When It Comes to Saving, Who Would You Listen to: My Wife or Milton Friedman?

My response when Money magazine asked for the best advice I had ever received about personal finance:

When I was a first-year assistant professor at the University of Chicago, my friend and department chair, Jose Scheinkman, relayed the advice Milton Friedman had given him 20 years earlier, “Don’t save too much.”

The logic was simple: An academic’s salary rises steadily over time, as do outside opportunities — like writing popular economics books! The right reason to save is so you can even out your consumption. When times are good, you should save, and when times are bad, borrow.

Most likely, I would never be as poor again as I was starting out. That meant I should have been borrowing, not saving. I didn’t follow the advice as fully as I should have, partly because my wife insisted we save — she is not quite as good an economist as Milton Friedman.


A vote for your wife.


Haha, I think the methodology to be used here is one of credit derivatives.

You need to account of all your future cash flows, discount them at the rate you borrow and multiply by the probability of no default (i.e. you keep your tenured job etc)

This difference between a risky bond and risk free govt T-bills was forgotten by many in this crisis. :)


Granted, I haven't read all those comments, so this may be totally redundant.

As far as I know, "consumption smoothing" (borrowing when you're low, repaying when you're flying) assumes that individuals prefer to have less fluctuation of consumption levels over their life cycle. Also, it assumes decreasing marginal utility of consumption.

The decision on whether or not to borrow to afford additional consumption then depends on the increase in utility (whatever that may be) from that additional consumption outweighs the (present value of) disutility from consumption foregone in the future due to principal repayments and interest.


If your wife derives little utility from additional consumption in the present, and / or expects high disutility to arise from repayments in the future, then she is absolutely correct in her assessment.


Writer's Coin

It took me a while to "get" the whole "don't save too much" mantra, but now I get it. Especially when it comes to saving for retirement. You can't go bungee jumping when you're 60, so why not spend the money today to go do that? It's like the time issue someone mentioned above only it comes down to health and physical ability for some activities you might save for.


Perhaps she was worried about a very big loss, like your losing job or even death.

But then, a better solution might have been borrowing (and spending) + insurance.


I went on my first (and only so far) overseas trip by loading up on debt at the end of university just before starting a quite high paying job. I figure that the time value of four weeks leave from uni (about zero) versus the time value of four weeks leave from work (about $4000) justified it, and i'm in the public service and feel very secure.

I still think it made good rational sense, with a few caveats. Firstly, i'm not as disciplined in paying down the loan as i hoped i would be, although am making reasonable progress. Secondly, there is a psychic cost of being in debt at this point (as opposed to about net zero) which is quite a bit higher than i thought it would be. I think about money more than i should do. If i did it again, i'd borrow a bit less, but still borrow quite a bit.

It all depends upon how you feel about being in debt and your level of risk aversion. If your wife feels bad about being in debt, than it's rational not to be, unless you can change her feelings.



While life is short, it can also be hard- two facts that contradict one another. That said, we live a luxurious life in the US with so much taken for granted. To save a significant portion of your money early on so that your 40's and 50's can be full of freedom seems a very good choice indeed looking back.

I make well into six figures but lived beyond our means with my ex-wife and saved much less than I should have. I regret it now and am saving and investing furiously. The freedom to live simply but well is indeed a treasure that can be bought with some moderate sacrifice early on...

Juggling Frogs

Milton Freedman said not to save TOO MUCH, not "not to save". Implicit in that instruction is the assumption that you'd be attempting to save.

Not saving "TOO MUCH" isn't the equivalent of going into debt.

Walter Wimberly

The advice only works well on the assumption that you can stick with the same job, and can expect continual raises, such as in a unionized position like academics.

However, at least where I am, colleges have been laying people off, as have other government sectors, and even private schools have moved to a more adjunct instructors to reduce costs.

Consider additionally, the large number of layoffs at other union facilities (construction, and auto manufactures come to mind), and you cannot assume to do better later in life as your job my not be there any more, and you have to start back at a lower position, and/or you may never grow to the level you expect.

After all, this advice (borrow when poor to even out consumption) is what got us in the house/credit situation we are in.

Not everyone can write popular economics books, and if everyone could, think of what that would do the the market.



Listen to your wife, birdbrain. She is smarter than the mainstream economics who got us into our current mess. You may consider yourself very lucky if you will never again be as poor as you were in graduate school. Suppose you get sick in your "golden years" and your medical bills eat your 401K. Might you, while sitting in your wheelchair waiting for a hip replacement with a surgeon who accepts Medicaid, wish that you had saved a few extra shekels when you could have done so? Suppose your tax rates double and your earnings are eaten in a stock market crash during the Hillabama administration, and you suddenly discover that your "tax deferred" 401K was a riskier bet than your mattress. Might you perhaps be forced to "underconsume" during your golden years? Suppose EVERYBODY is having a bad year, (like in 2008 to take a year at random), and credit dries up, and you CANT borrow, and your kid wants to go to college. Might high savings and low debt look better to you?



Yes, but you must remember that risk is a cost. If you, God forbid, became disabled or otherwise unable to work productively, then saving is a much better strategy. I would rather have less money than a fear of potentially no money.


I wonder if Milton Friedman's wife got him to save despite his protestations? It makes me wonder how well economists are at managing personal finances. Something tells me they're no better than the rest of us.

A Saving Guy

Your wife wins. Now I understand why the microloan program in developing nations mostly accepts women to make loans to. Apparently, taken as a whole, they are more responsible with the money.

