How to Think About Money, Choose Your Hometown, and Buy an Electric Toothbrush: A New Freakonomics Radio Podcast

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cartoon headsOur latest podcast is called “How to Think About Money, Choose Your Hometown, and Buy an Electric Toothbrush.” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player in the post. You can also read the transcript below; it includes credits for the music you’ll hear in the episode.) It’s another installment of our FREAK-quently Asked Questions, in which Stephen Dubner and Steve Levitt answer questions from you, our readers and listeners. 

Steve Reda, a 22-year-old in the Washington, D.C., area, asks if kids today are more careful using credit as opposed to cash. (It’s a question that makes Dubner recall his salad days, back when he fell in love with economics and the “mental accounting” research done by Richard Thaler, Daniel Kahneman and Amos Tversky.) This leads to a conversation about spending in general, which leads to Levitt’s counterintuitive advice for the youth of today (advice passed down from Milton Friedman to José Scheinkman and on to Levitt):

LEVITT: I think, so often, young people don’t consume as much as they should. And they end up really scrimping and saving, and wasting tons of time.

(Put down the pitchforks, people! Levitt defends his advice convincingly.)

This episode also answers Joe Westhead’s question about how an economist chooses a hometown. Turns out Levitt and Dubner prioritize different things when picking a place to live.  

P.S. We do these FREAK-quently Asked Questions episodes regularly — you can find earlier ones here, here, here, here, here and here — and your questions are great, so please keep them coming!


On the topic of were you would want to live is such a broad question, but most people in my field tend to like small towns due to cheap living and a less stressful enviroment. I build wind turbines. please excuse my spelling and grammar errors. I have never been vary good in those particular areas. we pretty much have a fixed amount we make and we have to learn to be save ever penny for when we are laid off. the amount of time varies from year to year, but every year it does happen and for a extended period of time. so to have a cheap place to go back to is great and as long its not sunday most small towns have the town dinner and most of the things you need and as for the extra stuff you want, you have the internet for. also one more thing to look at is the right small town. some small towns do have golf courses. Just some food for thought from a person who has lived a much different lifestyle.


Joe W

After my question was read out I was immediately outed as a non-American. Funnily enough, the suggestions of a gay-friendly area, local diner and (replacing) golf (with soccer) were bang on the money. The science of cold reading ;-)

Michael Young

The trouble with paying cash for things instead of credit is that cash purchases become untraceable unless you want to do a lot of bookkeeping on your own. All your credit/debit card purchase histories are immediately and automatically collected and made accessible to you. Cash shows up as a bank withdrawal, and then it's gone from records. I'm far more willing to splurge with cash, because it FEELS like cash is already spent the moment you withdraw it, so keeping it in your pocket just feels wasteful.

About preparing kids for spending decisions, one thing I regret from growing up is how sudden the ramp up of expenses was. You go from a $40 a month allowance, buying a movie or two, or a few books, and then you're at college spending many hundreds a month on basic essentials, like rent, food, etc. I had help from my parents with rent, but I was trying to fit all other expenses to that same $40 a month budget I'd become accustomed to all through high school, which meant I bought food and nothing else. I can point to a year in my life where I just missed out on all popular culture because I wouldn't buy movies/books/cable/phone service/etc. I also lost 60 pounds, though I've since managed to recover to being unhealthily overweight. ;-)

I'd suggest getting a kid more comfortable with having traditional expenses. Even while at home, give him a thousand a month, charge $700 as rent, and have him start covering all his day to day expenses. Encourage him to save half, to accumulate some savings for a big expense like a car. More important to teach budgeting than thrift.


Steve Reda

"The trouble with paying cash for things instead of credit is that cash purchases become untraceable unless you want to do a lot of bookkeeping on your own. "

This is exactly what I was referring to. I may have left out the all-important factor that I use financial software to track my incoming/outgoing spending. When I have cash it's usually either repayment or withdrawn some time ago for a cash-only venue. I don't have to watch any purchase I make count on the "outgoing" side of my cash-flow because my financial software already counted the withdrawal some time ago. Really cool to have my question read and answered! Maybe my assumption is only applicable for a very select group of people like me who use financial software and watch their finances very closely digitally.


