Sometimes, It Doesn’t Pay to Save
By Shannon Christman
“Act now, and you may be able to pay less than you owe!” proclaims an ad for debt consolidation services. I’m all for paying off debts, but I was offended. Why should some people be allowed to pay less than they owe when others (like me) are habitually denying themselves things they want in order to stay out of debt? The ad might as well have said, “Be rewarded for your financial irresponsibility!”
Situations like these — where savers are penalized — are rare, but they are irksome to those of us who work hard to keep our accounts from going negative. Any type of amnesty from debt or taxes can serve as a reward for those who did not plan ahead and a penalty to those who did. So can several other cultural practices and business policies. In some cases, the act of saving itself can cause a real loss of buying power.
For example, I am grateful to my parents for saving for my college tuition, but their savings put me at a disadvantage when it came time to apply for scholarships. My grades and extra-curriculars would have qualified me for financial rewards, had my parents not socked away money for my education. The applications asked not only about their income, but also about how much they had in savings. I still remember the words of my teetotaling father: “If I had spent all my money on alcohol instead of putting it away for college, you would be able to get these scholarships.” In other words, it hadn’t paid to save so much.
Had my parents chosen to stuff the money in a mattress instead of a trackable savings account, I might have gotten a scholarship, but they still would have faced other penalties for saving that way. Saving alone is not enough; you have to save in an interest-bearing account to be significantly better off than someone who spends it all. Yes, stashing money around your house will ensure an emergency fund (so long as the emergency doesn’t involve your house burning down), but thanks to inflation, the money you saved will be worth less when you spend it than it would have been had you spent it earlier. Each year, your savings will buy about 2-3% less than the same amount could have bought the year before. At times, even the interest earned on savings accounts and other investments aren’t enough to keep up with cost of living increases. Paying your mechanic before your car breaks down sometimes makes more sense than saving without interest.
Then again, if the interest is just enough to bump you into the next tax bracket but not enough to cover the additional taxes, you might have been better off saving some of your money in a piggy bank.
Even death comes with penalties for savings. Assuming you have been diligent in saving throughout your life and have accumulated at least $1,000,000, the U.S. government currently claims a right to tax the money you leave for your heirs — that same money on which you have already paid income or capital gains taxes. (The IRS website calls the Estate Tax “a tax on your right to transfer property at your death.”) Granted, you can avoid this tax by putting assets in a trust fund, but you still have to pay to set up the trust, so either way, you — or rather, your heirs — are penalized for your saving habit.
So, saving doesn’t always pay. You might miss out on forgiven debts and college scholarships, see your money lose its value, or find yourself paying more taxes. Nevertheless, it’s more likely that you will lose out on much more if you don’t save: Debts could overwhelm you and lead to bankruptcy. Your children could wind up with a pile of student loans and no job to cover them. The things you buy before inflation usually lose their value more quickly than saved cash does. Spending makes you lose out on interest and capital gains that are usually worth more than the taxes you would have to pay on them. No, savings doesn’t always pay, but all in all, it pays far better than not saving.
You can’t lose money by being bumped into a higher tax bracket by interest income. Tax rates are marginal, which means the higher rate only applies to the amount over the threshold.