Why saving can be a bargain

The U.S. savings rate was 4.5% of disposable personal income in August, the latest month for which data is available, according to the Commerce Department's Bureau of Economic Analysis. That's far better than it was in 2005, when the monthly savings rate bounced around between 1% and 2%, but below May 2008's 8.3%, when we recorded the highest monthly savings rate since the early 1990s. Even as Americans endeavor to save regularly, they are trying to get their debts under control. The New York Federal Reserve reported that total consumer borrowing amounted to $11.4 trillion at the end of 2011's second quarter, well below the $12.5 trillion peak that was hit in 2008's third quarter.

Looking for a reason to save more? Try keeping this in mind: Saving is a bargain compared to spending.

To understand why, imagine that--after paying Social Security and Medicare payroll taxes--you are left with $100 in earnings. If you set out to spend that $100, you might first lose 25% to federal-income taxes and 5% to state-income taxes, leaving you with $70 to spend. If you then spent that $70, you might end up with just $66 of actual goods, because of state-sales taxes.

Now, imagine instead that you aimed to save that $100. If you put the money in a traditional 401(k) plan or a tax-deductible Individual Retirement Account, you would hang on to the full $100. If the money went into a 401(k), you might even get a matching employer contribution, so your $100 becomes $150, assuming your employer provides a match of 50 cents for every $1 contributed.

To be sure, you would owe income taxes when you draw down your IRA or 401(k) in retirement. But in the meantime, you might benefit from years or even decades of tax-deferred growth--and that growth could take a lot of the sting out of the eventual tax bill.

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