Receipts. Not difficult. And how will the financial software know that today my Safeway purchases are food but last week my Safeway purchases were Pyrex cookware, which obviously falls into a different budget category?


I remember Steve Levitt talking about how much he loved his electronic toothbrush in an earlier post - I took his advice and tried one myself. True to his claim, it was really a superior brushing experience. The one downside: has anyone else noticed a spike in the cost of replacement toothbrush heads? It seems like they are exorbitantly expensive for what they are.


No joke- every time I buy replacement heads I get sticker shock. I haven't tracked the prices using any scientific method, but it seems to me that either a) the cost per head is increasing over time, or b) more heads are being packaged together (I used to see them sold in packs of 3, but now I see packs of 5) to increase the transaction cost while the unit cost remains the same.
This is probably the nerdiest thought I'll have all day. Thanks Steve.


Nice - so I'm not the only one! Also, I've tried buying generic/off-brand replacement heads... which are very substandard (almost to the point of being a regular tooth brush). It seems like there's money to be made if someone can produce a low cost, high quality replacement head.


I found Levitt a bit out of touch in this podcast. 20-somethings should be encouraged to spend? Has Levitt forgotten about all of the recent college grads who are working at starbucks as their college degrees gather dust? 3-5 years from now I would hesitate to hire someone who spent a very important developmental period coasting through life and instead prefer a spunky college grad from that year. The stale college grad would be grateful but in my experience that motivates for a couple months before old habits re-emerge. A fresh college grad who wants to impress can go gang-busters for years and turn into a cornerstone of a company.

Steve Cebalt

Certain experiences in youth are worth more because they create a memory or a knowledge base for the rest of a person's life, increasing quality of life. Many expenditures in youth fall into this category and create more value than saving because the experience is leveraged over time. Also, youth is a "utility multiplier" that makes money worth more. A keg of beer at a frat party will create more fun than a keg of beer at a 50-year-old's birthday party. More fun for the buck is powerful economics. Plus the money avoids the erosion of inflation, which compounds just like interest on savings would.

BUT, I find myself disagreeing strongly with Mr. Levitt for the first time, specifically his assertion that a person will never be poorer than they are in college. I agree with MarkD about the Starbucks jobs. Plus, I had far more DISPOSAB LE income when I was young and "poor" than I do now at age 53, with 4 kids in college. The scale and the stakes are SO much higher as we grow older.



I agree with both points you make. And I think they don't have to be mutually exclusive.

As a 50 year old, where most of your income goes to large scale payments (e.g. kids tuition), you don't have much disposable income. However, that doesn't mean the $100 a month you save as a twentysomething is coming in handy here because the scale is much different.

Though, it really also depend on your position. If you are a junior in college with a mediocure degree, and no "real job" in sight, that extra money you save for a year or two in college may buy you some extra time to build human capitol the first year you get out of college.

As far as paying for credit cards. I agree with the questioner and the question IS consistent with mental accounting. I have it setup where my budget is tracked by, and all my credit card spending is logged to tell me how much in each category I spent. So its not easy for me to swipe a card on any item without considering my budget. If I spend cash, no one knows, its essentially "free money" that is not assigned to any mental accounts. So in that sense, the effect of mental accounting and the effect of the "pain of paying" is kind of in conflict here.


MJ Person

I'm with the questioner on this one. These days, money in my pocket is spare, extra money easily spent. Money on credit cards, bank accounts, bills etc. are different. They all show up on the computer screen, in the budget, they are literally part of my "SCORE". Putting something on my credit card has real effects that reduce my score. Buying something with cash just reduces the paper in my pocket. Essentially meaningless compared to more serious things like bank balances and available credit balances.


Couldn't agree more. In fact, it's common for friends of mine in their mid-20s to avoid withdrawing cash because they are afraid of spending it too quickly


Mr. Levitt seems a little disingenuous here. He says he doesn't care about money and things but the things he loves are big houses, big yards, golf and good schools for his kids. Sounds like the quintessential yuppie to me or do these things not cost money. Add to that his proud disdain for culture and he sounds just like the other so called experts on things economic, the bankers.


