SAVINGS DISINCENTIVE

We live in a day of economic turmoil. With each passing day, prices continue to rise with no end in sight. The markets have not experienced price stability for some time. There are many reasons for this, but chiefly government interference in the market always causes price instability. Government policies are set by people who are not governed by market forces. The government is not a profit seeking enterprise.

The Frugal Accountant was driving down the road the other day and he saw a sign at a Credit Union announcing their current Certificate of Deposit rate. A thought flashed into the Frugal Accountant’s mind in this regard. Interest earned on Certificates of Deposit and other interest bearing accounts are ridiculously low. Why would someone want to tie up their savings for five years at 3% interest?

It is almost to a point that you would be just as well off to put your money under a mattress. The Federal Reserve has been recently cutting the Federal Funds Rate. This is a rate that banks charge each other for using Federal Funds. When this rate gets cut, the banks in turn lower the amount of interest they pay on their interest bearing accounts. At one point, the Federal Reserve had cut the Federal Funds Rate to 1%. This made saving money for interest a joke.

What is the result of cutting the Federal Funds Rate? It encourages people to borrow money at an artificial interest rate. This interest rate is not determined by the market, but by bureaucrats. This gives people an incentive to borrow money, but there is a catch to it. The lure of debt is instant gratification. When you borrow money, you get the funds instantly without having to earn it or to have to save to get the needed funds.

Saving money requires self discipline. It requires being frugal i.e. not spending more than you earn. Borrowing money does not require any self discipline. Saving money takes time to accumulate and borrowing does not. The advantage of savings, as opposed to borrowing, is that it does not have to be paid back. A saver will always have the advantage over the borrower even at a lower interest rate.

This cutting of the Federal Funds rate has the effect of giving a disincentive to savers. There is a great cry that people are borrowing too much and not saving enough. The government’s policies give an incentive to borrow money and a disincentive to save money. This is the opposite of the way things should be. If the government should be promoting any policy, it would be encouraging people to save money. The government’s current policy is instant gratification which reflects our current society.

Another way that government discourages saving is the tax law. Borrowers get to deduct their interest payments on mortgages and for business loans. This reduces the borrowers tax rate. The tax law favors debt. Savings, dividends, and capital gains are taxed. This is a disincentive for saving money. This increases the tax bill for savers and saving is thus, penalized. Clearly, the government’s policy favors going in debt and not saving money.