Disincentives to Frugality and Saving

[DoubleDown]

I was just thinking of a few instances I've come across in life that reward excessive spending and provide incentives against being frugal or saving or improving their own financial situation. I'm not talking about the obvious things like credit cards that give rewards for spending, but more nuanced things buried deep into public policy or culture. These things could almost be viewed as "punishing" savers, and they're consequential -- perhaps things we should be aware of to avoid potential pitfalls. Here are a few examples, can you think of any others?

1. Need-Based College Financial Aid - When need determinations are calculated, one prominent consideration is the assets of the family. Consider two identical families earning identical incomes. The first family lives very modestly, carefully saves over the years in investment accounts and pays off their house. The other lives high on the hog, rents a high-priced apartment, goes on expensive vacations each year, buys expensive cars, jewelry, electronics, eats out all the time, and saves nothing. The frugal/saving family could find themselves getting no financial aid for their college-age students, while the other gets a free ride.

2. Marriage/Divorce - One partner can spend at will, while the other wants to save. Certainly bad for a marriage in its own right, and in the event of divorce, it doesn't matter who saved and who spent, everything is (generally) split down the middle.

3. Alimony - Several court cases have upheld that people paying alimony cannot take lower-paying jobs or retire "early" and reduce alimony payments based on their new, lower income, sometimes even in cases of failing health or other considerations. Say you're a high earner making high alimony payments to an ex-spouse. You may literally be forced to remain at your job until you are 65 in order to continue making the same alimony payments to your ex, even if you have structured your own life to reduce expenses and retire 25 years early. In fact, courts have regularly prevented people as old as 63 from taking "early out" incentives from their jobs, refusing to reduce alimony payments.

4. Child Support (sorry for another marriage-related one, it's just another ludicrous situation) - In almost all cases, courts will follow a robotic income-based formula to determine child support, and there are often no caps. There have been famous cases where wealthy individuals have been ordered to pay $100,000 or even $1 million PER MONTH in "child support", as though any kid needs $100k or $1 Million/month to survive. Even though the money is ostensibly for the support of children, it goes directly to the other parent, who has absolutely no incentive to try to reduce costs and lower the payment. The receiving spouse has a strong incentive NOT to earn more themselves, or payments will be reduced correspondingly.

5. Income Taxes - By taxing income instead of consumption, there are incentives for people to find ways against having productivity taxed (for example, just lowering productivity), with no corresponding incentive against consumption. In fact, in some big cases, consumption is rewarded (such as home mortgage interest deductions).

[Argyle]

My parents paid the full rate for my college with their carefully squirrelled-away savings, despite the fact that they were not high earners.  I remember my mother saying, as she saw all my friends getting reduced tuition, "We're paying the price for having saved the money."

That said, I don't think help for strapped students shouldn't be available.

[CommonCents]

My parents use to joke they have three kids and:
Kid 1 they should spend all of their money to pay for it
Kid 2 they/I should take out all available loans to pay for it
Kid 3 should be poor enough now to get scholarships

Agree with most of what you've posted, I just have some qualms re alimony because it can be so badly abused.  This will probably blow up this thread to discuss though.

[GuitarStv]

Fuel or electrical bills with fixed costs.

I typically pay 60 - 80% of my bill to fixed costs.  There's a much reduced incentive to save if doubling the amount of electricity/fuel I use only bumps my bill up by 20%.

[DoubleDown]

Agree with most of what you've posted, I just have some qualms re alimony because it can be so badly abused.  This will probably blow up this thread to discuss though.

Yeah I don't mean to imply that (rehabilitative) alimony is a bad thing, or that a paying spouse should just get to change the status quo all of a sudden after a certain standard of living has been established ("Hey ex-wife of 25 years, I'm frugal now, let's cut your spousal support in half!"). It's a complicated subject, and as we all know, no one really wins or should expect that there will be no negative fallout in a divorce. It's just one of those unfortunate outcomes, IMO, that once a pattern has been established, it can be really difficult or impossible to change it even for the better. There are, no doubt, equally screwed up circumstances for the receiving spouse.

[Thespoof]

I asked the question of whether or not there was a cap on child support in my parenting after separation class and there isn't. The reson being is that the child/children have a right to partake in the wealth of the parent. That may be fine and dandy so long as any money above and beyond a reasonable amount to provide for the child is perhaps put in a trust fund or invested for their future as opposed to allowing the ex to drive a Mercedes and take 3 out of country holidays a year paid for by the "child support". That is the issue that I have with these large support payments - they don't just enrich the child's life and that's a pile of BS.

[CommonCents]

Agree with most of what you've posted, I just have some qualms re alimony because it can be so badly abused.  This will probably blow up this thread to discuss though.

Yeah I don't mean to imply that (rehabilitative) alimony is a bad thing, or that a paying spouse should just get to change the status quo all of a sudden after a certain standard of living has been established ("Hey ex-wife of 25 years, I'm frugal now, let's cut your spousal support in half!"). It's a complicated subject, and as we all know, no one really wins or should expect that there will be no negative fallout in a divorce. It's just one of those unfortunate outcomes, IMO, that once a pattern has been established, it can be really difficult or impossible to change it even for the better. There are, no doubt, equally screwed up circumstances for the receiving spouse.

Sounds like we're on the same page.

[Davin]

Fuel or electrical bills with fixed costs.

I typically pay 60 - 80% of my bill to fixed costs.  There's a much reduced incentive to save if doubling the amount of electricity/fuel I use only bumps my bill up by 20%.

I agree. We have to pay for a utility baseline, no matter how much we use. In our area it is about $50 a month. We rarely use the baseline amount, but even when we only use half of the baseline it is the same fixed cost.

The same is true for water and sewer. Our monthly bill for 3-4 acre feet per month is also about $50/month. Our friends who have a huge yard with a garden, ponds and several fountains regularly use about 16 acre feet of water in the summer. They pay only about $70/month for using 4-5 times as much water. It seems to make almost no difference how much you use.