I think you missed an important component of the question about whether the younger generation, who grew up more accustomed to using plastic, spends cash more freely than credit cards. That is that many of us make most of our purchases, even small ones, with plastic - but it's not actually credit. I use my debit card for most things, and the money comes straight out of my bank account. It's not credit. And I do tend to think of cash differently, because it's money that is already out of my account.
That is not to say that we don't treat a credit card differently than a debit card. But it may be worth pointing out that we are more likely to have begun using "plastic" in the form of debit cards, and are more likely to have set up our credit card bills to automatically debit our bank accounts for the full balance every month anyway. So while we certainly have the same attitudes about spending credit vs. "real money" as older generations and presumably everyone else, it may not manifest in the same way. Basically, we see spending on a debit card as mentally ticking down the numbers in a bank account, and spending on a credit card as nearly the same thing, while spending cash doesn't do that and sort of feels more like spending free money, or money that doesn't count.

Two more quick points about that: The first is that I studied in Germany for two years, and most stores don't accept credit or debit cards. Mostly you have to use cash for everything, so you have to carry around cash and keep track of how much you have so you don't run out. Plus, at the time I was a starving student and always broke. So spending cash felt much more like spending real money, and I paid much more attention to it. When I finished and came home, I reverted to my previous attitude about cash vs. my debit or credit card.

The second point is that I can recall a few times when I or someone else of my generation (I am 31, BTW) paid for coffee or some other small purchase with some form of plastic, and I overheard some older individual in line grumbling about how these young people just run up their credit cards and buy their lattes with borrowed money. A couple of times I have even tried to explain the use of a debit card to someone like that, and they really do not understand that this is not the same thing as spending money you don't have because you have a credit card - it is just saving a trip to the ATM.



You're also missing a couple of points about paying with plastic. First, rewards cards. I get anywhere from 1-5% cash back on whatever I pay for with plastic. Second, the float. Even in normal times, I have an average of about 3 weeks between purchase and payment due date, in which the money is in MY accounts, earning money for me. These days, with zero-interest for X months cards? I just transferred (no-fee transfer) most of the balance of the last 0% card to one with %0 to the end of 2014. Meanwhile, the money's sitting in my mutual fund accounts, which have gone up about 20% in the last year or so.


Random thought - when was the last time someone payed for something with a credit card and they actually took a carbon copy swipe of the card. For me I think the last time was in 2006; it seemed a little weird at the time though. My understanding is that these swipes were the norm at one time (maybe until the early 90's when stores became networked to some main credit database?).


I could go either way on the paper (cash) vs. plastic debate, as I grew up in the pre-ATM era, but currently find myself spending cash much more freely than credit, since as far as my checking account is concerned, cash is already spent. I can see that side of the argument.

But I have a HUGE HUGE HUGE problem with the advice that young people should spend more and save less. I think this fails to take into account the fact that nobody can really predict the future. You may *hope* that you will never be as poor as you were when you graduate from college or grad school, but this is not necessarily the case. It certainly was not for me, or anyone else who may have had a decent paycheck but crippling student loan debt eating pretty much the entire thing up. This was compounded by the fact that every job I've taken has paid me *less* than the previous one, to the point where now I am making less than half of what I earned my first year out of grad school. I am sure it is not news to economists that the job market sucks. I currently work at a university, and even tenured professors are experiencing salary cuts. So saving money hardly seems like a bad idea, unless you live in some alternate universe where you are guaranteed that you will make more money next year than you are currently, or that you will make any money at all, for that matter.

The only people who can afford to not care about money are the ones who actually have it. The rest of us have to plan accordingly.



Michael, MJ, and E. O'B have it right.

I suspect it actually has a lot to do with growing up with computers (I'm 32). Numbers on a screen are not something I dismiss easily from my mind.

E. O'B makes a great point about debit cards, and I'll even take it a little further. I use my credit card, because I get reward points for doing so, but I pay it fully every month from my checking account. There is no debt incurred, and I feel the pain writing a four-figure check on the 1st of the month. I don't get any sense that I'm "delaying" payment for instant gratification.

