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China’s Savings Rate vs. USA’s Savings Rate..are we (USA) doomed? March 9, 2006

From a CNN Money article:

Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the U.S. saved only 13% of its national income, or $1.6 trillion. That’s right, the U.S., whose economy is six times the size of China’s, can’t manage to save twice as much money.

And that’s just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income).

Savvy Saver had an entry about some bloggers who say that we may be saving too much. Within the personal finance community, that may be true to an extent, but America as a whole is not saving enough for retirement. If we continue to use our homes as a source of spending money, we’re doomed.
Source:
The U.S. and China’s savings problem
By Stephen Roach
March 8, 2006

Got a tax return or bonus? Where to park it for now?

A friend of mine received a bonus, so we talked about where to park his money. He doesn’t need it now, but plans to buy a house in the next 2 years or so. He owns a house and is thinking of either pre-paying his mortgage, put it in mutual funds, or a mix of both. This is my response to him. I think there’s 3 scenarios (the numbers are examples for ease of calculation):

  1. So assume you have a $100k mortgage at 5% and you have $100k in cash. You can put down the full $100k mortgage and you have a guaranteed 5% saving that you don’t need to pay down in the future. Any money you save from this point on can go into your portfolio which can go up or down in value, but at least you don’t have to worry about future mortgage payments. Plus any appreciation in your home value will go into your pocket. Essentially no risk because you have a guaranteed 5%.
  2. Same assumptions: you have a $100k mortgage at 5% and you have $100k in cash. You can hedge your money like the example you gave previously. Put 50% of the $100k into the mortgage and 50% into your equities portfolio. Here, you’re playing the arbitrage, a little more risk. However, you do get the mortgage interest deductions, which would give you more than 5% return.
  3. Same assumptions. In this scenario, you put 100% of the $100k into your portfolio. The value will go up or down. Assuming that your cash flow (a job) doesn’t change, you still have to pay the monthly mortgage like most people in America. If someday you want financial freedom, this is probably not the best route because your mortgage is tied down with your job. Plus this is the riskiest of the 3 scenarios, because you’re assuming at least a 8% market return which may not necessarily be the case. Too many unknowns.

I think he decided to put it in ING Direct while he makes a decision.

At least he gets 4.75% there. All of us finance bloggers know about ING Orange Savings Account. 4.75% rates until April 15, no fees, no minimums..
What do you think? Other ideas out there?