Garbage collection has a similar fixed cost. We use the smallest size residential garbage can, but it costs almost as much as the largest size.

[SAHD]

Your credit score is another area were you are punished for not having lots of credit and loans rather than rewared.

Used car loans, if you buy a new car you can get 0%-2% financing but buy that same car only one year used and it interest rate jumps up to 3-5%

[seattlecyclone]

Fuel or electrical bills with fixed costs.

I typically pay 60 - 80% of my bill to fixed costs.  There's a much reduced incentive to save if doubling the amount of electricity/fuel I use only bumps my bill up by 20%.

Yeah, this annoys me. Our gas company has a $10/month base fee that you pay regardless of whether or not you use any. So in the summer when we're not running the furnace, we pay $10/month for nothing. The electric utility has a similar fee, but it's less apparent because we use electricity all year long. Still, the fixed costs made up about 20% of our last electric bill. I wish they would bake these fixed charges into the per-unit charges. The average customer would end up paying the same, while those of us who conserve resources to protect the environment would be rewarded financially as well.

[kingma15]

In Australia when my Grandpa retired (mid 1980s), people were able to spend their super/retirement savings. It was almost the done thing to "cash out" ie: spend all of your retirement savings (holidays, new car, furnish the house etc..) and then go on the old age pension and recieve all of its benefits (cheap car registration, subsidised medical etc...)

He instead decided to purchase an investment property and an annuity instead of a lump sum payment.

I think it worked to his favour in the end as he has lived to a ripe old age and never wanted for anything, but there have always been lots of complaints when he has had to pay full price for everything (medical, car registration etc...) while friends of his enjoy lots of subsidies.

However, his frugality and savings ethic have been passed down to me, hence my receptivness when I found this blog a couple of months ago!

[CarDude]

As many others have noted, utilities, although I'm not sure I'd see it as a disincentive; it just leaves an uncanny valley between not using a utility at all (and disconnecting it) and barely using it, but paying at least $10 or $15 for the privilege.

[Breaker]

Hi,

One place it definitely proved it was better to be less frugal is my Gas & Electric bill.

The Company is trying to get everyone to use less, so they initiated a plan to give rebates to those who used 20% less than the year before.  If you were already frugal and using a little as possible, no rebate for you.  But if you wasted the gas or electric, you got a rebate with no trouble.  And you could get it 2 years in a row as they offered it for 2 years.  The more you had wasted before the easier it was to get a rebate. 

OBTW, the gas company then raised the rates because they needed the money.

Since our economy is based on consumption there is very little incentive for the Gov't. to encourage savings of any form. 

College education is free if you end up in jail.  The poor slobs who are honest and save their money pay the full boat.

Well, no one said that life was fair.

Jan

[DollarBill]

Great post! I notice these things all the time. Especially with taxes, I'm single so with no kids. I think all of our taxes should be linked to new consumption. That way more used items would be bought and sold...equals less waste and save on taxes. That's a win/win situation!! Every time I hear a finance channel that says "we need more growth" I know they mean more people and more consumerism.

As far as the marriage side of things I'm sure you read WMFD https://forum.mrmoneymustache.com/welcome-to-the-forum/divorce-wmfd-(weapon-of-mass-financial-destruction)/

I'm Military and never understood why they pay you more if you are married or have children. I understand you have more mouths to feed but it's not the Military taking on that decision. Why do I (as single/no kid) make less for doing the same job. This also makes a lot of people to jump into a marriage so they can live off post and/or get paid more.

I also think about the people that file for bankruptcy. I know a friend that while married (20+ yrs) had about $750K in debt and no assets. Got a divorce, foreclosed on a $420K house, $75K boat, $100K RV, $50K each in CC debt, and vehicles. Walked away from it all with no bills but for current living expense. First thing on the agenda...take a vacation. I haven't taken a vacation for many years to save money...who is the smart one here????? They both still have a job but now no debt. I'm 10 yrs younger and have none of these problems but dang I have the feeling like maybe we're doing it all wrong.
   

[No Name Guy]

OP - you missed the biggest dis-incentive to saving and frugality out there - the fiat currency system and in the US, the Federal Reserve.

With a stated policy of destroying 2-3% per annum of accumulated capital (e.g. savings) via inflation what bigger disincentive to saving is there?  Using the compounding formula of A=A_o*e^(r*t), then looking at the inverse (1 / A) to get the purchasing power yields:

Purchasing Power Relative to Year Zero             Inflation Rate (% / year)       Years   2   3   4 1    0.98    0.97   0.96 2    0.96    0.94   0.92 3    0.94    0.91   0.89 4    0.92    0.89   0.85 5    0.90    0.86   0.82 6    0.89    0.84   0.79 7    0.87    0.81   0.76 8    0.85    0.79   0.73 9    0.84    0.76   0.70 10    0.82    0.74   0.67 15    0.74    0.64   0.55 20    0.67    0.55   0.45 25    0.61    0.47   0.37 30    0.55    0.41   0.30 35    0.50    0.35   0.25 40    0.45    0.30   0.20

This stealth tax on wealth is a huge disincentive to save - and worse, unless one is paying attention, it generally slips in under the conscious radar, although most people can "feel" it at some level.  In 10 years at 3%, the same dollar is devalued to only 74 cents, in 20, its buys barely over 1/2 of what it did when the consumption was foregone.

Add to this the absolute suppression of interests rates for savers - what's a plain Jane savings account pay?  0.05%?  What bigger dis-incentive to save is there?  Pays practically nothing, lose nearly 1/2 in 20 years if the stated policy is achieved and there's a recipe for spending, not saving.

[warfreak2]

Option 1: a small, well-managed level of inflation, and the associated benefit to the economy and long-term growth in the stock market (c.f. the USA)
Option 2: zero inflation for extended periods of time, zero long-term growth in the stock market (c.f. Japan)

Yes, inflation is, directly, a (small) incentive to spend rather than to save. Without small incentives to spend, businesses don't have customers. Indirectly, it's a much bigger incentive to save (at least, to invest) - 7% after-inflation growth in the stock market beats 0% growth with 0% inflation, hands down.