Cash in my pocket, though, is like free money. In fact, when my wife or I make a little money on a side business, we keep the cash in a drawer. We specifically *don't* deposit it, because this we, we can spend it frivolously.

chris freeman

I'm 50 and feel exactly the same way. I used credit cards for nearly everything. I pick the one with the best cash-back rewards or the best zero-interest deal. The card balances are very real because I pay them off entirely at the end of each cycle.
I don't use debit cards at all. They are just a scheme banks dreamed up to get fantastic transaction fees and they have little to offer when compared to credit cards. The only people using debit cards should be people who can't get good credit terms.
Cash ... when you buy nearly everything with plastic and pay for everything online - most with automatic payments - cash becomes irrelevant.
So I have cash still. I use it almost exclusively for fun stuff. When I collect too much of it, I deposit in the bank so I can pay my real bills with it.
I grew up with cash, paper checks, and very conservative parents. I'm not stuck in 1980 though.


There's another thing: paper checks. I've written exactly two this year: one to the IRS, one as a contribution to the local school orchestra.


As others have said, I think you missed Mr. Reda's point. Although it appears I'm older than him, both my wife and I have the same mindet -- those green pieces of paper in my wallet aren't my real money, my credit card is my real money. As Mr. Reda says, once the cash leaves my bank account, it's as if it's already spent. So if somebody is willing to give me something I want for those green pieces of paper, I'll hand them over.

In this mindset, using one's card isn't seen as delaying payment. With cash, the pain of payment occurred when it was withdrawn from the bank, so actually using the cash is much less painful than incurring a new debit to my account.

I don't think very many people are irresponsible regarding credit for significant lengths of time. So I think in that way, Mr. Reda is correct.

The more interesting behavioral question to me is quantification. Paying $120 with cash vs paying $80 with cash requires me to part with 6 twenty-dollar bills instead of 4. That's pretty tangible. Whereas with plastic, I'm parting with a signed piece of paper regardless of the amount. Does that change the amount I'm willing to pay for something because I'm not physically handing over more money when it costs more?



I agree that Levitt sounds a little out of touch with "younger" spenders (including my generation), but I also feel like his advice is consistent with something my baby boomer mom told me years ago: "You'll miss the experience, but you won't miss the money." I was being tightfisted and trying to decide whether to go on a trip or keep saving my money, and my mom said I should go on the trip for the aforementioned reason. Her advice seems more true over time when I turn down opportunities for new or enriching experiences because of the price. It's not like I'm swimming in a pool of money like Scrooge McDuck (all one-dollar bills, though), cackling "Who needs a trip to Yellowstone?"

So when Levitt said that he thinks younger people aren't spending enough, I interpret that as meaning "you're so focused on your bank account that you miss out on the experiences that make life worth living." But that's just my lens.



The type of people who read the freakonomics blog probably are the same type of people who over-think the way they spend their money anyway, in which case his advice is applicable to those who see it here.


I agree, people in similar position as Levitt could benefit from spending. That position is: Good education, good degree, GREAT job prospect, and preferably NOT buried in loans, should spend more.

Most people? probably shouldn't take this as reinforcement to spend more. People have trouble saving as it is. I know plenty of my twentysomething friends who spend every last penny of disposable income and some, while needing to pay off loans...

The population where this advice applies to is a minority

Ben F.

I am in a very similar position as Steve: I am a 22-year old recent college graduate from a top-20 university. I just started a great job in IT and have the same feeling as described in the podcast: as a recent college graduate, my earning potential is going nowhere but up. I agree with what Mr. Levitt said about the fact that young people should spend money now due to increasing future earning potential. However he said we shouldn't be saving anything now. Does this mean I should put nothing into my 401k? I'm currently putting enough money into my 401k for it to be a significant amount. This is what I've been told to do - saving this money now allows it to work for me for 40 years while if I put money away in my 30's and 40's as Levitt suggested it has significantly less time to work for me. Is Levitt saying that I should stop putting money in my 401k and worry about saving money later in life?



