The 80% Problem: Why Wealthy People Don't Save for a Rainy Day

0:00Here's what I know about the rainy day everyone's been saving for. It almost never comes. And when it does, it rarely costs as much as we had feared. And the sunny days, the ones we skipped because we weren't sure we could afford them, those are the ones we can never get back. Hello friends, this is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

0:45Quick note before we get into it, June's pre-order incentive for my book, Real Wealth, is the most personal thing I've ever agreed to share. Pre-order in June and submit your receipt at TylerGardner.com, and you'll get an exclusive three-episode audio series that will never appear on this feed. Three pivotal moments in my own financial life. The humbling one, the embarrassing one, and the one that made me rethink everything. Three episodes, three moments, TylerGardner.com. Pre-order, submit your receipt, get the episodes delivered digitally in early July, and receive every additional monthly incentive between now and the book's release on December 1st.

1:26And now, On to today's episode. I want to start today by telling you a personal story about mashed potatoes. When I was nine years old, my family made its annual pilgrimage to visit my grandparents in Connecticut. And if you grew up with grandparents who believed that the highest expression of love was feeding you until you couldn't move, you understand that these visits had a particular ritual to them. Ours involved the all-you-can-eat buffet. Now, I want to be clear about something. My grandfather was a man of genuine financial sophistication. He was careful, deliberate, and deeply strategic about money in ways that I would only come to appreciate decades later.

2:10But at an all-you-could-eat buffet, he became something else entirely. He became the MVP participant in a fully competitive sport. That$10.99 entry fee was not a meal. it was a contract, a covenant, a solemn agreement between him and the restaurant that he intended to honor in full with interest. So there I was, nine years old, and my first plate, I piled approximately two pounds deep with mashed potatoes, marching back to the table with the quiet confidence of a child who has no idea what's about to happen. My grandfather looked at the plate. Then he looked at me. Then he looked back at the plate.

2:54What on earth do you think you're doing? I should tell you that I'm not entirely sure whether I actually remember this evening, or whether it has simply become so thoroughly retold at every family gathering since, at my expense, every single time, without fail, whenever shrimp or mashed potatoes appear on a table within a 50-foot radius, that it has achieved the status of mythology. Family legend, the Tyler potato incident of the mid-1990s. What I do remember is the look on his face. Did you not see the shrimp cocktail? I saw it, I said. But I don't like shrimp. I really like mashed potatoes. Wrong answer.

3:38These dinners cost$10, he said, with the calm authority of a man who has thought about this more than I ever will. You can eat anything on the line. Why would you fill up on something that we can make at home? Line drawn, point made. And I will tell you the only other detail I can confirm from that evening, because my grandfather was, above all else, consistent, is that on our way out, he subtly slid approximately seven bread rolls and a handful of butter packets into his coat pockets. He always won. What lingers from that story, beyond my having to hear it retold every Christmas, is the voice it left behind.

4:23My grandfather's voice, in the back of my mind, telling me that financial waste is a cardinal sin. That you don't eat mashed potatoes at a buffet. That you extract maximum value from every dollar, every opportunity, every all-you-can-eat situation life places in front of you. And here's what's interesting. Freud would not be surprised to learn that I am now, as an adult, genuinely obsessed with shrimp cocktail and almost never order mashed potatoes. Trauma, one. Tyler, zero. But here's the thing. That voice, the one that says save everything, waste nothing, protect every dollar. It's a voice that a lot of us have inherited from grandparents, from parents, from a cultural narrative that has been telling us for more than a century that saving money is virtuous and spending it is reckless.

5:21And today, I want to push back on that hard because I believe, and I'm going to spend the next 30 minutes making this case with data, not just opinion, that truly wealthy people, and I mean that both literally and figuratively, do not save money for a rainy day. And more importantly, that the habit of saving money the way we've been taught to save it is not building your financial future. It is consistently mathematically destroying it. Let's get into it. Chapter one, the virtue trap. I just told you a story about mashed potatoes. now I want to pivot to a story about a marshmallow. In the late 1960s and early 1970s, a psychologist at Stanford named Walter Mischel conducted what would become one of the most famous experiments in the history of behavioral science.

