Stop Trying to Redefine Savings!

Everyone just stop it! If, in some twisted sort of way, redefining "wealth" or "net worth" as "savings" makes you feel better about the world and your own lot in life, then go ahead and do it - just do it in private.

Whatever gets you through the day.

But, please, stop sharing your rationalizations with the rest of us who prefer to continue believing that "savings" (as either a verb or a noun) is not something that can come and go as quickly as a subprime lender.

Call it old fashioned if you want, but, just leave the word "savings" alone. Please.

Since the personal saving rate turned negative in 2005 and then plunged even further into the red last year, there has been a steady stream of commentary and research papers intent on blurring the lines between "wealth", "net worth", and "saving(s)" - sort of like a bad doctor anxious to ease the immediate discomfort of an ailment with one pill or another while the underlying illness remains untreated.

Wealth is the value of your assets.

Net worth is assets minus liabilities.

Saving is income less expenditures or money put aside.

Stop confusing them.

Commentary such as this($), appearing in respected publications such as the Wall Street Journal, doesn't do anyone any good (particularly Chinese manufacturers of piggy banks).

This month, the Commerce Department's Bureau of Economic Analysis put the nation's personal saving at negative $116.6 billion for December 2006.

To get that number, the bureau starts with after-tax disposable income then subtracts "personal consumption" of all sorts.

Here's what doesn't get counted, though: the increased value of stocks or mutual funds in brokerage or retirement accounts, or the rising value of your home.
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If you're already trying to figure out where you stand, pay attention to the nomenclature. Commerce's study of personal saving is all about the verb -- "saving" -- what you make, minus what you spend.

But a more complete snapshot may well come from also adding in your "savings," the noun -- an accounting of your total assets and how they've grown, even if you haven't realized the gains yet.

No, there's another word for when savings are used to buy stocks - that's called investment.

And real estate?

Up until a few years ago, real estate was just a place to live in - with sometimes hefty maintenance expenses and even heftier taxes to pay. But, lately it's become plan B for retirement planning, as in, "I was too busy to save and invest while I was younger - it's a good thing my house did that for me".

Real estate is not savings.

Enter the Economists

The added perspectives of Federal Reserve economists and college professors doesn't seem to be helping the word savings retain its original meaning.

What appears below may be comforting to dismal thinkers, but translating all the squiggly lines and formulas into a conclusion that Americans may be saving too much for retirement as in this report from personal finance columnist Laura Rowley, well, that's just plain irresponsible.


[At the risk of offending any readers of this blog who may be economists, it should be noted that Economics is not a "hard science" - far from it. Some scientists and engineers view their math as kind of a "pretend" applied mathematics.]

Here's what Ms. Rowley had to say about the squiggly lines:

Conventional wisdom suggests that people are woefully unprepared for retirement. Study after study portrays most Americans as the proverbial grasshoppers, playing the fiddle with their finances while a minority of conscientious ants store up supplies for their golden years.

In 2004, for example, the Center for Retirement Studies at Boston College estimated that 43 percent of working households were in danger of having too little income to fund their retirement, even after tapping home equity.

Now a group of economists is offering a wildly contrarian view: People may be saving too much for their retirement. A few go so far as to suggest that the financial services industry is deliberately encouraging over-saving because it profits from managing such assets.

Consider a recent study (.pdf) conducted by Paul Smith and Lucy McNair of the Federal Reserve Board, and David Love, an economist at Williams College. They found that 88 percent of all households with breadwinners over age 51 had accumulated sufficient resources to finance adequate consumption in retirement.

A separate study by John Karl Scholz, an economist at the University of Wisconsin, Madison, and two other researchers found more than 80 percent of households headed by Americans born between 1931 and 1941 have accumulated their optimal wealth targets for retirement.

The other 20 percent missed their goal by a relatively small margin, according to the study published in the Journal of Political Economy (.pdf).

Fortunately this piece was more food for thought than personal finance advice as the author ultimately recommends that individuals "err on the side of caution" and economists develop "more accurate models".

You don't get that message from just reading the first few paragraphs, which is about as far as anyone would get if they were looking to rationalize their spendthrift ways.