[smalllife]

-employer chosen 401k plans (rather than the supers (?) in Australia) - high fees, long wait periods, horrible investment choices
-low interest rates (risk averse hard put to find a savings vehicle)
-economy measured on growth rather than sustainability

[Schaefer Light]

The income tax is my biggest complaint.  We need to scrap it and move to a national sales tax.  This also needs to happen at the state level.

Social Security is a disincentive to saving for a lot of people.  They see it as their retirement plan.

The home mortgage interest deduction definitely encourages spending.

Obamacare and the subsidies associated with it are definitely a disincentive to shopping for the most economical health insurance plan.

Health insurance in general doesn't encourage savings.  I'm going to pay the same co-pay whether I go to the best doctor in town or the worst.  Why would I bother to shop around if the co-pay is the same no matter which doctor I go to?

There should be a way to save money on your children's education, but you're currently paying for government schools via your taxes so there's no incentive to shop around for a better bargain.

What it boils down to for me is the free market vs. govt control.  Let free markets work the way they're intended to and a lot of these problems go away.

[CommonCents]

The income tax is my biggest complaint.  We need to scrap it and move to a national sales tax.  This also needs to happen at the state level.

Usually the reason against this is that it'll end up hitting the middle class really hard, and mean the rich pay much much less (because they only spend a fraction of their money while the middle class spend a much greater percentage).  The poor would likely pay nada, as they'd have personal exemptions. 

[Schaefer Light]

The income tax is my biggest complaint.  We need to scrap it and move to a national sales tax.  This also needs to happen at the state level.

Usually the reason against this is that it'll end up hitting the middle class really hard, and mean the rich pay much much less (because they only spend a fraction of their money while the middle class spend a much greater percentage).  The poor would likely pay nada, as they'd have personal exemptions.

I get the arguement (although I personally disagree with it), but Mustachians should love the idea of having their taxes controlled by their spending.

[Beridian]

I worry that as I approach retirement age that the US government will change the rules regarding social security and medicare such that they means test the applicant and pay out on a graduated scale.  What this might mean is that those of us who have been responsible and have saved up a nest egg may actually have our benefits reduced, where as the jerks who bought big houses, expensive cars,  lavish vacations while saving nothing will collect more.   I certainly hope that this will not be the case, but it worries me and makes me wonder if saving now will cost me later.

[mxt0133]

Let free markets work the way they're intended to and a lot of these problems go away.

I hate to bust your bubble but we do not live in a free market economy.  Other than small tribes that still exists in remote places there are very few true free market economies left.  They disappeared for the same reasons that we broke up AT&T and filed anti-trust lawsuits against Microsoft.

As for the resentment about various disincentives with regard to savings, the way I view it is learning to live on less, learning to be happy without much, learning how to adapt to new conditions are all skills.  Even if the person that spends every cent is taken care of via welfare, bailouts, ect. they would still be dependent on external things to be happy.  Where as if you learned to live on less and be truly content and have enough then who cares if they have a bigger house or more expensive car?  You can only control your own behavior and trying to impose you views on others will just cause you stress.

[randymarsh]

1. Need-Based College Financial Aid - When need determinations are calculated, one prominent consideration is the assets of the family. Consider two identical families earning identical incomes. The first family lives very modestly, carefully saves over the years in investment accounts and pays off their house. The other lives high on the hog, rents a high-priced apartment, goes on expensive vacations each year, buys expensive cars, jewelry, electronics, eats out all the time, and saves nothing. The frugal/saving family could find themselves getting no financial aid for their college-age students, while the other gets a free ride.

If we assume the families are making decent middle class salaries, neither student will be getting much except for loans.

My parents being divorced allows me to pick which income I report on the FAFSA. They have basically equal incomes so it doesn't really matter in my case. But I can tell you that if you make 50K or more, don't expect anything but loans. You may get a $1,000 grant here and there, but that's about it.

[Beridian]

The income tax is my biggest complaint.  We need to scrap it and move to a national sales tax.  This also needs to happen at the state level.

Social Security is a disincentive to saving for a lot of people.  They see it as their retirement plan.

The home mortgage interest deduction definitely encourages spending.

Obamacare and the subsidies associated with it are definitely a disincentive to shopping for the most economical health insurance plan.

Health insurance in general doesn't encourage savings.  I'm going to pay the same co-pay whether I go to the best doctor in town or the worst.  Why would I bother to shop around if the co-pay is the same no matter which doctor I go to?

There should be a way to save money on your children's education, but you're currently paying for government schools via your taxes so there's no incentive to shop around for a better bargain.

What it boils down to for me is the free market vs. govt control.  Let free markets work the way they're intended to and a lot of these problems go away.

Right, let the free market fix things.  Just like the way that the free market fixed worker safety, remember the Triangle Shirt Waist Fire, Union Carbide in Bopal India, or the recent West Fertilizer Company explosion?   Remember how the auto industry embraced with open arms things like safety glass, seat belts, airbags, or anti-lock brakes?   The auto industry had to be dragged kicking and screaming every step of the way towards safety reforms that have saved thousands of lives.   What about pollution?   Remember lead in gasoline and in paint?  Remember how private industry volunteered to stop using lead?   Oh that’s right, they fought reforms to remove lead as well.   Remember Love Canal, the Exxon Valdez, how about the recent BP Gulf of Mexico oil spill? Yeah, just leave everything to the free markets and they will fix everything and it will be all sunshine and lollipops.

Jeese...I almost forgot about the tobacco industry and how they freely owned up to their problems and put things right, or the Catholic Church and the way they protected all those poor abused children from the predator priests, then there is the way that industry jumped right in and fixed the whole asbestos problem without any outside pressure.....

[teen persuasion]

My parents use to joke they have three kids and:
Kid 1 they should spend all of their money to pay for it
Kid 2 they/I should take out all available loans to pay for it
Kid 3 should be poor enough now to get scholarships

Agree with most of what you've posted, I just have some qualms re alimony because it can be so badly abused.  This will probably blow up this thread to discuss though.