6:16He sat preschool children down in a room with a single marshmallow, or a similar treat, and gave them a choice. Eat it now, or wait 15 minutes and receive a second one. Apparently, the children who waited, the study found, went on to score higher on SATs, they demonstrated better emotional regulation, and they enjoyed what researchers described as better life outcomes by almost every measure. The world heard this and decided it had found the key to everything. Delayed gratification, Self-control. Wait for the bigger marshmallow. Save now, enjoy later. Deny today's desires for tomorrow's rewards.

7:01The marshmallow experiment became a cultural institution, a parable, the scientific foundation for an entire philosophy of financial restraint. And then it started to fall apart. Later research, most notably a 2013 study by Celeste Kidd published in the journal Cognition, found that the children's decisions were not primarily about self-control at all. They were about trust. Children from unstable environments, where promises weren't necessarily reliably kept, chose the immediate marshmallow not because they lacked willpower, but because experience had taught them that the second marshmallow might never arrive.

7:41Their choice was actually quite rational. It was a function of their environment, not their character. This matters because we built an entire financial culture on a misread of a flawed experiment. And then we handed that culture to everyone we know and told them it was wisdom. Save for a rainy day. Don't spend what you can save. Safety is virtue. Risk is reckless. And that narrative has been doing significant damage ever since. Chapter 2. The History That Made Us Afraid To understand why we are the way we are about money, you have to understand where this fixation on savings came from. In the 19th century, mutual savings banks emerged to serve working-class Americans, institutions like the Philadelphia Savings Fund Society, founded in 1816.

8:38The pitch was simple. Put your money somewhere safe. Build a cushion. Don't be vulnerable. Then came the Great Depression. Bank failures wiped out billions in deposits. People who had saved lost everything. And the government's response, the creation of FDIC insurance in 1933, solved the immediate problem, but embedded something deeper into the American financial psyche. The idea that safety was not just prudent, it was actually patriotic. To save was to be a good citizen. To invest was to gamble. To spend was to be reckless. A cultural artifact as American as complaining about capitalism at Thanksgiving while being first in line for a 70-inch television on Black Friday.

9:30Federal regulations went on to reinforce this. Regulation Q capped interest rates on deposits, which meant savings accounts were associated with safety, but explicitly not with growth. Americans were told in every way possible to save for a rainy day. The rainy day largely never came, and the money sat there, losing ground to inflation year after year, generating anxiety rather than security, and making banks very wealthy while doing very little for the people whose deposits funded those profits. A 2019 study published in the Journal of Economic Psychology found that individuals who rely heavily on savings accounts as their primary financial tool are more likely to report anxiety about their financial future, not less, more, which is the exact opposite of what they were promised.

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11:54Head to facet.com slash Tyler because it's not just me, they see you too. Facet is an SEC registered investment advisor. This is not advice. All opinions are my own and not a guarantee of a similar outcome. I'm not a member of Facet. I have an incentive to endorse Facet, as I have an ongoing fee-based contract for cash compensation, as well as a percentage of equity in Facet based on this endorsement. This episode is brought to you by Element. Heading into the summer, Element just dropped what is essentially their version of an Arnold Palmer, lemonade iced tea, and I currently have a full picture of it sitting in my fridge.

12:31A little caffeine alongside the salt and electrolytes is exactly what I want after a long walk through the woods with the bloodhounds or in the late afternoon when I'd otherwise be reaching for a second cup of coffee that I don't actually need. But here's what makes this different from other energy drinks. Most energy drinks use synthetic, isolated caffeine. Element uses full-spectrum, organic black tea extract from Caricho, Kenya, 7 ,000 feet of elevation, so the caffeine comes with its naturally occurring L-theanine and and polyphenols. The result is steadier energy, less spike, less crash, and only 50 milligrams of caffeine per serving.

