Does It Pay to Save?


Roben Farzad at Business Week wrote a pointed analysis of how American savers have gotten hosed by the current economic state. Farzad makes the point that those who resisted excessive debt and lifestyles beyond their means (BTM) are now faced with low savings yields, high inflation, and overall instability. But those BTMs are seemingly rewarded with bailouts and bankruptcy.

Is America just one big BTM? We want bigger houses, fancier cars, and nicer clothes. On a national level, we’re using resources we don’t possess. But who will bail us out? What will become of the savers who tried so hard to be responsible in the face of rampant consumerism?

Farzad ponders:

Maybe savers’ ultimate vindication will arrive when and if every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else. Assuming, of course, they didn’t stash all their money in one of the many banks that is about to go under…

Just as interesting as the article is the first comment by a reader in Japan. The commenter claims that country is essentially a cash society where consumers make even major purchases like furniture or cars without the crutch of credit. Homes are financed with big down payments and 15 year notes.

According to the Japan Economy News, the amount of saving deposits over loan balances in Japan is at a record high. In addition government bond issuance is down. Not only are Japanese citizens eschewing credit, it seems their government is attempting to live within its means as well.

What a concept.

  • Great article. I think it’s the natural economic cycle that’s taking place here – where the US on an extremely long-term path will learn to live beyond their means but by using conservative methods. I don’t think we’ll ever get our act in shape to resemble Japan or India’s cash-rich method of thinking – but buying almost every possible item you can on credit? This era will pass and we’ll all say “good riddance.”

  • Drea

    You nailed one of the main reasons I really want to learn to be a good investor. I grew up in a family that always saved and lived below its means–it was just the way things were done (my folks are from Europe). Naturally, I do the same…and watch my moola lose its value. I do feel reamed right now, and I know I’m not the only one. Sometimes it doesn’t “pay” to follow the rules.

  • Ryan

    I feel the same way here. But let’s remember that those of us who leave below our means are not only positioned to benefit from buying things with cold hard cash, but also buying ownership in fundamentally sound corporations with cold hard cash.

    The question really is this: are there any fundamentally sound corporations in the current economic climate?

    At the end of the day I always say to myself: unless the entire US economic system collapses, in which case there will be total and utter chaos, there will always be some fundamentally sound corporations out there that are doing things well and also under valued. It is in depressed states like the current one where we can find the best values on fundamentally sound companies and position ourselves to benefit as economic conditions improve.

    What to look for in a fundamentally sound company? Well, I’d look for growth in market share. I’d ask whether the company has a product or service that will continue to be in demand for at least the next 10 years. I’d look for a relatively low Price to Earnings ratio. I’d look for a relatively high Return on Shareholder Equity. These 4 factors can help you invest with long-term confidence.

    I also recommend this article by Vito over at The Common Sense Investor:

    Top 3 Questions To Ask About Every Stock

  • Lela Davidson

    Good point Ryan. Like I always say – it’ll either work out or we’ll all be eating beans together. You’ve got to be an optimist! Thanks for the link to Common Sense Investor.