Now, I see it working the reverse for our family.  We have 5 kids, so the older ones' aid has been based on a large family size, and they have gotten lots of aid, but are gradually leaving the nest.  By the time kids 4 & 5 are in college, our family size will be much smaller, and I have watched the fafsa formulas become much tighter each year (especially the allowed assets chart).  I am hoping to get to FIRE by the time DS5 is ready for college, but changes each year in the formulas make it difficult to plan more than a few years ahead.

As far as the OP, I'm finding that the Obama are income limits for subsidies would force us to curtail 401k savings to get us out of 'poverty level'  income to be eligible to purchase health insurance and not take Medicaid. At least we still have insurance through DH's employer, for now.

[cpa cat]

I asked the question of whether or not there was a cap on child support in my parenting after separation class and there isn't. The reson being is that the child/children have a right to partake in the wealth of the parent. That may be fine and dandy so long as any money above and beyond a reasonable amount to provide for the child is perhaps put in a trust fund or invested for their future as opposed to allowing the ex to drive a Mercedes and take 3 out of country holidays a year paid for by the "child support". That is the issue that I have with these large support payments - they don't just enrich the child's life and that's a pile of BS.

What's silly about the whole policy is that if you were married with the child in your home, the child would have no right to partake in the wealth. It is absolutely the parents' choice what they choose to spend on their kids, above and beyond basic needs.

There is no legal requirement that I pay for private school or Summer camp. In fact, I could put a swimming pool in my back yard, swim in it all day and ban my kid from joining me due to "drowning risk" and it would not be considered neglect or abuse under the law. But if I get a divorce, now suddenly the kid is entitled to his own swimming pool.

As a married person with custody of my kids, I'm allowed to buy a BMW and drive it to work while forcing my child to ride his bike to school. But get a divorce, and suddenly my child is entitled to ride to school in a BMW - nothing else will do.

[DoubleDown]

What's silly about the whole policy is that if you were married with the child in your home, the child would have no right to partake in the wealth. It is absolutely the parents' choice what they choose to spend on their kids, above and beyond basic needs.

There is no legal requirement that I pay for private school or Summer camp. In fact, I could put a swimming pool in my back yard, swim in it all day and ban my kid from joining me due to "drowning risk" and it would not be considered neglect or abuse under the law. But if I get a divorce, now suddenly the kid is entitled to his own swimming pool.

As a married person with custody of my kids, I'm allowed to buy a BMW and drive it to work while forcing my child to ride his bike to school. But get a divorce, and suddenly my child is entitled to ride to school in a BMW - nothing else will do.

Indeed! And in several high profile cases, even when the wealthy parent (most often the dad) has argued to the courts that they don't want their child to be raised in affluence, and want them to learn frugality and a work ethic instead of everything being handed to them, it falls on deaf ears. The courts say, "Nah, the child should share in the wealth in both homes, just follow the formula and keep paying $10,000 per month." Like you said, this is only the case in divorce -- otherwise you would be well within your rights not to lavish $$$ on your child.

[eil]

1. Need-Based College Financial Aid - When need determinations are calculated, one prominent consideration is the assets of the family. Consider two identical families earning identical incomes. The first family lives very modestly, carefully saves over the years in investment accounts and pays off their house. The other lives high on the hog, rents a high-priced apartment, goes on expensive vacations each year, buys expensive cars, jewelry, electronics, eats out all the time, and saves nothing. The frugal/saving family could find themselves getting no financial aid for their college-age students, while the other gets a free ride.

Not to go too far off-topic but I'm in my mid-30's now and I'm still confused about society's perception that the parents' are the ones that are by default responsible for furnishing the expenses of their child's college education. And then, only if they can't afford it, charities and the state (through scholarships and grants).

Both of my parents said they would be proud of me if I went to college and got a degree but stated flat-out that they were not going to pay for it, even though they could have technically afforded it. (I didn't want to waste away in Dullsville, Midwest for the rest of my life so I went into the Air Force instead.) So when I finally did apply for financial aid, I had been fully self-sufficient for four years. But I still recall the application not-so-subtly implying that for the purposes of financial aid, my parents' assets were still counted the same as my own.

This same system caused my niece a lot of anguish too. She lived with my wife and I while she was going to college. Her parents were divorced. Mom was a raging alcoholic living in a trailer park and Dad was... somewhere but wouldn't talk to her. But the financial aid system doesn't care about such little things. They still won't consider your application complete until you have your parents tax return information readily at hand. She came from a pretty broken home (raised her kid sister due to drunk/high mom), so you can imagine her lack of amusement at the irony of having to go through all this in an attempt to break free of the kind of lifestyle she was forced to grow up in.

[bwall]

OP - you missed the biggest dis-incentive to saving and frugality out there - the fiat currency system and in the US, the Federal Reserve.

With a stated policy of destroying 2-3% per annum of accumulated capital (e.g. savings) via inflation what bigger disincentive to saving is there?  Using the compounding formula of A=A_o*e^(r*t), then looking at the inverse (1 / A) to get the purchasing power yields:

This stealth tax on wealth is a huge disincentive to save - and worse, unless one is paying attention, it generally slips in under the conscious radar, although most people can "feel" it at some level.  In 10 years at 3%, the same dollar is devalued to only 74 cents, in 20, its buys barely over 1/2 of what it did when the consumption was foregone.

Add to this the absolute suppression of interests rates for savers - what's a plain Jane savings account pay?  0.05%?  What bigger dis-incentive to save is there?  Pays practically nothing, lose nearly 1/2 in 20 years if the stated policy is achieved and there's a recipe for spending, not saving.

This is why your money should be invested, not saved and not stuffed in a mattress. Note that there is a difference between saving and investing.

Inflation is bad, but much better than the alternative, deflation. Look at post-1989 Japan as a lesson in what NOT to do after a bubble bursts.

Optimists see inflation as a reason to invest, complainypants see it as a dis-incentive to save.

