J.D. Roth over at Get Rich Slowly wrote an excellent post today about the fall and rise of personal savings. He cites a number of experts who believe that the increase in personal savings is just temporary. I am not an expert, but I did write my Master’s thesis on this topic. I respectfully disagree with those experts.
Where did we go wrong?
Back in the 1980’s all interest payments were deductible. Car loans, credit cards, student loans… you name it, you got to write it off. Our savings rate was pretty low and Congress, in its infinite wisdom decided that this could not go on forever. The Country was falling farther into debt. The 1986 Tax Act limited and eventually disallowed the deduction for most types of consumer debt, except mortgages. There were very generous limitations put in place on mortgage deductions. A homeowner could borrow up to $100,ooo on top of the original mortgage for things completely unrelated to the purchase or upkeep of the home and write off the interest.Members of Congress felt that these changes would discourage consumers from borrowing and increase savings rates.
As the value of homes rose in the 1990’s and the beginning of the new millennium, home equity loans and home equity lines of credit became all the rage. Consumers would rack up credit card and car loan debt then roll it into their mortgage to get the tax deduction. Plus, home loans have been really inexpensive. Interest rates are still historically low. Consumers continued to spend as credit flowed freely. Did they cut up all those credit cards after paying off the balances? Of course not. Now, they had a shiny credit card with no balance. Well, until the next statement came. Never fear, home equity is here! When the cards were maxed again, many consumers just refinanced again. It was a personal ATM machine. Who needs savings when there are credit lines available to save the day?
Fast forward to 2008. Home prices start to decline. No more personal ATM machine. Lines of credit, including credit cards, start to dry up. Subconsciously, consumers started to become savers. Without the safety net provided by lines of credit and home equity, people turned back to personal savings. Most consumers realized that they could not keep spending more than they make. They needed a real cushion. Cash in the bank.
I believe that as long as credit is more difficult to get, consumers will continue saving. They will think twice before getting a new car loan or another credit card. They will think twice before getting that big screen TV. Hopefully, we will return to the days of paying cash for things. Remember lay-a-way? It’s making a come back.
Are you saving more? Have you put off big purchases in order to save for them? Are you a little more leery about putting things on a credit card?