I agree with some of the other comments on here about mental accounting and cash. To me, it's a matter of timing. I consider the cash 'spent' as soon as I withdraw it from the ATM. I can see it hit my bank account immediately. I pay for most things with a credit card, but when I do need to actually spend the cash that is in my wallet, I feel better about it because that money has already been debited from my account and is therefore 'free' money. So therefore mental accounting is alive and well, but the timing of it may have shifted.


A point or two about spending while young that seems to have escaped mention so far. First is the power of habit: if you get used to spending every cent of the small paycheck you earn while young, chances are that as the paycheck grows as you grow older, you'll keep the habit of spending it all. Whereas if you start frugal habits while young, you will keep those habits, and wind up saving by default. Further, at least for me there are so many free/low cost great experiences that (even though I have grown older and accumulated a certain amount of money), I just don't have time to add very many of the more expensive ones to my life.


I personally will try and be sure that my children understand compound interest and how powerful it is to save a little early versus a lot too late. Not necessarily in order to gain material things, but in order to hedge against the unforeseen. A large retirement savings does not give you happiness, but it does make things easier when you lose a job or face a disability and hopefullywill guarantee against dependence on the state . And I don't believe young people need to save ALL of their disposable income, but they should save a portion, give a portion, and spend a portion. And I agree the earlier people establish those habits the better.


I think you are
(a) overestimating the happiness gained by spending more. The hedonic treadmill is a well-known phenomenon.
(b) underestimating the value of freedom. Because I am thrifty and not in any debt, I don't have to tie myself down with a full-time job. This is hugely valuable to me.


Further on b), even when I choose full-time jobs, having a nice pile of money (mostly stocks & mutual funds, actually) rather than living paycheck-to-paycheck gives me the freedom to choose jobs that are interesting, and to insist on a certain degree of flexible hours & telecommuting, rather than 8-5 in a cubicle doing boring work because I have to meet the bills.


I'd like to see a more in-depth analysis of the mental accounting question for millennials. I (33) have always considered money on my credit card _spent_. For most of my adult life, I have used digital tools to track my current credit card balance against my bank account and think of the remaining amount as the money I *have*. Because of this, any cash that might be in my pocket, has already been deducted and I tend to think of it as 'free' money. By spending it, I don't have the consequences later of seeing that purchase show up on my records.

So yes, it's very backwards from how you seem to think of it, but I think it's quite common for people who have grown up in the digital age. I feel the pain of spending on my cc the moment I hand it over, but I feel like I kinda got out of it when I have some cash. And when I visit the ATM, I feel like I'm spending any money that I take out then and there. Probably because I will have no record of how I spend it later (paper receipts are too much trouble), so it seems like it just disappeared.



Buy an Electric Toothbrush. - I thoroughly enjoyed the discussion on person's decision to spend more on shipping for a computer vs. an electric toothbrush, however, i think there is one large factor missing: Utility. A computer may possibly give people more functional utility than an electric tooth brush (unless one really enjoy's brushing their teeth). It is perfectly rational for one to pay more for express shipping on a computer so one can take advantage of Utility sooner. If one receives the computer later then there is an opportunity cost in that Utility. I understand the argument stating it is irrational to spend $30 on an item that costs $700 or an item that costs $15, however, the two items chosen in the example represent two different aspect's of one's life. A computer can be used for various tasks, whereas a toothbrush is used for a hygienic chore.


A theory of African runners and Jamaican sprinters is in Sports Gene, David Epstein.


I think Levitt makes the error that Nassim Taleb holds over all economists in his book Anti-Fragile, in recommending advice based on the average, ignoring variation and downside risk. It may be true that the average college grad will see an increase in income over their career, but small variations in an individual student's income or length of time until full employment can create huge downside risks. If one assumes they will have a good paying job by age 25, but doesn't until 27, they may find themselves bankrupt before then by spending on that assumption. Likewise, on the road to that good paying job may be brief periods of living lean job-hunting or making good money in a temp job. Saving is the buffer that gets you from one to the other. Finally, if one needs to move or shift careers for unforeseen circumstances, savings is needed. Debt is a chain which binds college grads to their employer, their place, and their circumstances. Finally, time value of money increases return on early savings. As others have pointed out, greater income doesn't necessarily mean greater discretionary spending later in life as expenses of family increase.