(Of course, I do understand Milton's larger point and it is worth thinking about what he is saying, because on a psychological level you don't want to focus so much on saving that you turn a blind eye to earnings opportunities. That does take creativity and openness and a certain looseness at times. On the other hand lots of people with big net worths are also savers, just because they respect value in general and are not big on wastefulness. Warren Buffet, "The millionaire next door" and my Dad taught me that.) :)


I've come across a similar debate:

Here in New Zealand there's a tradition to take an "OE" or "Overseas Experience" for 2-4 years in your twenties.

Mostly people go, work in London (or sometimes elsewhere in UK/Europe or Canada), and use their ££ to travel the world, especially Europe before coming "home", "settling down", and having kids. While they're away some cluster in NZ enclaves and do standard things: Gallipoli, Running of the Bulls in Pamplona, An All Black test, Scandinavia, and the Munich Beerfest, and Hogmany in Scotland. Others travel a more individual path, and develop a UK friend network.

A couple of friends of mine decided instead to have kids in their 20s, and to "do" their travel when the kids have grown up, and they are in their 40s. They got into the housing market as soon as they could, and are happily ensconced.

I remember thinking that I wasn't travelling to "tick off the list of places to see before I die", but to become a different person for the experiences.

As soon as I paid off my student loan I was off travelling. I saved less as a result, but my whole outlook on life, and intellectual capital is different for having worked in 2 overseas countries, and gone through that struggle, met different people, and had different experiences.

I think risk-averse savings assume that the world will be the same, and that they need to defend against risk. Some find contentment in a steady-state life.

I wouldn't advocate spending money on CDs, a plasma screen and cocaine, the opiates of the masses, spending time watching E to enliven their life (and dull the pain).

But I would advocate buying books, travelling, and engaging with people. Investment in ourselves as people pays off in a richer quality of life.

Too many people don't want to risk their savings, and live life in a defensive mindset, averse to taking risk.

Yes, you can sit at home eating beans and watching TV, but the most precious resource we have is time, not money.



From a strictly dollars and cents perspective, Friedman is probably right. From a "lifestyle and behavior" perspective, your wife has the clear advantage.

If you are not to outspend your income, of whatever size, it is important to develop the right habits. Starting at an early age, I impressed upon my children the need to save. Don't borrow, unless it is clearly necessary. In our case, we borrowed to buy a house, and to pay for education.

People who borrow for less important reasons often flirt on the edge. Being risk averse, that is something we avoid.

To live comfortably, always live somewhat below your means. Somewhat, in that you still want to live well. But spending another few percent of your income will not usually lead to a much better lifestyle. On the other hand, after a number of years, the accumulated savings will give you a sense of comfort that is worth more than their numerical value indicates.

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Jesse D.

Jon Luke (#35) has a good point that inflation affects the desirable outcomes.

If no additional consumption is desired, it's not clear to me how to factor in rampant inflation. Holding durable and necessary goods as an alternative to savings comes to mind, but that would be a gamble. Either you are hoping the good's price rises faster than the regular RoI (and ideally beats inflation), or you believe you will need this exact good sometime in the future (and it is cheaper now).

Following that thought, you might sensibly borrow at low real interest rates to buy rare or necessary goods in the hopes that you can turn a profit by reselling or using the goods while repaying the low interest due on the loan.

Such behavior could potentially spur speculative bubbles in necessities like food and oil, luxuries like art or gems... interesting.


I think I would have asked Friedman for further clarification. Was he really advocating that you borrow money to get a fancier car, or to eat at a swanky restaurant, so that your lifestyle would even out over the course of your life? Should you have borrowed money when you were in college so you could travel in style, just because you would probably be able to make that choice in your 50s? I doubt that he meant this -- mostly because I don't think he was actually stupid.

Also, Friedman's advice was spoken for the hypothetical median person, while you live a specific individual life. Your life might or might not line up with the average -- thus your wife's wise insistence on planning for a cushion in case you lost your job or ended up disabled. If the median case was all that mattered, then no tobacco users would ever get lung cancer.

Fred Jones

"If you are so smart, why aren't you rich?"

As a independently wealthy 43 year old who saved like crazy when young, and wisely invested every penny, I have to disagree with the eminent Dr. Friedman. I left graduate school at 27 with no debt and $10,000 invested, and have never looked back. My portfolio currently replaces 100% of my spending at a 2.5-3.0% withdrawal rate, and I live an upper-middle class lifestyle. I am currently working on that book I always wanted to write, and waste a lot of time reading things like this forum.

The key was never spending more that about 25% of my raises and investing smartly. I topped out at saving 40-50% of my gross income. I suggest you check out http://www.early-retirement.org/ if you want to see the contrary opinion to the good Doctor. Many normal people retire in the 40s and 50s this way.

CT reader

If you know how long you'll live, it's not too hard to figure out the "right" amount to save. Since we don't have that information, it's best to save too much rather than too little. If it turns out that you've "oversaved" you can make big gifts to charity in your will to avoid making the next generation too wealthy.

Jon Luke

I'm really astonished that the word "inflation" hasn't factored into the blog/comments as of yet.

After all, if the rate of inflation outpaces the rate of return or interest rate, especially in the case of most short/mid term saving accounts in today's price-hiking economy and the Fed's low rates to fight recession...then of course it makes a lot more sense to spend/borrow in bad times.

Alternatively, if the rate of inflation is outpaced by the ROI, particularly during good times, then saving does indeed look like a good idea. Is this what Friedman was getting at? If so, his argument should not necessarily be thrown out of the window so wrecklessly.

After all, that might be why a community college part time lecturer is a community college part time lecturer and Milton Friedman...is Milton Friedman.