13:11Enough to matter, not enough to regret. Head to drinkelement.com slash Tyler, become an Element Insider, and you'll get four boxes for the price of three. That's drinkelement.com slash Tyler, and even though I love this new flavor, this does nothing to diminish my feelings about mango chili and watermelon salt. Chapter 3. Three Reasons I Will Never Save for a Rainy Day. Let me give you three specific objections to the saving as virtue narrative. Not philosophical ones, financial ones. Objection 1. You have to know the true cost of saving. The first concept I actually retained from my freshman year macroeconomics class, and I will be honest, the list is not long, was opportunity cost.

14:02If something costs$100, it doesn't just cost$100. It also costs whatever that$100 could have become. In 2023, the average savings account interest rate was about 0.47 % according to the FDIC. Inflation that same year averaged 4.1%. That means your money lost more than 3 % of its purchasing power in a single year. Let me make that a little more concrete. You worked hard. You got a raise. Let's say the raise was 3%. Congratulations, you kept all of your savings in a traditional account. Your raise was entirely consumed by inflation. You are financially exactly where you were 12 months ago, except that you worked a full year to get there.

14:52Now, let's extend that timeline. $10 ,000 in a savings account earning 0.5 % annually for 30 years becomes$11 ,616. That same$10 ,000 invested in a diversified portfolio earning 7 % annually, the historical average for broad index funds in real terms, becomes$76 ,000. 76 ,000 versus 11 ,000. For the same starting number, the only difference is where we put it. In professional money management, we call the excess cash in a portfolio cash drag because any cash holdings drag down your annual returns. Clients hated cash drag. And then those same clients went home and kept three years of living expenses in a savings account, earning nothing.

15:45That is not safety. That is a slow leak. Objection 2. The more you save, the more the bank wins. When you deposit money into a savings account, the bank does not put it in a drawer with your name on it. They lend it. They invest it. They pool your deposits, lend a portion out as mortgages at 6%, invest the remainder in bonds, and pay you back 0.5 % on your deposit. The spread, 5.5 % in this example, goes directly to the bank. Your money's working. It is just working for someone else. You are literally funding the bank's profits. You're providing them with extraordinarily cheap capital that they then deploy into the exact low-risk assets that you could buy yourself.

16:33They take no meaningful risk. They collect the return. You get table scraps and the feeling of security. Banks are businesses. They provide necessary services. I'm not here to villainize them, although it might sound like I am. I am here to point out that this model has your money working against you and for someone else, and we somehow treat this as responsible financial behavior. Objection three, life deferred. And this is the one that tends to keep me up at night. The most insidious problem with teaching saving as a virtue is what it does to how people actually live and think about money. I'm not advocating ever for reckless spending.

17:15I'm not suggesting anyone go to Vegas and find their way into a VIP club. Although if any of you are planning that trip, offer stands. I'll see you there. What I am saying is this, when saving becomes the goal rather than the tool, it produces a scarcity mindset, even in people with an abundance of money. I've sat across from retirees with$2 million in their accounts, who are afraid to take a vacation, who add up the bill at a restaurant before they even order, who pass on experiences that are genuinely within their means because somewhere in their nervous system, the fear of running out of money overrides every piece of rational evidence that they will not.

17:56A 2023 study from Morningstar finds that retirees with substantial savings typically withdraw just 2.8 % annually, well below the once commonly recommended 4 % rule, now adjusted to about a 5 % rule, not because they don't have the money, but because they're afraid to spend it. And a 2018 study by United Income found that retirees typically die with 80 % of their pre-retirement wealth intact. I need to say that one again. 80 % intact. People work for 40 years. They defer trips. They skip experiences. They choose the mashed potatoes when the shrimp is right there. And then they die. And the money they were protecting goes to someone else who will spend it in ways the original earner could never have anticipated and would probably not have approved of, maybe on mashed potatoes.

