You Don’t Get Wealthy From Saving

saving penniesDid you see The Atlantic’s piece about why the middle class doesn’t save money? I was with them for most of it—wage stagnation, increased cost of living, the usual suspects—until it got to the end:

It’s also a sign that Americans who aren’t rich still must be taught that being wealthy starts with not spending money.

I literally thought of a record scratch.

You don’t become wealthy from saving. This was one of the biggest points in Helaine Olen’s Pound Foolish, which the Billfold Book Club read in July.

If you make below the United States median income, which was $51,939 in 2013 (and notably 8 percent lower than pre-recession income), saving money is going to do a lot of good things for you. Maybe you’ll save $10K in a year, which a lot of Billfold readers have done, and which is possible to do on a $50K income if—to borrow from Barbara Ehrenerich—the starting conditions are correct.

But $10K in a year is not wealthy. Even $50K in five years is not wealthy. That is the type of savings that pays for one year of your child’s college education.

The Atlantic piece offers up the idea of a mandatory savings plan as the solution to middle- and lower-income money problems:

[Economists Gabriel Zucman and Emmanuel Saez] have another proposal to nudge behavior toward saving: a new automatic retirement plan that skims 3 percent of annual earnings up to $100,000. The money would go into a savings account invested in a broad fund to keep its growth near the global return on capital. Individuals could only take money out of the account early for special reasons, like buying a house or going to school. 

Okay. So let’s say you’ve got that median income of $51,939. Three percent, pre-tax, is $1,617.57. That’s not wealthy; that’s some families’ monthly health insurance premium.

But okay, you save $1,617.57 a year and invest it in a mandatory broad fund which—well, Time Magazine suggests your retirement funds may only return 4%, but let’s be optimistic and say 6% returns, which is what Bloomberg predicts in the retirement calculator I used to calculate this—anyway, saving $1,617.57 a year starting at age 30 at 6% returns gets you $192,686.34 at age 65.

And that’s a fair enough number, but it’s nowhere near wealthy. Nor are the other permutations (salary increases, savings increases) that might get you a slightly higher but still non-wealthy number.

You don’t become wealthy from saving, or become wealthy just from saving. You become wealthy for a lot of other reasons.

Photo credit: Alamo’s Basement

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