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)