Monday, June 16, 2008

Consumption Smoothing and "Irrational" Savings

I'm just going to post a link to this, dedicate it to a certain special someone I know (who happens to feel strongly and differently about personal finance) and say nothing more than, "I'm not the only one out there who thinks this way."

2 comments:

  1. Theoretically it's great. Theoretically you can make a killing on zero downpayment an ARM too, provided consistantly favorable conditions. What is missing in this is any mention of a calculation for risk, other personal spending (neccessity and want), any future gains/saving by planning your finances out better than that, etc.

    Can wait for this guy to reaffirm the notion that I "need to keep an open mind" about putting my kids college savings into a single hot stock too!

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  2. Thanks for your thoughts. I don't think most of what you say directly contradict what the article asserts or what I think about the issue, but this is an issue that tends to touch nerves.

    So, I had a student a bit ago who thought that if you took out a 300k loan and paid back 30k a year you'd be paid off in about 10 years. I explained that this was not the case - that about 20k of hat 30k the first year would only pay the first year's interest. His response to this was, "I'm never getting a loan." Let me point out that the student was bright, but missing the point entirely. Whether or not the 300k loan would have been considered a good idea or not depends a lot on context. something that the blog post leaves to the reader to supply herself.

    What the post might be helping is a bit more nuanced and challenging to the reader. Speculating irresponsibly is still poor (hence, I wouldn't recommend betting your kids college on a single hot stock), but extreme debt aversion or having a complex about preset savings rules is not unifomly better. Some folks set themselves into habits without careful consideration for changing economic conditions (which include risks AND returns no matter how naive to real world questions economists might be perceived to be) or their own unique financial situation.

    Thanks again or your thoughts. I hope that you got something positive from the linked article - I have no special insights on the topic for anyone's personal circumstances than my own.

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