[Blindsquirrel]

5. Income Taxes - By taxing income instead of consumption, there are incentives for people to find ways against having productivity taxed (for example, just lowering productivity), with no corresponding incentive against consumption. In fact, in some big cases, consumption is rewarded (such as home mortgage interest deductions).

   Yep, Taxes are our biggest expense. In fact, we pay more in taxes than all other household spending combined. Food, housing, utilities, transportation, medical care, etc add up to about 70% of what we pay in taxes. As we are not yet ready to pull the plug on our day jobs, that is just the way it is. Interesting disincentive on saving and investing is that we target areas with lower property taxes in which to renovate houses. We end up with more loot that way.
 
   A huge disincentive is also the stunning corporate tax rate in the USA. I would rather pay the contractors who work for me a ton of money and buy and renovate more houses than we actually need rather than flush more money in taxes.

[bacchi]

   A huge disincentive is also the stunning corporate tax rate in the USA. I would rather pay the contractors who work for me a ton of money and buy and renovate more houses than we actually need rather than flush more money in taxes.

Corporate taxes (federal) are only on profits. Couldn't you pay the contractors more and have fewer profits?

- What others have already mentioned -- utilities.

- Medicine, mainly with how it's provided. What drives profits is not aligned with what people need.

[Blindsquirrel]

   I do pay them a fair bit, provide them with lots of work, and spend money on rehabbing houses to avoid federal profits. Paying property taxes is the killer.

[DoubleDown]

1. Need-Based College Financial Aid - When need determinations are calculated, one prominent consideration is the assets of the family. Consider two identical families earning identical incomes. The first family lives very modestly, carefully saves over the years in investment accounts and pays off their house. The other lives high on the hog, rents a high-priced apartment, goes on expensive vacations each year, buys expensive cars, jewelry, electronics, eats out all the time, and saves nothing. The frugal/saving family could find themselves getting no financial aid for their college-age students, while the other gets a free ride.

Not to go too far off-topic but I'm in my mid-30's now and I'm still confused about society's perception that the parents' are the ones that are by default responsible for furnishing the expenses of their child's college education. And then, only if they can't afford it, charities and the state (through scholarships and grants).

Both of my parents said they would be proud of me if I went to college and got a degree but stated flat-out that they were not going to pay for it, even though they could have technically afforded it. (I didn't want to waste away in Dullsville, Midwest for the rest of my life so I went into the Air Force instead.) So when I finally did apply for financial aid, I had been fully self-sufficient for four years. But I still recall the application not-so-subtly implying that for the purposes of financial aid, my parents' assets were still counted the same as my own.

This same system caused my niece a lot of anguish too. She lived with my wife and I while she was going to college. Her parents were divorced. Mom was a raging alcoholic living in a trailer park and Dad was... somewhere but wouldn't talk to her. But the financial aid system doesn't care about such little things. They still won't consider your application complete until you have your parents tax return information readily at hand. She came from a pretty broken home (raised her kid sister due to drunk/high mom), so you can imagine her lack of amusement at the irony of having to go through all this in an attempt to break free of the kind of lifestyle she was forced to grow up in.

You're actually a lot closer than you know. I used to work in the financial aid profession, and it is not just a perception that there's an expectation for the "family" to provide for the student's education (to the extent they can) -- that's the #1 underlying philosophy of the financial aid system, and the way financial aid is calculated. And, as you've noted, it doesn't matter whether or not the parents agree with this policy; the need determination will assess a parental contribution whether or not they actually agree to provide it for their kid.

This can cause a big problem for the child, needless to say, if the parents are assessed a contribution but refuse to provide it. Now the kid has to find a way to make up the difference (if that's even possible), as the fed/state/school won't provide any help there. It turns out it's naïve of parents to just say "Go fund your own education" to their kid. The financial aid system will not agree with them, and will not make up the difference. Also, that mentality is really outdated nowadays. There was a time decades ago where you could "work your way through school," but that is just not very viable in many circumstances now. With the incredible increase in college costs compared to 40-50 years ago, it's just incredibly difficult to do that at a major university today.

From society's perspective, it's not a bad thing that the financial aid system operates under this philosophy. If society allowed every parent to just say, "I don't think I want to contribute, how about the rest of society picks up the tab for my child even though we could afford it?", it would collapse.

As it turns out, your niece or others in bad situations like hers likely could have benefitted from a little-known appeals process. It is possible in certain cases to appeal a parental contribution assessment if you can explain and document extraordinary circumstances like your niece's. Then the school will waive all or part of the parental contribution.  I was able to do that successfully, and it meant the difference between me dropping out and getting a 100% aid package. Note that "the parents don't want to contribute" will not do it; it has to be a documented and extraordinary case where the student can show they should be considered completely emancipated.

[Schaefer Light]

The income tax is my biggest complaint.  We need to scrap it and move to a national sales tax.  This also needs to happen at the state level.

Social Security is a disincentive to saving for a lot of people.  They see it as their retirement plan.

The home mortgage interest deduction definitely encourages spending.

Obamacare and the subsidies associated with it are definitely a disincentive to shopping for the most economical health insurance plan.

Health insurance in general doesn't encourage savings.  I'm going to pay the same co-pay whether I go to the best doctor in town or the worst.  Why would I bother to shop around if the co-pay is the same no matter which doctor I go to?

There should be a way to save money on your children's education, but you're currently paying for government schools via your taxes so there's no incentive to shop around for a better bargain.

What it boils down to for me is the free market vs. govt control.  Let free markets work the way they're intended to and a lot of these problems go away.

Right, let the free market fix things.  Just like the way that the free market fixed worker safety, remember the Triangle Shirt Waist Fire, Union Carbide in Bopal India, or the recent West Fertilizer Company explosion?   Remember how the auto industry embraced with open arms things like safety glass, seat belts, airbags, or anti-lock brakes?   The auto industry had to be dragged kicking and screaming every step of the way towards safety reforms that have saved thousands of lives.   What about pollution?   Remember lead in gasoline and in paint?  Remember how private industry volunteered to stop using lead?   Oh that’s right, they fought reforms to remove lead as well.   Remember Love Canal, the Exxon Valdez, how about the recent BP Gulf of Mexico oil spill? Yeah, just leave everything to the free markets and they will fix everything and it will be all sunshine and lollipops.

