Laura Rowley Money & Happiness

Remember Aesop's fable about the ant and the grasshopper?

The ant toils daily, makes sacrifices (no luxury vacations in far-flung colonies), scrimps and saves to send his larvae to college and retire. He struggles to manage and properly diversify his crumbs, tries to take appropriate risk (foraging just far enough from the nest to get results without getting devoured), and hopes the queen ant doesn't tax his stash into oblivion.

The grasshopper, meanwhile, plays his fiddle, replaces his molting exoskeleton with one by Prada every season, ignores his 401(k) plan, buys an alfalfa pasture with no money down and a subprime mortgage, and hops away when the interest rate readjusts.

Puny Savers

Lately, the ants are feeling foolish. They see the U.S. government slashing interest rates, rescuing Bear Stearns by guaranteeing $30 billion in troubled mortgages and other assets, and bailing out subprime borrowers. And they wonder why the taxpayer is always left holding the bag for other people's financial shenanigans, greed, and stupidity.

As one reader commented on my column a couple of weeks ago: "Saving and living within your means is rational only if there is a future payoff that exceeds the value of the present consumption you must sacrifice. But government policies (tax policies, welfare in all its forms, bankruptcy laws, etc.) do everything possible to destroy the natural incentives and disincentives."

Who's Happy Now?

The reader continued: "One person, by committing mortgage fraud, gets to live in a $500,000 house for $1,000/month, realizes $100,000 in appreciation, cashes this illusory equity via a [home equity line of credit] and blows it on toys. When the mortgage payment adjusts and the price crashes, leaving him upside-down and with no hope of making the payments, he simply walks away, and the bank has no recourse. ...

"Another person takes your advice. ... He foregoes all the consumption the first person enjoyed in terms of both house size and HELOC-funded toys, planning to move up to the bigger house when he can truly afford it. But then the government freezes ARM adjustments; the Fed pushes interest rates to the floor and orchestrates a massive bailout of the insolvent mortgage-backed securities, leading to inflation, negative real returns on savings, and ultimately higher tax rates when he withdraws from his IRA. ... The second person is happier how?"

Repugnant bailouts and questionable economic policies are matters you need to take up with your elected representatives, not your personal finance columnist. However, I'm delighted to challenge the notion that grasshoppers end up happier than ants. Even in an economy where no bad financial deed seems to go unrewarded, ants still rule. Here's why:

1. Ants invest in stocks and bonds and pay attention to taxes and fees.

Inflation, taxes, and fees can wreak havoc with one's nest egg, which is why you almost never hear financial services companies talk about real rates of return. A study by Thornburg Investment Management in Santa Fe, found that from 1976 to 2006, $100 invested in the S&P 500 in a taxable account would have grown to $3,225 -- a 12.26 percent nominal rate of return.

Factor in fees, taxes, and inflation? The real rate of return is a meager $456, or 5.19 percent. And that was the best performance of any asset class in the study (for instance, someone who put $100 in Treasury bills would have lost 67 cents over 20 years.)

The lesson here: While you can't control inflation, you can do something about taxes and fees. Mitigate taxes by sheltering your savings in tax-deferred (or tax-free) vehicles -- 401(k)s, Roth IRAs, and state-sponsored 529 college savings plans, to name a few. The study also underscores how critical an employer's 401(k) match can be in meeting your long-term goals -- so contribute enough to grab it. In addition, knowing how to avoid egregious fees is really helpful in an inflationary environment. Ants worry about stuff like this -- grasshoppers don't.

2. Ants don't expect personal finance to be a merit-based system.

"Whoever said 'life ain't fair' was right," says Charles Farrell of Northstar Investment Advisors in Denver. "Sometimes people do stupid things and take a lot of risk. You can take that course and hope you get lucky, or rely on prudent principles that have high probability of succeeding."

In the late '90s, for instance, I was in the midst of a decade's worth of saving to buy a home. I knew a guy who accumulated his down payment in less than a year by putting $25,000 in Lucent stock and watching it double.

"Another guy who gambled on Lucent a few years later is still waiting to get his money back," says Farrell. "We have all these anecdotal stories in the media -- every so often someone gets lucky. If you want to be someone who is responsible, who has self-respect about how you handle yourself financially, you have no choice but to save and build capital. If not, you can wing it and see how it turns out."

3. Ants sleep better at night.

Someone could commit mortgage fraud, spend like a fiend, and incur debt he'll never be able to repay. Then, when he's old and broke, he can throw himself on the mercy of whatever political regime happens to be in power, and hope he's the beneficiary of some kind of bailout.

"If you're working three jobs and trying your best and not getting anywhere, it's hard to keep the faith," says Doug Flynn of Flynn-Zito Capital Management in New York. "But what's the alternative? Do you want to give up? Do you want to be the person who doesn't need anybody, or the one who tries to get taken care of?"

Moreover, if you face a serious health problem, do you want the government to be in charge of your care?

4. Ants desire freedom of choice more than toys.

Grasshoppers value bling, so they spend; ants value options, so they save.

Consider the story of a parent I met recently, whom I'll call Lisa. Lisa told me she had been in medical sales for more than 15 years, and had always banked her bonus and lived a frugal lifestyle, while her peers splurged on big-ticket items like cars.

Thanks to her savings, Lisa had the option to switch to consulting, and works just eight hours a week so she can spend time with her young child. One of her peers, who always blew her bonus on toys, also has children and reluctantly works full-time. She told Lisa, "I'm just not in your position" -- implying that Lisa had a trust fund, a winning lottery ticket, or some other secret source of support.

Lisa says she wanted to scream: "I chose this position!"

"Building financial assets is tough because it seems to take so long to get anywhere," says Farrell. "But once you get it built, it provides financial and intellectual independence. That's the ultimate reward -- the freedom to do what you want on terms you consider reasonable, because you have enough assets to tell everyone else to take a hike."

5. Ants pursue their own goals while grasshoppers compare and covet.

Ants know that envy is useless, because the good life another ant appears to be enjoying may be just that -- an appearance, concealing a mountain of debt and stress.

"Stop comparing yourself to your neighbor and your friend and get down to your core values and execute on them," advises Farrell. "The happiest people I meet measure themselves against their own objectives."

Bottom line: If you're a saver, the way the government is handling the mortgage crisis may change the way you vote. It shouldn't change the way you manage your money.