Hey Kids: Frugality Is for Chumps

Steven Levitt’s favorite personal financial advice:

When I was a first-year assistant professor at the University of Chicago, my friend and department chair, Jose Scheinkman, relayed the advice Milton Friedman had given him 20 years earlier, “Don’t save too much.”

The logic was simple: An academic’s salary rises steadily over time, as do outside opportunities — like writing popular economics books! The right reason to save is so you can even out your consumption. When times are good, you should save, and when times are bad, borrow.

Most likely, I would never be as poor again as I was starting out. That meant I should have been borrowing, not saving. I didn’t follow the advice as fully as I should have, partly because my wife insisted we save — she is not quite as good an economist as Milton Friedman.

Let me just say that Milton Friedman would think I’m a genius. And Kerry’s not about to cramp our consumerist style.

But seriously, it’s pretty hard not to be against over-saving when young once you grasp the symmetry of savings and credit. If a consumption experience now is worth the cost plus expected interest then you should go for it. In general, people in their twenties travel too little. College kids with a decent projected life-cycle income trajectory who eat ramen anyway are the mirror image of the imprudent never-saver who ends up eating “cat food” (Ramen is cheaper than cat food, by the way. I investigated this in college.)
The difficulty is not having a time machine, which prevents certainty about lifetime income, and so gets in the way of really truly optimal consumption smoothing. Confidence biases might be problematic as well. For example, I just know I’m going to strike it rich any day now, so really it’s just silly to save.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center