what if saving was stupid


Personal finance wisdom teaches us that you should always “save for the future.” You should take your current earnings and put at least some aside for the future.  That future may be a time when you need an emergency fund (health crises, car repairs, etc.) or a child’s education, or buying a house or retiring.  Hundreds of reasons we need to save can be identified, but underlying the “save for the future” mantra is a core belief – that money saved will be worth something in the future.

In the US the idea that saved money will be available in the future, and worth something, is not often questioned. We all know that inflation can eat away at the value of the dollar, but most of us don’t notice price changes over long periods of time.  You may notice that meat’s gone up, or that tomatoes are suddenly expensive, but with the exception of gas prices the changes are often gradual and we like to feel that our earnings are keeping up with the increase.

Over the last decade, the pay of an average wage earner has barely kept pace with inflation. Now, with interest rates falling – possibly to zero, depending on the Fed’s actions – money kept in CDs or high-yield savings accounts will barely keep up with inflation.  We all know how money “saved” in the stock market and real estate is performing.  Day after day, any money stashed away for the future is losing value.

The market is always up over time. Yes, true.  If you believe that, I hope you have all of your money invested in a total stock market fund.  But do you really want to take the chance that the day you need that money – whether it’s to get a downpayment for a house, or retire, or pay for a medical emergency – is going to be a day when the market’s up?  What if you needed it today?  Money in the market isn’t saved – it’s invested, and investment carries a risk that it won’t be there when you need it.

My wife’s family lived through this situation before. Her parents followed the rules in the Soviet Union.  Despite what you may have heard, their life wasn’t that different from life here in the West.  They had professional jobs.  They sent their kids to the best schools they could. They took care of their relatives, they went on vacation.  They saved money for the future.

Only the future wasn’t the one they (and millions like them) expected. When the Soviet Union collapsed the middle-class lifestyle and retirement and lives they had planned went up in smoke…fast.  Their jobs disappeared.  The value of their savings crashed to (literally) nothing.  Everything they had saved for vanished in a decade.  They still had the “things” they had bought and the education they had achieved, but their savings were gone.  They came to the States with their clothes.  Nothing else.

I’m not suggesting anything that drastic will happen in the US. I still have a lot of hope that we may see some rational governmental actions after January 20th.  And just like the dot-com boom or the real estate boom, there may be another fake boomlet to lift the economy back to life again (alternative energy, maybe)?  But in my own planning I’ve had to address something I once viewed as sacred as the law of gravity – maybe there’s not much point in saving money right now.

Debates over paying down the mortgage or investing in the market used to get kicked around a lot – I think now it’s clear that paying down your mortgage guarantees a rate of return and the eventual outright ownership of a place to live. Investing in the market might have bought you a piece of Lehman Brothers, returning 10% per year, but that money is gone now.  Putting your money in a high-yield savings account has its advantages; I find that having money that requires 2-3 days to withdraw is a good psychological barrier to wasting that money.  But if you left it there, over time you’re going to lose money.  Imagine that $5000 in a high-yield savings account was going to go to pay for groceries or gas in 5 years; would you take the bet that gas prices will only go up by 3-4% per year for the next few years?

You need savings. I just got laid off and it’s nice to have money in the bank so the next few months I don’t have to worry about paying for food or heat or the mortgage.  But my savings pattern has changed.  I used to put “saved” money in the market.  I thought of “saved” money as money well used.  Now I am trying to think of other ways to use that money – paying down the mortgage, buying durable goods, and building my alternative income wealthstreams.  It’s not time to cash your paycheck and instantly rush out and buy food, as my Russian colleagues did when I lived in Moscow in the mid-90s.  But the days of calmly stashing your money away until you need it may be over for now.  Let’s just hope it’s not over for good.

(photo by colin.brown)

45 Replies to “what if saving was stupid”

  1. The photo really got me to read the whole post — great job.

    You make a good point. What if all of my dutiful saving goes up in smoke? I'll be pissed, no doubt. But if I can maintain the “it's only money” mentality… I think I might be able to cope.

    Hopefully neither of us will have to worry about it.

    1. @NDP: Time was, I would have said I WAS hopeful – or even positive – I wouldn't have to worry about it, ever. And as I said, I think we'll know fairly soon into the next administration if it's going to be more of the same or an improvement – so let's keep our fingers crossed.

