Is Saving Money Smart? image

Is Saving Money Smart?

Why the government—and the banks—don't want you saving money

Like most people, you were probably told growing up that saving money was a smart financial decision. Our culture is filled with positive little sayings about saving money like, "A penny saved is a penny earned," "Rainy day fund," and "Another day, another dollar." Our culture is also filled with phrases like, "Broke the bank," "Cleaned out," and "Money burns a hole in his pocket."

The truth is that for a culture that seems to value saving money, we don't show it in our actions. According to Zero Hedge, the U.S. personal savings rate was around 2.6% going into 2013, down from a high of over 14% in the 1970's. It's not a coincidence that around the time the personal savings rate started declining was also the time that the U.S. dollar went from being on the gold standard to being a commodity.

Even our government doesn't save, as we all know well after the last couple weeks of government shut down and stalled talks on increasing the debt limit.

Yet, still our leaders pay lip service to saving money. In 2009, Obama said, "Even before this recession hit, the savings rate was essentially zero, while borrowing had risen and credit card debt had increased. More broadly, tens of millions of families have been, for a variety of reasons, unable to put away enough money for a secure retirement. ... We cannot continue on this course."

So the question becomes, if saving is considered such a good thing, why aren't we encouraged to do it more through tax policy.

My tax advisor and friend, Tom Wheelwright, wrote an excellent book on how taxes work as incentives for the behavior our government wants to see from the populace. That book is called Tax-Free Wealth. If the government thinks saving is such a good idea, why don't they have tax breaks for those who save in order to encourage such behavior?

Give me a break

If you notice, you can get a tax break for buying a house and going into debt, but you don't get a tax break for saving money. Given that the government uses tax policy to encourage certain behaviors, it would stand to reason that since there are no tax breaks for saving money, they don't want you actually saving it? Why?

I imagine one big reason is that banks see your savings as a liability. Why would powerful lobbying forces like our banks allow a law to pass that encouraged you to increase their liability sheet? Most policy is not geared to help you and me but instead to help the banks. That is why in 2009, when Obama said he wanted to increase personal savings, what he really meant was to make it easier to put money into retirement plans like the 401(k), where banks benefit from your money.

Another reason is that our economy needs debt in order to grow. That is why the government doesn't save money but rather increases debt each year. It is also why back in 2009 when Obama said he wanted to encourage saving, what he really meant was to encourage investment in debt by allowing people to get their tax refund in the form of a U.S. savings bond.

Open your eyes

Most people have their eyes closed to the motives of others when it comes to their money. If you wish to prosper, you must learn to open your eyes. Once you can see and understand the motivations behind conventional advice like invest for the long term in a balanced portfolio of stocks, bonds, and mutual funds, you'll be able to make smarter financial decisions rather than just following the conventional advice.

For instance, a person with open eyes might decide that rather than save money in the bank or invest it in a 401(k), which have no real tax savings, they might invest in an asset like investment real estate or a business that allows for passive income that is taxed at the lowest rate.

But in order to do that, you must have a high financial IQ, which takes financial education. I encourage you begin on your path to financial freedom by opening your eyes to the possibilities all around you.

Original publish date: October 15, 2013