Asymmetrical Information - Megan McArdle

09.25.12

What Makes a Good Savings Alternative?

Hint: not things with engines in them.

Smart Money has a piece pointing out that with savings accounts yielding about 0.0000001% more than your mattress, it's worth looking around for other options.  They offer a lot of the suggestions that I would . . . indeed, have.  Put more money in the stock market?  Check*.  Refinance the mortgage--or better yet, pay down principal?  Check.  Look into bond funds?  Check, I guess.  Buy a car?

. . . er, what?  Buy a car?  Was this article written by my college boyfriend, the one who thought that a vintage Stratocaster counted as an emergency fund?  Because otherwise, I'm at a loss as to who could have decided that consumers bummed about the low return on their savings account should find somewhere safer to stash their cash like . . . a rapidly depreciating asset full of electronic thingamabobs that break all the time. That's an alternative to a savings account only in the economic model sense, where you have two potential uses for your money: savings, or consumption.

A car is an asset, in the sense that has resale value.  But a new car loses value as soon as you drive it off the lot.  It loses even more value whenever you are so rash as to drive it anywhere else, scraping things and getting your Jimmy Buffet's Greatest Hits album stuck in the CD player on permanent repeat, at which point you are going to have to pay someone else to take the thing off your hands.  Unless you are buying a mint-condition 1966 Shelby Cobra and sticking it in your climate controlled garage where you can admire it from behind a suitably removed glass wall, a car is not a substitute for savings.  It is a consumption decision.  

That is not to say that you should not buy a car.  There is a very good time to buy a car: when you need a new one, and have the cash to pay for it.  Otherwise, you're better off in the savings account, even if they're paying interest in chewing gum and baseball cards. 

*(Although only if you don't need it for the next five to ten years--emergency funds should go in a boring, low-paying bank account.)