especially for longer-term goals that aren’t quite as far off as retirement, such as buying a home.