18:52That's not a retirement plan. In my mind, that's actually a minor tragedy. Chapter four, the two things I hate about emergency funds. So I want to talk briefly about the concept of the emergency fund, which is one of personal finance's most enduring and I would argue most misguided myths. On the surface, it makes sense. Have three to six months of living expenses, liquid, accessible, ready for whatever the universe decides to throw at you. But here are two problems. Problem one, most emergencies don't happen. According to a Federal Reserve study, 64 % of Americans did not face a significant financial emergency in the prior year.

19:37But even more interesting, of the 36 % who did, they reported expenses of less than$1 ,000. I am not here to minimize the psychological weight of a$1 ,000 unexpected expense. I understand that for many people, that is genuinely stressful. But consider, if you had been investing even a modest percentage of your income from the beginning, you would almost certainly have well beyond$1 ,000 in accessible assets to address it. The emergency fund is solving for a problem that proactive investing largely prevents. So we're locking up large amounts of money, money that could be compounding, growing, building actual wealth, at the very least keeping up with inflation, in an account that earns nothing because we're afraid of something that is statistically unlikely to happen and which would be largely manageable if it did.

20:34Problem two, the high yield savings account is not what it claims to be. Here's the math that almost nobody does. You have a high yield savings account earning 4%. You tell your friends about it. You feel good about this. Now subtract inflation. Let's call it 3%. You're now at 1%. Now subtract taxes. Yes, interest income from a savings account is taxed as ordinary income. Depending on your bracket, that takes another 22 to 37 % of your already reduced return. You're left with something approaching zero, sometimes even in a high yield account below zero. We don't talk about post-inflation post-tax returns because they don't sound as good.

21:21But if we don't speak in real terms, we are making financial decisions based on numbers that simply aren't real. And financial decisions based on fantasy are called something else in most contexts. Again, that is why I always and forever will use 7 % referring to market returns on average, because that is the real return on the stock market since inception. This episode is brought to you by Gelt. Quick question. How did your CPA treat you this tax season? Did they reach out proactively, walk you through your options, and make you feel like a priority? Or did you hear from them in mid-March, feel rushed, and wonder afterward if you left money on the table?

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22:47Both are paid add-ons that often cost you nothing net by the time they're done. So if your CPA made you feel like an afterthought this season, go to joingelt.com slash Tyler. That's J-O-I-N-G-E-L-T dot com slash Tyler. This episode is brought to you by Keeper. Quick admission, my current password system is an embarrassment. It's always some combination of my first dog's name, a number I find personally meaningful, and a symbol I added when a website forced me to. And I've used variations of this same password since approximately 2004. A moderately determined 14-year-old could probably crack it on a Saturday afternoon with time left over for lunch.

23:31The problem is that we all know better and continue to do nothing about it. Strong passwords look like someone fell asleep on a keyboard. Nobody memorizes them, so we recycle the easy ones across every account. Which means the moment one gets compromised, they're all compromised. Your email, your brokerage, your bank, one domino. Keeper is the fix I use to solve this problem. Keeper is a password manager that creates strong, unique passwords for all your accounts, stores them securely in one place, and logs you in automatically across all your devices, so you never have to remember, guess, or worry about your login credentials again.

24:14And right now, Keeper is offering my listeners 60 % off personal and family plans at KeeperSecurity.com slash Tyler. This offers only for you, our podcast listeners. That's KeeperSecurity.com slash Tyler for 60 % off personal and family plans. Make sure you use our link so they know we sent you. KeeperSecurity.com slash Tyler. Chapter 5. So what do we do instead? Let me try to be constructive here because I appreciate that I've just been knocking things down as I've gone in this episode. Let me rebuild. First, if you have high interest debt, that's your only real emergency. The same financial voices telling you to fund your emergency savings account are often also telling you to do that before paying down credit card debt at 25 to 35 % interest.

