EVEN with today’s low interest rates, saving is smarter than borrowing.

The World is Upside Down

Maybe it’s because I’m getting old, but I’m listening to more talk radio than music while driving. If you’re the same you won’t be surprised that there are things said on the radio that almost make me crash my car. An advertisement I heard this last week was one of those.

It started by declaring the “the Fed has dropped the ball again” and the result is that borrowing money was going to remain relatively inexpensive. But here’s where the accident almost happened. They said that this fact (low interest rates) meant that “borrowers are the winners and savers are the losers!”

They were saying that now is a great time to rack up as much debt as you can, don’t worry about saving or accumulating. After all, (their theory goes) interest rates are so low, you are a “winner” just by borrowing. There is one part of that equation they are leaving out. You have to repay every penny that you borrow.

Don’t get me wrong, I know there is good debt and bad debt. I know that few can purchase a home or an automobile for cash – and that leverage, by way of borrowing, can be of strategic economic benefit. I know that .9 percent financing on my Nissan Leaf was a great decision, and that my 3.5 percent mortgage is a miracle. But I think we have lost sight of what debt really means.

When a “logical” argument can be made in a 30-second radio ad to promote borrowing for borrowing’s sake I feel like our logic is broken.

Let’s look at some statistics. The average person in the US during the 1970s saved 12.25 percent of their income, with 1975 topping the chart at 17 percent. The average savings rate in the 2000’s was 5.75 percent, with the low being 1.9 percent in 2005. From 2010 to today the average savings rate is 5.3 percent. Plain and simple, we’re losing ground.

This decline in savings rates has been accelerating since the advent of the 401k – that retirement tool available to almost 80 percent of workers in America. These plans were introduced in the early 80s as a replacement for company-sponsored pensions, which are almost non-existent today. During a time when increasing numbers of Americans could sock away record tax deductible contributions the savings rate has fallen to half.

Maybe it’s because taxes are so high, right? Some corners claim that the U.S. is the most taxed nation on earth. That would leave little to save – after paying all those high taxes. Sorry, wrong again Timmy. Personal income tax rates today are the lowest they’ve been in 46 years. In the 70s Federal personal income tax rates started at 14 percent and topped out at 70 percent. Today those same rates start at 10 percent and top out at 39.6 percent. So the average American pays less Federal income tax than ever.

So what’s the deal? Attitude. And by that I mean the attitude that accepts the idea put forth by the radio commercial I referenced. That “borrowers are the winners and savers are the losers.” We have decided that it’s better to owe than own. I think that is a bad decision. I see clients weekly that have adopted this attitude and they are suffering financially for it.

I also see clients who have paid off their debts, accumulated wealth slowly and systematically by way of weekly or monthly savings plans and who are retiring comfortably, on time, and in control of their finances.

If your money matters – knock off the indiscriminate borrowing. Peace of mind won’t come from owing more. Use debt wisely and appropriately. We’ll talk more about that in the weeks ahead. In the meantime, if you can’t afford it – don’t buy it. Savers are still the winners.

Contact Chris Basom at chris@ymminc.com .