Nobel Prize-Winning Economist Money-Savers

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The 5 Simple Money-Savers Even Nobel-Prizewinning Economists Use

Economists spend their days exploring weighty topics ranging from gross domestic product and stagflation to trade balances and yield curves. But when they crunch numbers at home, the challenges they face and the solutions they find are not that different from what the rest of us grapple with. Learning how economists manage their money can help all of us spend less, save more and invest more wisely, so we asked five prominent economists to reveal money-saving strategies that they use in their own lives…

Take out a 15-year mortgage. In the mid-1980s, I refinanced my 30-year mortgage to a 15-year mortgage. The shorter mortgage meant thousands of dollars less in interest payments — and the higher monthly mortgage payments gave me experience living on a tight budget. That made it easier for me to continue to save aggressively even after my mortgage was paid off. (Recently, the average rate for a 30-year mortgage was 5.2%, versus 4.5% for a 15-year loan, a savings of more than $50,000 for every $100,000 borrowed.)

Mortgages provide automatic savings discipline. We must make our mortgage payments every month or we could lose our homes. Thus, money needed to make mortgage payments is less likely to be misspent than money earmarked for bank and investment accounts.

George Akerlof, PhD, is Koshland Professor of Economics at University of California, Berkeley. He won the Nobel Prize in Economics in 2001. He is coauthor of Identity Economics (Princeton University).

Don’t wait for a “better time” to invest. I don’t get caught up in trying to time the markets. There is no wrong time to save and invest. When stocks are struggling, I tell myself, Good — I can buy bargains. When stocks are up, I tell myself, Good — investing is paying off for me. I don’t get caught up in worrying about which investments to buy, either. I just put all of my savings into low-expense stock index mutual funds and exchange-traded funds (ETFs).

Edward C. Prescott, PhD, is the W.P. Carey Chair of Economics at Arizona State University’s W.P. Carey School of Business, Tempe. He won the 2004 Nobel Prize in Economics. Prescott is coeditor of Great Depressions of the Twentieth Century (Federal Reserve Bank of Minneapolis).

Make sure your gifts are worth the cost. The rules of etiquette warn us not to arrive at a party empty-handed — but gift giving often is economically inefficient. The gift that costs us $40 might hold only $20 in value for its recipient. Like most people, when I’m in a situation that requires a gift, I usually bring a bottle of wine. It’s not the most unusual or memorable gift, but if I select a wine that I know offers good quality for the price, my gift is likely to hold approximately as much value for its recipient as I paid for it, and it doesn’t matter that he/she likely already owns bottles of wine.

If the recipient does not value wine, it is one of the easiest gifts for him to give to someone else. Economists tend to be less sensitive about such “regifting” than most people.

Betsey Stevenson, PhD, is assistant professor at The Wharton School, University of Pennsylvania, Philadelphia. She also is a faculty research fellow with the National Bureau of Economic Research and a visiting scholar with the Federal Reserve Bank of San Francisco.

Set your spending priorities, and stick to them. Unfortunately, most people spend money on things that are not particularly important to them, which leaves them unable to afford things that would hold greater value.

In the early 1980s, when my husband and I were assistant professors earning modest salaries, we decided that owning a home was high among our priorities. To afford the down payment, we made sacrifices — for instance, cutting back from two restaurant meals each week to an average of one or fewer. When we met with a real estate agent, we were encouraged to buy a larger home than we had saved up for because we could qualify for a larger mortgage. But my husband and I decided that we would rather have a modest home and enough assets left over to travel than a large home that consumed most of our resources. Because we had prioritized our wants, the agent could not talk us into overspending.

Tahira K. Hira, PhD, is executive assistant to the president and professor of personal finance and consumer economics in the department of economics at Iowa State University, Ames, and creator of its Financial Counseling Clinic.

Make it easy to save and hard to spend. The easier it is for us to spend our money, the more likely it is that we will do so. I build up almost all of my savings by having money automatically withdrawn from my paycheck and invested. That money never even makes it to my bank account, so it is difficult for me to spend it.

And in the case of tax-advantaged retirement accounts, there is a penalty for taking out money early, so that is an additional deterrent to spending.

John Caskey, PhD, is professor of economics and former chair of the department of economics at Swarthmore College, Swarthmore, Pennsylvania. He previously was economist with the International Monetary Fund. He is author of Fringe Banking: Check-Cashing Outlets, Pawnshops, and the Poor (Russell Sage Foundation).


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