25:08This is advice that should come with a warning label. There is no savings account, no high yield account, no investment available to the average person that earns 25 % annually, which means every dollar sitting in a savings account, even a high yield savings account, while you carry credit card debt, is a dollar that is losing you 25 % per year net. That's your emergency. Everything else is a footnote. Second, consider better alternatives for the liquidity you actually need. If you genuinely want accessible, lower-risk money, there are better options than a traditional savings account. Series I savings bonds are backed by the U.S.

25:53government and tied to inflation. They protect your purchasing power in a way a savings account structurally cannot. Treasury bills offer similar characteristics. Dividend-paying index funds provide both income and appreciation. And, I know this one ruffles some feathers, a Roth IRA allows you to withdraw contributions, not earnings, at any time penalty and tax-free. So it can function as a hybrid emergency fund while still allowing the majority of your money to compound over time. Before you write me a note saying how dare I suggest we use a Roth IRA as an emergency fund, let me just go back to how rare statistically the emergency is.

26:34And on average, you are more apt to have a great safety net if you invest in the Roth IRA for the long run, but it is there if you actually need it. Third, invest early, invest consistently, invest broadly. A diversified portfolio earning 7 % annually doesn't just beat inflation. It's already accounted for inflation. It builds wealth at a rate that makes savings accounts look like they're standing still because they are. If you're not allocating at least 5 to 10 % of your income into assets that appreciate over time, stocks, index funds, real estate, you're choosing, actively or passively, to let inflation consume your financial future.

27:21That, for many, is a choice that feels like safety, but it is mathematically the opposite. Chapter 6, Two Things I Usually Asked Clients to Do Instead Beyond the investment mechanics, here are two reframes that I want you to think about. I use these constantly with clients who are trapped in fear-based financial thinking. Strategy one, replace your emergency savings account with an emergency spending account. This is exactly what it sounds like, a use it or lose it account. The only rule is that you have to spend it on experience, not bills, not material possessions, not things that will sit in a closet, on experience.

28:05Not one client who took me up on this came back to me at year's end having failed to spend it, and not one of them came back talking about interest rates or account balances. They came back with stories and memories about the trip they finally took, the thing they finally did, the version of their life that had been on pause while they were busy protecting money they could afford to spend. That to me is real wealth, and it always will be. Strategy two, and I practice this one regularly, name your marshmallows. I used to ask clients to identify three things that genuinely brought them joy. Not what they think should bring them joy.

28:44Not what brings other people joy. Not what looks good from the outside and then commit to spending money on those things throughout the year completely without guilt. Research from the University of Cambridge has shown that spending on experiences rather than material possessions produces significantly more lasting happiness. The science on this is actually quite robust. But more importantly than the science, you know what makes you happy. You have probably always known. The question is whether you give yourself permission to spend money on that thing. The whole point of building financial security is not the security itself.

29:25It's what the security then makes possible. A means to an end, not an end in and of itself. Chapter seven, what happens when we save too much? Here's the tragic irony at the center of all of this. We defer so much of life in order to enjoy this concept called retirement. And then retirement arrives, and we defer the enjoyment of that too. Afraid of living too long, afraid of markets declining, afraid that social security will evaporate, afraid of the same rainy day we've been afraid of our entire adult lives. Today, a 65-year-old American has a 50 % chance of living their 80s and a 20 % chance of reaching their 90s, according to the Social Security Administration.

30:15These are long lives. They require funding, but they also require living. The retirees who die with 80 % of their wealth intact did not fail at saving. They succeeded brilliantly at it. What they failed at, and I say this with genuine compassion because the culture made them this way, was spending, was living, was giving themselves permission to enjoy what they had built. My grandfather passed away with millions in the bank. He was a remarkable man. He was careful and wise and genuinely funny when he wasn't looking at your dinner plate with barely concealed disappointment. But I think about him sometimes, and I wonder if he had known the ending date, Would he have traded some of that money for a little less worry?