  2. Agree with NDP that picture is very creepy. I understand your thinking and yes the end of the world scenario could happen in the US like USSR, but tough comparison. Would you recommend just keeping money in the banks, instead of investments? Even with a collapse you are guaranteed your money.

    I like how you mention to put money towards alternative income. I think more people are trying to set up side jobs to help pay for small expenses and ease things a bit.

    1. Yeah, like Jews did in Swiss banks during the WWII?? Who got it now? You know the answer to that.

  3. You are definitely correct about paying down your mortgage. Obviously we all need cash to guard against the exigencies you named, but if you are looking for a way to get a return on your money, paying off your mortgage (or other debt), at least guarantees a positive return. But what a world! Who would ever have thought it would come to this?

  4. The future of the U.S. is a big uncertainty. Another big uncertainty is when we're going to die. It would sure make planning a lot easier if we knew the answers!

  5. Really great post. The current recession forces everyone to reexamine their assumptions: that the stock market is the only place to invest, that always bonds are safe investments (just re-learned that myself), that money saved in a bank will keep up with inflation. One key is still diversification – but applied to different areas: diversify your INCOME streams through different jobs and investments; diversify your ASSETS through combinations of real estate, stocks, bonds, commodities, etc.

  6. I understand your point and this is definitely an interesting post. While I agree it makes sense to secure your home by paying down the mortgage, I'm not sure how I feel about the rest of this. Many of these thoughts seem irrational to me, but I'm still quite young (mid-twenties) and haven't lost much. Only a few thousand in my 401(k) and IRA's, and definitely not a job. While I guess our economy could literally fall to pieces, I don't think it is very likely. I do agree with Four Pillars. If you are investing for the long term, or in my case the very long term, I think now is the time to be investing in the market.

  7. As things stand, it's going to take me between 20 and 30 years to pay off my mortgage. I can't overpay enough to cut down the mortgage term by more than a couple of years. I'm effectively prepared to bet that over the next 20+ years the stockmarket will perform better than 5.5% per year on average. There's no risk that I will lose more than I put in, and I am on track to pay off the mortgage on schedule anyway.

    The advantage of this approach is that money invested in the stock market is accessible if required (although I would be loathe to take it). Money that I overpay on the mortgage is gone forever.

    Of course it's possible that the money and investments I have could become worthless overnight but it's not likely (I am diversified internationally) and in practice the best mitigation against this is investing in myself which I would do anyway.

    I just don't see the current economic situation being a good reason to change my long-term strategy. It might well be different if I was older and closer to retirement.

    1. It is not true that money used to pay the mortgage down is lost forever. I have eliminated mortgage debt – actually, all debt – and I applied for a HELOC against the value of our house. If you have good credit these are still easy to come by, and I now have a credit line for several hundred thousand dollars available to me if I need it. This does not replace my emergency fund, but I sleep better knowing that if I do need (or want) to get hold of money quickly it is available.

    2. Stephen, that's a good point – the “money is gone forever” argument doesn't really work, since (usually) homeowners can use a HELOC to get that equity back out if they need to. The terms are probably worse, and therefore the paying-early strategy isn't worth much if you have to get money back out through a HELOC, but if you use it as you describe, as a “just in case” fund, then it's a very valid point.

  8. Well, consider this:

    Instead of saving money you pay extra towards your mortgage, but then you suddenly lose your job.

    Your mortgage company will still expect to receive monthly payments from you, even if you've paid extra in the past. But because you spent the money instead of saving it you could end up in foreclosure, not to mention not having cash to pay for utilities, food, etc.

    1. Good point, you can work around this though by saving money up, and every half year, take a large chunk to apply to the principle. That way you will always have the emergency money, and still be paying down.

      But honestly, you shouldn't be paying down your house anyway unless you have a well established emergency fund.

      When I think of saving money, I don't think about how much I'm going to make off it, I think about being financially prepared for the unexpected. Investing is where you make the money and should be concerned about earning more than the rate of inflation.

  9. great article and the persona anectodes make it that much more poignant. Definetly an editors pick in the CoPF.

