Strategies for saving money effectively

Saving Money

Encouraging saving: The American government

Currently, the United States is still mired in an economic downturn. Despite the slight increase in its Gross Domestic Product (GDP), which is technically an official sign of growth, American unemployment remains high and the government is attempting to encourage citizens to spend, rather than to save, to stimulate the economy. To some degree, this is easier than engaging in carefully-targeted policies to encourage savings. Furthermore, critics of the current pro-spending policy are fearful that it will foster the type of credit and debt-dependant practices that lead America into the credit crisis in the first place.

Promoting savings requires a reversal of current monetary policy. To facilitate an expanded monetary policy, the Federal Reserve Bank has been buying government securities on the open market to infuse liquid assets into the economy, lowered the discount rate (the rate which member banks borrow from the Fed), and lowered the reserve requirements banks must retain (Federal open market committee, 2009, Fed). Banks are encouraged to lend more money through lower discount rates and reserve requirements, and the Fed has also lowered consumer interest rates to encourage more borrowing rather than saving. To stimulate the economy and encourage spending, the U.S. government has embarked upon a stimulus program of public works and various other spending incentives such as 'cash for clunkers.' In the past, the federal government has also sought to stimulate the economy through tax cuts.

When the Fed wishes to encourage consumer savings, it pursues the opposite policy. It raises the interest rate to make saving more attractive, raises the discount rate so that member banks can borrow from the Fed to meet reserve requirements with ease, and raises reserve requirements overall, thus decreasing the funds banks can lend to consumers. It also buys back government securities to decrease the amount of money circulating in the economy. The federal government can complement the Fed's policies through specific, targeted initiatives to encourage savings, just as it has encouraged targeted spending programs in the automotive sector. Taxing different types of savings less or not at all is one way to encourage savings: for example, traditional IRA (individual retirement accounts) and 401Ks are not taxed, and Roth IRAs are financial instruments that offer no deduction for contributions but extract no taxes for withdrawals (Ehrbar 2009). Increasing consumption taxes and capital gains taxes on investments also encourages savings rather than spending. State sales taxes are the most notable form of consumption taxes, although the federal government does have a few types of consumption taxes, such as taxes on gasoline (Ehrbar 2009). However, the government is often loath to increase the gasoline tax, given the negative impact this can have upon commerce and consumer prices. Decreasing income taxes will not necessarily encouraging savings, as consumers will have less money to both save and spend but by making consumption more expensive, savings becomes more attractive.