Jeese...I almost forgot about the tobacco industry and how they freely owned up to their problems and put things right, or the Catholic Church and the way they protected all those poor abused children from the predator priests, then there is the way that industry jumped right in and fixed the whole asbestos problem without any outside pressure.....

Free markets, free people.  That's all I have to say.  If people are too damn stupid to do things for themselves, then they get what they deserve.

[warfreak2]

Right, let the free market fix things.  Just like the way that the free market fixed worker safety, remember the Triangle Shirt Waist Fire, Union Carbide in Bopal India, or the recent West Fertilizer Company explosion?

Free markets, free people.  That's all I have to say.  If people are too damn stupid to do things for themselves, then they get what they deserve.

It's hard to interpret this charitably. Surely you aren't saying that the citizens of Bhopal, India deserved Union Carbide's chemical plant disaster?

[Fishingmn]

In many ways the healthcare system is like this - there aren't enough disincentives for people to actually try to save money on going to the doctor or shopping for healthcare on price.

At the extreme, when I worked for a very large software company our family got 100% covered healthcare. Nothing from check, no copay, no deductible and no cost for prescriptions. This totally leads to disincentives to try and scale back any healthcare savings and applies to lots of people who hit their deductible limits or only pay a small portion of the full cost of a visit.

[Schaefer Light]

Right, let the free market fix things.  Just like the way that the free market fixed worker safety, remember the Triangle Shirt Waist Fire, Union Carbide in Bopal India, or the recent West Fertilizer Company explosion?

Free markets, free people.  That's all I have to say.  If people are too damn stupid to do things for themselves, then they get what they deserve.

It's hard to interpret this charitably. Surely you aren't saying that the citizens of Bhopal, India deserved Union Carbide's chemical plant disaster?

No, that's not what I meant at all.  I'm talking about things like tobacco.  We don't need the govt to make the warnings bigger or tell us that cigarettes are bad for us.
 

[warfreak2]

No, that's not what I meant at all.  I'm talking about things like tobacco.  We don't need the govt to make the warnings bigger or tell us that cigarettes are bad for us.

So apply that logic in the mid-20th-century, when we didn't know that cigarettes were bad for us, but the cigarette companies sure did, and they were keeping schtum? Many people became addicted to cigarettes before there were educational campaigns about the dangers of smoking, as far as they knew they were indulging a harmless habit. Surely you aren't saying those people were "too damn stupid" and therefore deserved to die of lung cancer?

Or apply it to private individuals. If knowingly poisoning unsuspecting people shouldn't be a crime for the tobacco industry, why not permit it for cheating spouses too? Because, you know, freedom.

It's not unreasonable at all for the government to protect consumers from false advertising, nor is it unreasonable for that protection to extend to the implicit assumption that a product not labelled "this product causes lung cancer" isn't known to cause lung cancer. Unless you really do check for peer-reviewed independently-replicated scientific evidence on the risks of every single product you use, I am sure you won't argue that anyone not doing this is "too damn stupid" (also, the free market does not have a very good track record for publishing peer-reviewed independently-replicated scientific evidence, so I hope you appreciate public funding for science).

Any of the examples mentioned should be proof enough that profitability in a free market doesn't always align the interests of a business with the interests of its customers, let alone the interests of society. Seeing as the government is supposed to act in the interests of society, it's inevitable and appropriate that, in particular circumstances, the government should prevent the free market from operating against those interests.

[RootofGood]

OP, all those disincentives to saving are valid.  I still don't think they generally outweigh the benefits of saving.  With 401ks and IRAs, you can get a huge tax break today (on contributions) and for the next few decades (on dividends/cap gain distributions each year). 

Also, being a saver means you'll have less money stress in the relationship, thereby decreasing your odds of paying alimony or child support. 

As for taxes, you mention the mortgage deduction.  There's a step function at work because you get the standard deduction automatically, so you really have to buy a lot of house, or pay a lot of local taxes or state taxes, or contribute a lot to charity before you get into itemized deduction territory.  We've only itemized a couple years, and it just barely made sense to itemize (in fact we itemized one year for LESS than the federal standard deduction just to take a bigger state tax deduction).  Buying a cheap house also means less maintenance, insurance, taxes, utilities, etc.  So you save all over the place, and possibly lose out on a tax deduction.  You're still coming out ahead financially with the smaller house.

[DoubleDown]

OP, all those disincentives to saving are valid.  I still don't think they generally outweigh the benefits of saving.  With 401ks and IRAs, you can get a huge tax break today (on contributions) and for the next few decades (on dividends/cap gain distributions each year). 

Also, being a saver means you'll have less money stress in the relationship, thereby decreasing your odds of paying alimony or child support. 

As for taxes, you mention the mortgage deduction.  There's a step function at work because you get the standard deduction automatically, so you really have to buy a lot of house, or pay a lot of local taxes or state taxes, or contribute a lot to charity before you get into itemized deduction territory.  We've only itemized a couple years, and it just barely made sense to itemize (in fact we itemized one year for LESS than the federal standard deduction just to take a bigger state tax deduction).  Buying a cheap house also means less maintenance, insurance, taxes, utilities, etc.  So you save all over the place, and possibly lose out on a tax deduction.  You're still coming out ahead financially with the smaller house.

Agree with you 100% above. Just found it interesting/funny as I've come across some of these cultural or societal things over time that tend to work against a saver and that are fun (for me at least) to make fun of or lament in general. In all of these situations, I always remind myself it's far better off to be a saver and investor.

For example, when I was a financial aid counselor (a long time ago) and learned the underlying philosophy and calculations, it was an eye opener. I remember asking my boss who was training me, "Wait a minute -- you mean to tell me that someone who blows all their income their entire life could get a free ride, while the family with a paid off house and a bunch of savings gets the shaft??!" And he said, "Yup!" It's just kind of a perverse rewards system.