  10. Nice article, but one minor criticism: you state that “with interest rates falling… money kept in CDs or high-yield savings accounts will barely keep up with inflation.” Yet one of the main reasons interest rates have fallen is to combat the possibility of deflation. Assuming we end up in a deflationary period, you could be earning 0% returns on your CDs/savings and still technically make out well (because your money could buy more stuff). But of course, with deflation any debt you have would also become more expensive.

  11. IMHO it's naive to imagine the US economy cannot and will not eventually collapse in a way reminiscent of the USSR's implosion. One hopes that will not happen, at least not in our lifetimes, but it is a possibility. Nothing lasts forever.

    If that happens, FDIC and NCUA guarantees of bank and credit union savings will be worthless, because the government, itself bankrupt, will have no money to reimburse your savings.

    In that scenario, obviously paying off your mortgage is the smartest strategy. Do not, however, imagine it will guarantee that you can keep your home. Governments will immediately raise taxes — as federal, state, county, and local governments are doing now. My property taxes are already so high it's questionable whether I can keep my home in what is going to be an impoverished retirement. If the county sends the police to take your home away from you — or if civil unrest leads to uprisings in which gangs of thugs take power and force people from their homes — there won't be much you can do about it.

    I'm on the verge of retirement right now…or I was, until the Bush economy collapsed. After years of tightwadding and saving, I had all I needed to live on comfortably even if I survive into my 90s, and enough to pass along a good chunk of capital to my son after I die. Most of my savings were in stocks, bonds, and Vanguard funds.

    Now I have nowhere near enough to live on. My savings are sliced in half. I can't draw down 4% of those savings now if they're ever to regain any value at all. For savings to recover to the point that proceeds from principal will support me will take a good 15 to 20 years–by then I'll be in my 80s! I'm advised not to sell; otherwise I lock in my losses in the unlikely event the economy recovers soon. If the economy continues to spiral into depression, hanging on to the widely diverse set of securities and mutual funds I own will guarantee that I lose not half my shirt but all of my shirt. In either event, I can't use my retirement savings to support me at this time. My financial adviser tells me I will have to work in “retirement.”

    So, effectively, after 40 years of saving, I have no retirement savings. Not any that I can use to support myself. If I'm laid off — a strong possibility — I will be effectively penniless at an age when I haven't a snowball's chance of getting another job. I will have to try to scrape together a living on $1,000 a month of Social Security payments and whatever I can generate as a freelance editor (try to imagine!), hoping that my investments recover by the time I'm too decrepit to hit a keyboard and lift a pen…or clean house for those who walked away from this mess with seven-figure bonuses.

    Mercifully, I paid off my house a long time ago. But in the current situation, if I don't have a job, I can't pay the taxes, and sooner or later the house will be taken away from me. Having paid off the mortgage delays the day that I will be living under the Seventh Avenue Overpass, but it doesn't guarantee that day won't come.

    Right now, I'm certainly feeling like a fool for having invested six hundred grand in the stock market and ended up at retirement with around half that. My friend who has his savings in laddered CDs still has all his money, and at the moment it's earning at more than the rate of inflation.

  12. Steve, I've been stuffing away as much money as possible over the last few years because I know that the longer I have for that money to grow, the better my potential payout. As you mentioned, it is investing, not saving, and there is risk involved. So far I can accept the level of risk I have taken.

    But I am starting to see that there is more than just saving in stocks and bonds. I need to create cash flow that can withstand economic downturns. I am currently growing my business and continue to focus on that. I pay a little extra on my mortgage, because I don't want to carry that mortgage for 30 years, nor do I want to have a mortgage into my retirement. No mortgage = a certain amount of financial freedom.

    My long term goal is to add additional income streams and hard assets, potentially real estate. It would start off small of course, maybe a rental unit. But eventually, I would like to have a few units bringing in enough money every month that I can pay all associated mortgage expenses, and have additional cash flow that I can use for other needs.

    I don't want my income to be limited to my day job or my assets to be limited to a few stocks and bonds that are at the mercy of the markets and/or the value of our currency.

  13. “Right now, I'm certainly feeling like a fool for having invested six hundred grand in the stock market and ended up at retirement with around half that.”

