Leading Economists Talk about Simple Steps to Improve

I recently came across an article that featured interesting ideas about saving money that were suggested by some of our nation’s leading economists.  It illustrates how some of the best ideas are the simplest ones.  One might think that leading economists, all individuals with doctorates in economics who annually are considered for a Nobel Prize, would have some pretty fancy ideas.  But no, what caught my attention was how basic their thoughts were.

Betsey Stevenson is a PhD at the prestigious Wharton School of Business at the University of Pennsylvania.  Her money saving idea focused on getting value in the gifts one buys for others, because she maintains gift giving is “economically inefficient.”  In non-economist terms, what she means is that the recipient of a gift would rarely value it as highly as the price paid.  Good etiquette requires guests to bring a gift when invited to a party, so what Ms. Stevenson does is to bring a bottle of wine she feels offers good value for the price.  A wine drinker will assign a value to the gift approximate to what was paid.  And, if the recipient is not a wine drinker, well, wine may the easiest gift of all the re-gift to someone else!

John Caskey is a PhD at Swarthmore College.  He maintains people should make it “easy to save and hard to spend.”  He states the easiest way to do this is to have money automatically withdrawn from your paycheck and systematically invested.  Because those funds never even go into his bank account, it is impossible to spend them!  And in tax advantaged retirement accounts (like an IRA or 401(k)), because there is a penalty for early withdrawal, an additional deterrent to spending is established.

Tahira Hira is a PhD at Iowa State University.  She stresses the importance of setting spending priorities and sticking to them.  Her position is that most people spend money on things that are not particularly important to them, which often leaves them unable to afford things that would hold greater value.  She related a personal story from years ago when she and her husband decided that buying a house was a priority.  Both had modest salaries, so they scrimped and cut back on some luxuries (such as how frequently they dined in restaurants) to accumulate a down payment.  When they went house shopping, every real estate agent tried to sell them a more expensive house then they had specified, BECAUSE they had qualified for a big mortgage.  But they had decided they wanted less house, one that would consume less of their resources so they would have money left over for travel.  They had prioritized their wants and did not let a real estate agent talk them into overspending.

Edward C. Prescott is a PhD at Arizona State University.  His mantra is simple: Don’t wait for a “better” time to invest.  It is statistically impossible to “time” the market, so there is never a “wrong” time to save and invest.  When the markets are struggling, he thinks, “Good, I can buy bargains.”  And when the markets are up, he thinks: “Good, investing is paying off for me.

George Akerlof is a PhD at the University of California at Berkley.  His observation is a little more “technical,” but still pretty straight forward.  If you are taking out a mortgage, make it for 15 years.  The shorter mortgage term means thousands and thousands of dollars in reduced interest expenses over the life of the loan.  At the moment, an approximate interest rate on a 30-year mortgage is 5.0%, whereas the rate on a 15-year deal is approximately 4.5%.  Doctor Akerlof points out that over the life of both loans, the 15-year mortgage will produce savings of about $50,000 for every $100,000, due to the lower interest rate and the accelerated payment requirement in the 15-year loan.

While these economics professionals spend their days researching and teaching on weighty topics like stagflation, trade balances and yield curves, when it comes to the issues they face at home, their approach is simple and straightforward.

You should do the same!