Why you should spend more money!

Posted by: Abhin Chhabra 3 years, 8 months ago

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I was recently listening to a freakonomics episode, where the hosts (Levitt and Dubner) were talking about what financial advice they would impart to their kids:

LEVITT: One of the best pieces of financial advice I ever got was from a senior economist at Chicago when I got here named José Scheinkman. What he told me is actually something that he said Milton Friedman told him. And what he said was that you should spend more and save less. I think what happens to young people is that young people are always told to be thrifty, to save, save, save. But Jose’s point was this, you’re never going to be poorer than you are today. This was when I was a first-year professor at the University of Chicago. Your salary will only go up, your earning power will only go up. And so you shouldn’t be saving now, you should be borrowing. You should be living today in much the way that you’ll be living in 10 or 15 years and it’s crazy to actually be scrimping and saving, which is what at least someone like me who was brought up in a middle class family was taught to do...

Let's imagine a guy named Michael. Michael's a student and has a part time job, earning him $15/hour. In his job, he essentially sells his time to his employer at a rate of $0.25/minute. 

When Michael saves up $2,000 and puts the amount in his savings account, he essentially slaved away for 8,000 minutes of his youth and saved it away for future use.

Now imagine Michael graduates from school and gets a full-time job, earning him $30/hour. Now, his time is worth $0.50/minute. This means that the $2,000 he put in his bank account fell in value from 8,000 minutes of effort to 4,000 minutes of effort the instant he accepted his new job offer. In fact, he essentially lost 4,000 minutes of his life. He could have easily spent the $2,000 he saved during school and saved up the $2,000 after graduating having spent 4,000 minutes less to achieve the same outcome.

What should he have ideally spent that $2,000 amount on? Anything that helps him increase his wage more rapidly. Perhaps the extra hour each week spent hunting down the best deals at grocery stores could have been used to learn a new skill.

Does this apply to me?

If you think your personal value is going to rise faster than the interest rate of your savings account (minus the inflation), aren't you the best thing to invest your money in?

If you've been eyeing that online course that will teach you photoshop, just go for it. If your computer is slow and keeps crashing on you, perhaps it's time to retire the little guy and get yourself a new one. Anything that helps you improve your skills is a better investment than the savings account in your bank with that measly interest rate.

Please note that no part of this article suggests that you don't save for a rainy day. Having a back-up for emergencies is a very bright idea. 

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