    Funny About Money, I don't want to pile on, because you're in a bad way, but it sounds from your description of your holdings that you were heavily invested in the stock market while “on the verge of retirement.” In which case, you were completely ignoring the common-sense rule that any high-school graduate who ever read a single personal-finance book could have told you: as you approach retirement, you need to shift out of equities and into much more conservative investments. Probably because you liked the returns of the riskier investments and shut your eyes to the fact that they were riskier. In that case, the problem was not with the stock market as a tool for retirement savings, it was your unwillingness to use that tool properly.

    I feel bad for you, and for everyone who lost money, even a little, just before retirement. But this is an area where people let their–let us call it wishful thinking get the better of them. If you were a fool, it was not for investing in the stock market at all, it was for investing what appears to have been a really significant portion of your portfolio in the stock market at age 55 or so.

  14. Actually, Sarah, I've been about 30-30-30 stocks, bonds, and money market. Which tells us something about how much the stock market has lost, I guess.

    Fortunately, my financial managers yanked a lot of cash out of stocks in my big IRA during the brief upticks that we've seen during the ongoing volatility, and fortunately, too, I cashed in a bunch of Vanguard Wellington and Windsor II shares to move enough into cash to guarantee I could pay off a small loan against my house should I be laid off. As a result, I'm apparently down only about $100,000 or $150,000. I won't know for sure until the university's 403(b) administrators get around to sending statements for TIAA-Cref and Fidelity, whose online sites are inaccessible to me.

    At age 55, one still has 11 years to work–possibly longer, if one's health is good and one has nothing better to do. That's over a decade for inflation to eat up savings put into instruments that don't keep up with inflation. While it's a good idea to allocate a substantial chunk of investments in bonds and cash, you still have to keep your money working for you, even in retirement. So, it's not wise to move completely out of stocks.

    There was no reason to believe, eight years ago when I was 55, that this country faced the possibility of Great Depression 2.0. Under Clinton, the economy was in excellent condition and we had no national debt–indeed, we had a $230 billion budget surplus. Probably anyone with any sense should have realized that the wacko economic theories that drove the Bush Administration would drive the country into bankruptcy. In that particular, it's true that we all should have been preparing for recession as soon as Dubya took office.

    My friend who voted for Bush not once but twice must have had an inside view: he's the one who put all his cash in CDs. LOL! The rest of us were too busy surfing the wave of fake prosperity to see the rocks ahead.

  15. YOU SIR have NO CLUE what Communism was about if you can write such NONSENSE. I grew up in a Communist country and it was MISERABLE. My parents were both doctors, good ones at that and my dad was getting LESS money a month than a bus driver on a city bus. I now live in the US and after years of living here I can tell you I HATE COMMUNISM and the economic EVIL it is. Communism killed over 100 million people and destroyed the lives of hundreds more millions through the ECONOMIC SLAVERY that it was.

    SHAME ON YOU for spreading such lies, obviously from igonrance!

    So I don't know which part of the USSR your wife's parents came from but I

    “My wife’s family lived through this situation before. Her parents followed the rules in the Soviet Union. Despite what you may have heard, their life wasn’t that different from life here in the West”

    1. George, I think you might need to re-read what I wrote – you have missed the point. I'm not talking about everyone's situation, just my wife's family's situation. They had a home, a car, they went to work, they were able to eat, clothe their family, etc. Towards the end of the Soviet Union times got tough for them, but my point was just that THEIR middle-class experience there was not so terribly different than life here in the States has been for them. So no, that's not a lie. That's the truth of their experience. I wasn't defending communism, but let's separate a political system from an economic system. I won't defend Stalin, of course, but the political system (a dictatorship) is different than the economic system (communism). Communism didn't kill over 100 million people, a dictator did. I am sure there are many people in capitalist countries who could claim to be miserable, as well.

      So I'm sorry if you misinterpreted the post to feel it was making a defense of communism – and felt that I was belittling your experience – but thanks for the counterpoint.

    2. Steve, thanks for the reply. I didn't mean to sound vicious, so apologies if I did. I actually bothered to go and read your ABOUT page. For a man with such impressive life achievements, you sure don't seem to have a good grasp on what Communism was and is all about.

      For you to separate Communism from Stalin is like separating the Constitution of the US from Ben Franklin. Communism was not just some ill conceived economic system, although it was that, too. Communism was about violence and murder.

