Personal Finance, Saving Money

Sometimes, It Doesn’t Pay to Save

“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.

12 thoughts on “Sometimes, It Doesn’t Pay to Save

  1. 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.

  2. I can only think of one time it’s bad to be saving…when you have piles of debt to get rid of!

    However, I agree that people should be aware of how they are saving to maximize all the benefits that are available to them. The example you gave about college is a perfect one. Had your father saved your college funds in a Roth IRA, that money would not have counted in the financial aid formulas because it’s considered to be for retirement. HOWEVER, if needed, it can be withdrawn tax free for educational purposes.

    The estate tax is another example. If you plan…you can avoid unnecessary taxes.

    In the end, being unaware or uneducated about how you save your money doesn’t pay…saving does.

  3. My mom was about at retirement age when I started college. I guess we were lucky that she had hardly saved anything for retirement (there were probably better ways for her to save it, but I think it was just in her savings account). Even so, I was penalized.

    Fortunately, I did get a full scholarship through a state program along with some music scholarships and a small Pell grant.

    But get this…

    I worked my butt off to get another scholarship for working in the music library. I got the scholarship, and lost my Pell grant altogether, meaning I was right back where I started.

    But it’s been worse for friends.

    One girl was working for minimum wage while going to school and raising a toddler by herself. She started working a second job for minimum wage and lost her government assistance.

    A friend of the family’s worked and worked and worked to scrounge up enough money to buy a small plot of land for his family, while on food stamps. Once he bought that land, though, the government said he was too rich to help out. He had to sell it.

  4. I agree with PF. Saving should be weighed in ROI terms with debt. The only exception that I would make would be for an Emergency Fund (Baby Step #1 for all of you Dave-ites) you need to make a break with debt to get out of debt long term.

    Great blog!

  5. Considering that my single monther & I were dirt poor and couldn’t save for me for college and that when she died the day before high school graduation my absentee father started claiming me on taxes and I couldn’t get grants because of it… I do not feel sorry for you nor do I feel you should be able to cheat the system by having your wealthy folks “hide” $ so you can then get that $ that is rightfully allocated to those who are truly in need of it. Shame on you and all of those who do it.

  6. I disagree completely with #6. If your parents save money for THEIR retirement, why should that money be counted against YOU when it comes to educational scholarships? Just because they can afford to pay your tuition doesn’t mean they should be obligated to do so. Put differently, if you can’t force your parents to pay your tuition, why should a school be able to do so? Based on this logic, you are being punished for your parents’ unwillingness to use their retirement savings to pay for your education.

    Consequently, I have absolutely no problem in hiding assets from educational institutions that have no right to expect those assets will be spent on tuition payments.

  7. Kristi,

    I do not advocate hiding assets or cheating the system. I do believe, however, that the system penalizes a lot of good students. In fact, I think you proved my point — why should the assets of your absentee father have counted against you when you applied for grants?

  8. I had a problem when I was in college years ago. My dad retired and although we were considered low income during my college years, his job kept me from getting more financial aid since he retired one year and they still counted the year he was employed. My “financial aid package” included a job on campus, but when I worked more hours than my package allowed so I could pay more tuition, I lost my job! I had to find employment off campus and work awful hours so I could pay my tuition. I realize this has been awhile ago (in the 80s), but I was very resentful that I, who was willing to work to pay for my schooling, couldn’t work on campus.

    Years later when my husband’s nephew was awarded a full scholarship to his college, he had so much money it bought his books, and allowed him to travel. And mom and dad made decent money, but it didn’t count against him. Both instances(mine and his) are a financial aid system that is screwy.

  9. The estate tax exemption is $2,000,000 for 2008, not $1,000,000 (and has been for several years). And you don’t “avoid” estate taxes just by setting up a trust. Specific kinds of trusts can help reduce taxes, defer them, or are more efficient in using your marital estate tax deductions. It rather scares me that this basic information is incorrect on this article. What else is wrong?

  10. The $1,000,000 figure came directly from the IRS:,,id=164871,00.html

    I apologize if “avoid” is not an accurate term; however, I spoke with someone who has set up a trust, and he said that his heirs will not have to pay the estate tax — whether or not the “reduction” is to zero only in his particular case, I cannot say.

  11. The FAFSA is a joke. I have saved an emergency fund equal to six months of income as recommended by financial planners and FAFSA counts this against me. The expected family contribution calculated by FAFSA is 75% of my take home pay. I am being penalized for saving. I would have been better off blowing the money on a vacation.

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