But again, not in 1000 years would I trade FI for getting some "free money" as a sucker consumerist or being on the dole. Or in my example, I'd rather be the family with the paid off house and a lot of savings and whose child gets Zero financial aid, than the family with no savings and whose child gets a free ride. I'm just envisioning a perfect world where we could do away with some of the lame things noted in the thread ;-)

[DoubleDown]

Here's a high profile example of a ridiculous child support amount, fun to read in case you feel like throwing up! It's the case of Michael Strahan (former NFL player, now an entertainment figure). His ex-wife received $15 million in their divorce settlement, and yet the court found "the children had a supplemental need of $200,000 a year, for a total of $235,984 a year" for two toddler girls (3 and 4 years old). This opinion actually reverses the lower court's decision and sends it back to the lower court to be recalculated.

http://caselaw.findlaw.com/nj-superior-court-appellate-division/1314162.html

Snippets from the court's opinion:

Here, the parties' experts agreed the marital standard of living was approximately $1 million a year.   The court found that the “reasonable current standard of living” of defendant and the two children was $630,000 a year.   The court set forth all of the expenses that went into that figure, but did not distinguish defendant's expenses from those of the children's.   The court stated that defendant “reported spending approximately $8,000 per month over an approximate twelve month period on the children.”   The court added:  “The historical expenses attributed  to the children, to the extent reasonable and recurring, have been reviewed and weighed to their current needs as determined by the court's analysis of the factors under N.J.S.A. 2A:34-23(b).”  The basic child support amount under the guidelines was $35,984 a year.   But, the court found that the children had a supplemental need of $200,000 a year, for a total of $235,984 a year.

For example, the “children” sent their nanny and her family to Jamaica for a ten-day vacation, and gave their grandmother diamond jewelry.   Defendant claimed that the twin toddlers needed nearly $27,000 a year for clothing because she dressed them in a new outfit every time they saw their father, and one of the three-year-old girls did not like to leave the house without a purse.   There was no explanation as to why the children needed $30,000 worth of landscaping per year, or what was included in $3,000 for “audio visual” expenses per year.   Defendant listed $36,000 a year for the children's “equipment and furnishings” without explaining what that covered.

[Rebecca Stapler]

Right, let the free market fix things.  Just like the way that the free market fixed worker safety, remember the Triangle Shirt Waist Fire, Union Carbide in Bopal India, or the recent West Fertilizer Company explosion?

Free markets, free people.  That's all I have to say.  If people are too damn stupid to do things for themselves, then they get what they deserve.

It's hard to interpret this charitably. Surely you aren't saying that the citizens of Bhopal, India deserved Union Carbide's chemical plant disaster?

No, that's not what I meant at all.  I'm talking about things like tobacco.  We don't need the govt to make the warnings bigger or tell us that cigarettes are bad for us.

But we do need them to prevent tobacco companies from selling to minors. 50% of smokers start before they're 13 years old. With tobacco marketing the way it used to be, it's hard for me to say that middle school children get what they deserve when they find themselves with mouth or lung cancer along the way. Nicotine is a very powerful drug.

[Insanity]

Here's a high profile example of a ridiculous child support amount, fun to read in case you feel like throwing up! It's the case of Michael Strahan (former NFL player, now an entertainment figure). His ex-wife received $15 million in their divorce settlement, and yet the court found "the children had a supplemental need of $200,000 a year, for a total of $235,984 a year" for two toddler girls (3 and 4 years old). This opinion actually reverses the lower court's decision and sends it back to the lower court to be recalculated.

http://caselaw.findlaw.com/nj-superior-court-appellate-division/1314162.html

Snippets from the court's opinion:

Here, the parties' experts agreed the marital standard of living was approximately $1 million a year.   The court found that the “reasonable current standard of living” of defendant and the two children was $630,000 a year.   The court set forth all of the expenses that went into that figure, but did not distinguish defendant's expenses from those of the children's.   The court stated that defendant “reported spending approximately $8,000 per month over an approximate twelve month period on the children.”   The court added:  “The historical expenses attributed  to the children, to the extent reasonable and recurring, have been reviewed and weighed to their current needs as determined by the court's analysis of the factors under N.J.S.A. 2A:34-23(b).”  The basic child support amount under the guidelines was $35,984 a year.   But, the court found that the children had a supplemental need of $200,000 a year, for a total of $235,984 a year.

For example, the “children” sent their nanny and her family to Jamaica for a ten-day vacation, and gave their grandmother diamond jewelry.   Defendant claimed that the twin toddlers needed nearly $27,000 a year for clothing because she dressed them in a new outfit every time they saw their father, and one of the three-year-old girls did not like to leave the house without a purse.   There was no explanation as to why the children needed $30,000 worth of landscaping per year, or what was included in $3,000 for “audio visual” expenses per year.   Defendant listed $36,000 a year for the children's “equipment and furnishings” without explaining what that covered.

Eh, put that in perspective, he earned $5M for his TV role.  His network was something like $35M.   That' isn't so bad.

[Cheddar Stacker]

OP, all those disincentives to saving are valid.  I still don't think they generally outweigh the benefits of saving.  With 401ks and IRAs, you can get a huge tax break today (on contributions) and for the next few decades (on dividends/cap gain distributions each year). 

+1. I'm surprised it took so long for someone to mention this as I was thinking it the whole way through the thread. I'd like to add the saver's credit, HSA's, 529's, etc.

I realize it's not what you were asking for DD, but I think there are a lot of incentives as well. As far as interest rates (and the FED) as others mentioned, they are purposely providing savings disincentives to encourage growth and keep the economy going strong. While I don't appreciate the "big brother deciding what is best for me" mentality, I at least appreciate what they're attempting to do and I don't have a better solution at the moment. Maybe we can all come up with something better in FIRE with all our free time.