      Steve, please get this: if you study the history of Communism (and socialism for that matter) you'll realize something very important: it would have NEVER survived in history if it wasn't for its bloodthirsty nature! I recommend you quit quoting to me your wife's parents experience in Russia and begin to actually get acquainted with some history on the subject matter IF you are going to make comments on Communism. Otherwise, please stay off the subject, because you sound much like Ted Turner here: http://www.youtube.com/watch?v=0KBFbjfxGXM

      Now, Steve, let's establish this: Communism as a system was SLAVERY and EXPLOITATION of the worst kind. It was terror in terms of violence and it was also SLAVERY and EXPLOITATION in economic terms.

      Your attempt to separate the two can be explained either as: ignorance (which seems to be the case) or leftism, i.e. the deliberate defense of it.

      And yes, Steve, Communism as a system empowered Stalin to kill millions of people (between 30 and 60 mil) and host of other dictators to kill many millions more. http://www.victimsofcommunism.org/

      And yes, life under Communism was and is VERY MUCH different than what you can ever imagine, so I hope yo stop repeating this mantra as it were to become true if you repeated over again.

    3. Furthermore, let's examine your other “arguments” which they really aren't such:

      What really gets me going is the HISTORIC REVISIONISM going on here…

      Now, if your wife's parents were functionaries of the Communist Party, yes, they might have had it better. But if they were ordinary people, than I ask:

      “They had clothes” – what kind of clothes and how much? Did you know how much you could trade your Levi's for a pair of pants from the 70s Russia or any other Commie country? Wanna try a pair of shoes?

      “They had a car…” – Steve, this get hillarious, if it wasn't tragic…HERE, you really MISSPOKE (or you really are a paid propagandist of Volodya Putin). So, ready? Steve, wanna trade an old Chevy from the 50s, 60s, 70s or the 80s for a LADA??????

      Did your wife's parents have a LADA or a ZAZ?

      Watch this to inform yourself now in the area of COMMUNIST CARMAKING: http://videos.streetfire.net/video/Top-Gear-Com

      “They were able to eat?” – really? How much and what kind of food? You mean radioactive tomatoes from Chernobyl?

      Or others foods that came to market due to the exploitation of the agrarian class.

      Alright, this is getting too long. And again, who knows, you might be a real apologist of Russian supremacy.

      God bless!

    4. George, I've studied Russian history extensively but obviously we're on different pages here. I only wanted to make the point that my wife's family had a fairly benign lifestyle in the USSR that disappeared, and that the same was possible here. No more. I'm not defending Communism, far from it. And yes, they had a Volga, my father-in-law served in Afghanistan and so had a few extra perks. My wife's grandfather was in the gulag so they weren't exactly free, and I understand that.

      I hope you understand that I was just warning of the potential disappearance of a stable lifestyle. No more, no less. My wife's family were happy enough while they were there, at least as far as they've told me. They had their troubles – my father-in-law went to Afghanistan (and because of that he got a Volga), his father was in the gulag (but survived), they didn't always have it easy – but they didn't starve, they lived their lives as best they could, my wife does not have a horrific childhood to look back on. If that seems like I'm defending communism, sorry – I'm not. I just meant that they had a life they did not hate, and they lost it and regret it. Please don't read anything more into the post than that.

    5. Fair enough Steve! I am not attacking you or your wife's family. But I do get pretty fired up when it comes to history and the realistic portrayal of what went on in Russia and the Communist camp for so man years. I'm really honestly quite puzzled that you have studied Russian history “extensively”…makes me wonder from which books exactly? But again, American leftism has been around for quite a while.

      Again, Russian history since 1917 has been nothing but one mega tragic tale of suffering, violence and exploiation.

      And oh, yes – we know what kind of people got Volgas at that time. Even though these Volgas were a piece of TOTAL CRAP compared to what a decent car is supposed to be! Just like the food and clothes and the 45 sq. m. living space in the crappy apartments…You know Steve, I'm an insider too…hard to sell this idyllic story about did you call i “their life wasn’t that different from life here in the West”… Your father in law is probably not talking too much about Afghanistan, about his position in the army, etc. I understand. As you say, they followed the rules! Wow! And they were some rules!

