![]() ![]() ![]() ![]() It seems fairer to say that those who’ve developed the habit of saving money tend to keep on saving, and that those who haven’t, don’t. “Consumption smoothing” presumes that people can turn habits on and off: that they can go for a decade or more without saving, and then turn 30 (or 40) and decide, “It’s time to save big bucks and put away those credit cards.” I don’t know about you, but I don’t know many people who operate that way. After all, people tend to be good at wanting things and not so good at self-discipline. While academics regard such advice as wrong-headed, it’s not hard to see where the supposedly sophisticated, economically logical advice could lead us astray. As Choi says, “I tell my MBA students, ‘You of all people should feel the least amount of guilt of having credit card debt, because your income is fairly low right now but it will be, predictably, fairly high in the very near future.’” Economists call this “consumption smoothing.”īut Choi found that most popular authors ignore the economists and advise all their readers to live within their means and save steadily. The thinking is that they’ll eventually earn a lot more money, so it doesn’t make logical sense to scrimp now when it’ll be easier to save later. Choi notes that, while this advice may not be economically logical, it’s sensible and can help people resist their impulse to spend.Ĭhoi also points out that many economists actually advise 20- and 30-somethings with a steady job not to save money. That’s why many of the more popular finance authors tend to encourage “mental accounting,” with different buckets for different goals. The problem? If the money is there to spend and it’s not set aside for a specific purpose, it can be tempting to spend it on a whim. To an economist, whether you’re saving for a car, vacation, or house, it’s all just money-there’s no value in creating a particular fund for this or that. For starters, Choi explains that economists generally dismiss the idea of “earmarked” savings. I found the whole thing a powerful reminder of why educators misstep when they give short shrift to human nature and the importance of good habits.Ī couple of Choi’s examples really illustrated this point. In fact, the personal finance types often did a far better job of accounting for the role of temptation. ) Choi concluded that much practical advice departs from economic logic, but this doesn’t mean the popular advice is necessarily wrong. NPR had a story the other week about Yale economist James Choi, who examined 50 popular personal finance books to see how their tips aligned with traditional economic advice. ![]()
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