[DoubleDown]

Here's a high profile example of a ridiculous child support amount, fun to read in case you feel like throwing up! It's the case of Michael Strahan (former NFL player, now an entertainment figure). His ex-wife received $15 million in their divorce settlement, and yet the court found "the children had a supplemental need of $200,000 a year, for a total of $235,984 a year" for two toddler girls (3 and 4 years old). This opinion actually reverses the lower court's decision and sends it back to the lower court to be recalculated.

http://caselaw.findlaw.com/nj-superior-court-appellate-division/1314162.html

Snippets from the court's opinion:

Here, the parties' experts agreed the marital standard of living was approximately $1 million a year.   The court found that the “reasonable current standard of living” of defendant and the two children was $630,000 a year.   The court set forth all of the expenses that went into that figure, but did not distinguish defendant's expenses from those of the children's.   The court stated that defendant “reported spending approximately $8,000 per month over an approximate twelve month period on the children.”   The court added:  “The historical expenses attributed  to the children, to the extent reasonable and recurring, have been reviewed and weighed to their current needs as determined by the court's analysis of the factors under N.J.S.A. 2A:34-23(b).”  The basic child support amount under the guidelines was $35,984 a year.   But, the court found that the children had a supplemental need of $200,000 a year, for a total of $235,984 a year.

For example, the “children” sent their nanny and her family to Jamaica for a ten-day vacation, and gave their grandmother diamond jewelry.   Defendant claimed that the twin toddlers needed nearly $27,000 a year for clothing because she dressed them in a new outfit every time they saw their father, and one of the three-year-old girls did not like to leave the house without a purse.   There was no explanation as to why the children needed $30,000 worth of landscaping per year, or what was included in $3,000 for “audio visual” expenses per year.   Defendant listed $36,000 a year for the children's “equipment and furnishings” without explaining what that covered.

Eh, put that in perspective, he earned $5M for his TV role.  His network was something like $35M.   That' isn't so bad.

It might not be bad for his bottom line or overall net worth since he's so wealthy. But I think it's bad if Mr. Strahan doesn't want his toddler daughters to become accustomed to a $235,000 annual living expenses way of life or the sense of entitlement it might engender.

[RootofGood]

Agree with you 100% above. Just found it interesting/funny as I've come across some of these cultural or societal things over time that tend to work against a saver and that are fun (for me at least) to make fun of or lament in general. In all of these situations, I always remind myself it's far better off to be a saver and investor.

For example, when I was a financial aid counselor (a long time ago) and learned the underlying philosophy and calculations, it was an eye opener. I remember asking my boss who was training me, "Wait a minute -- you mean to tell me that someone who blows all their income their entire life could get a free ride, while the family with a paid off house and a bunch of savings gets the shaft??!" And he said, "Yup!" It's just kind of a perverse rewards system.

But again, not in 1000 years would I trade FI for getting some "free money" as a sucker consumerist or being on the dole. Or in my example, I'd rather be the family with the paid off house and a lot of savings and whose child gets Zero financial aid, than the family with no savings and whose child gets a free ride. I'm just envisioning a perfect world where we could do away with some of the lame things noted in the thread ;-)

I've thought about the optimal advice to give to my kids with respect to college costs, student loans, and living an easy life.

One choice would be to take the max student loans available.  Maybe get a masters or PhD.  Stay in school as long as possible and rack up as many federal student loans as possible.  Study abroad when you can.  Live it up pretty good for 10 years or so.  Save and invest any surplus loans you take out.  And if you earn more money from scholarships, work study, grants, grad school RA/TA stipends, etc, save and invest those, too.

Then once you hit 28 or 30 and max out your student loan borrowing, just get a non profit or government job.  Any old job will do.  Pay is largely irrelevant.  Work the job for 10 years and participate in Public Service Loan Forgiveness.  If you have a somewhat low paying job, your student loan payments will be close to zero (under income based repayment).  After 10 years in PSLF, any remaining student loan debt is forgiven.

At age 40, you'll have zero student loan debt, probably will have saved a decent amount along the way, and lived a life of relative leisure.  Sure, you might not be quite FI at age 40, but you had a bit more free time than a hard working person that finished college around age 21 and started working immediately.

Quantitatively, I'm not sure this path is any worse than finishing college as quickly as possible, getting a degree in something that leads to high paid work, and saving more than 50% of your moderately high income to FIRE around age 40.

Perverse incentives indeed.

[jpdcpajd]

Fuel or electrical bills with fixed costs.

I typically pay 60 - 80% of my bill to fixed costs.  There's a much reduced incentive to save if doubling the amount of electricity/fuel I use only bumps my bill up by 20%.

My house has no water meter because it is old (1892) as most of my neighborhood.  So they estimate based on amount of fixtures in the house (toilets, faucets etc)  Same amount every month and has not changed in years.

thought about creating some type of water powered electricity.  Though, some on this forum my think of me as worse than someone who sold baseball tickets for more than their face value for such thinking.

[galliver]

What about infrastructure?

How many people could give up car ownership if we had a robust and cheap public transit system...everywhere? And if our sidewalks and bike lanes got cleared year-round? Heck, what if we actually *had* sidewalks everywhere?

How many people would choose far more efficient rail over flight if we had high speed corridors between major cities?

What if we had integrated, walkable neighborhoods instead of residential subdivisions, shopping centers, and office parks miles apart?

[innerscorecard]

Need-based financial aid as currently applied (just like many other things in higher education) is pretty repulsive.

They're also yet another reason you should max out your retirement accounts (which aren't counted in need-based financial aid), and that even if you are below the 15% tax bracket for earned income, a $1 in Roth IRA assets or dividends is worth more than that same amount in taxable accounts.

[warfreak2]

Fuel or electrical bills with fixed costs.

I typically pay 60 - 80% of my bill to fixed costs.  There's a much reduced incentive to save if doubling the amount of electricity/fuel I use only bumps my bill up by 20%.

Fixed costs don't affect your incentives at the margin. The choice is whether it's worth spending another 13.4p to use another kWh of electricity. The same change in behaviour would produce the same effect on your bank balance, whatever the standing charge is - unless your behaviour is to avoid paying the standing charge at all.