      I'm sorry, but again – it's a VERY dishonest thing to do – to spread this story of how people in Communist Russia had it not so different from the West. Especially with a father in law who was in the army and mind you – he wasn't a foot soldier, you can bet he was a high ranking officer.

      This of course explains the high level of tolerance for Communism in that family.

      But let's change the subject – if you believe in free market Capitalism (which I'm not sure you do since you haven't this yet), how can you even COMPARE centrally planned economy (what a IDIOCY THAT WAS!) with free market?

      Even today, my friend – the reason Putin got so arrogant wasn't because they have a true free market economy in Russia, it was because of Putin's petro-dollars, bullying regional states into becoming economically dependent, etc.

      Putin's KGB mafia has been killing innocent people, including journalists.

      Now when the prices of oil collapsed, what do we have all of a sudden? A collapse of the Russian economy of course – http://tinyurl.com/43w369

      The average Russian man lives 59 years, while the average American man I think it's now 79 years.

      It doesn't add up Steve. Things weren't “almost” the same back then and they are certainly not “almost the same” today.You build a nice life for yourself, etc, – great! But do you know, sir, that ALL of your wonderful qualities and hard work might have not been worth even a DIME in the good 'ol USSR? And if you were born there you weren't going to write blogs today giving your opinions about achieveing financial prosperity, but you might have been driving a cab somewhere in Communist Russia, depending on how loyal or daddy and you were to the Party, not how smart and hard working you are.

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  17. George : Having read Steve's blog almost from the beginning, I think I can say with some degree of certainty that he (a) knows Russian history (b) isn't defending communism or any of its methods (c) is a capitalist (although not a right-wing total free market kind of capitalist) and (d) was making a very particular statement about one experience, not a general statement about millions of experiences.
    More to the point, from my perspective, I think it's true that even when things are going badly for people, they will cling to the familiar, regret the loss of the familiar, and fear a different life, no matter how much better it may be. Lord Byron, in his poem, “The Prisoner of Chillon,” perhaps said it best:
    My very chains and I grew friends,
    So much a long communion tends
    To make us what we are:-even I
    Regain'd my freedom with a sigh.

    My father quoted this to me frequently until he died. He was the kind of guy who left home early, saw many horrible things as a young man during the Depression and for six years as an infantryman from 1939 to 1945. Some of the horrible things were epic (a concentration camp) and some were petty (seeing a friend brutally beaten just so someone could get that guy's last few dollars). Human beings, either alone or en masse, can be wonderful, or they can be unspeakably cruel. And that's all Steve was saying, that one family at one point in time, didn't have it all that bad, at least compared to those around them. That's all he said. Really, Steve's one of the good guys!

    1. Just to clarify one point, since I think Ruth covered what I would have said otherwise – my father-in-law was a civil engineer, not an army officer. He worked to rebuild bridges and agricultural installations in occupied areas and was not a soldier at all.

  18. Personally I'd rather invest my cash back into my business than save it, pay extra on my mortgage, or stick it on the stock market any day. I think the only folks who are going to survive and thrive if there is an economic crash are those who create or buy assets they can continue to profit from no matter what the monetary system looks like (real estate, business, intellectual property, etc.).

    Regarding the pay-off-the-mortgage-quicker scenario… If you believe inflation, or even hyperinflation, is the future, then all your debts will be paid off for you as the dollar is worth less and less anyway, so if your home loan is at a good rate, what's the hurry? Plow some money into building up your alternative income wealth streams 🙂

  19. We'll need money set aside for Emergency cushion,Retirement etc.These emergencies to avoid going into debt to pay for what we need .

  20. The costs for private and public education are rising every year, and it's getting tougher to meet these demands. So, we must save money and deposit in good banks.

  21. It is so important to be saving money. While no one likes to think about the possibility that they will lose their job, become disabled, or have some other sort of disastrous financial crisis, the fact of the matter is that it happens to people all of the time.

  22. Good point, you can work around this though by saving money up, and every half year, take a large chunk to apply to the principle. That way you will always have the emergency money, and still be paying down.

    But honestly, you shouldn't be paying down your house anyway unless you have a well established emergency fund.

    When I think of saving money, I don't think about how much I'm going to make off it, I think about being financially prepared for the unexpected. Investing is where you make the money and should be concerned about earning more than the rate of inflation.

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