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One of my friends opined that if most people (limited to people on this forum, let's say) rationally priced in their future earnings, they'd be in debt more oft

One of my friends opined that if most people (limited to people on this forum, let's say) rationally priced in their future earnings, they'd be in debt more often, for longer and earlier in their life. The naive algorithm of "save as much as possible" might land high-earners with a huge nest egg they end up carrying to their grave. I think I agree with that.

pjc50 5y ago
> rationally priced in their future earnings, they'd be in debt more often, for longer and earlier in their life Future generations may not be offered a choice in this. After all, why should student debt start at age 18 and not age 5? Ouch.
- kamaal 5y ago
  You have presented a good edge case. But consider this. If you wouldn't want to go into debt at age 5. Would you want do it at age 45/55?
roland35 5y ago
I think it is good to be conservative with your retirement savings though! It is much better to leave behind a large estate for your children/charities/whatever than risk spending the last years of your life pennyless due to a market crash or large medical expenses.
ZephyrBlu 5y ago
The problem is, how do you price your future earnings appropriately?
kamaal 5y ago
This comment is gold. Debt phobia is real. But the facts here are big investments like buying a home, are not possible without debt, and earlier you go into a debt and earlier you can clear it. The earlier you will have that asset. The same logic continues for multiple properties too. Another big factor in this is Change jobs often is not a workable strategy here. Anybody with regular focus on their health and investments will tell you. You just can't raise money for making big investments(like above) when you don't have a stable job. Same happens with health too. Unfortunately most people often equate rapid changes to a process with progress. Whereas big progress is often a result of consistent improvement to a single process over long periods of time. In an economic system with Inflation, increasing responsibilities and biology making aging and being healthy hard. Hoping to save up to buy some thing later is strategy that just doesn't work. Simple reasoning tells us you need to go into debt a lot, early and often.
WJW 5y ago
> a huge nest egg they end up carrying to their grave Oh no! The tragedy of not spending everything you own! Sarcasm aside though, almost everyone will mispredict how much they are likely to earn in their lifetime and the opinion of your friend falters a bit in the presence of significant randomness. Estimating your future earnings too low is not really a problem, estimating too high can lead to serious problems when faced with unexpected expenses. Since there is only limited downside to being conservative with debt and serious downsides to being too extravagant, I don't think that potential high-earners are being all that irrational by avoiding debt. Of course, if you are psychologically a "maximizer" then you might want to skate closer to that edge and risk falling off in exchange for potentially squeezing every last dollar out of your life. If your psychological profile is closer to being a "satisficer" then avoiding risk to maintain your current lifestyle is probably better for you. In personal finance, no solution is correct for everyone.
- andi999 5y ago
  I am shocked as well that intergenerational wealth building is not a thing. I mean do people really think 'I was poor/had to earn everything so my kids should have it the same way'?
  - pjc50 5y ago
    Not everybody even wants to have kids. shrug Also, the only companies who put intergenerational wealth building into their advertising material are the expensive watch manufacturers.
    - jhanschoo 5y ago
      If you don't have kids, and are rationally altruistic, it can be argued that you can create more expected pleasure by willing your fortune to charity than spending it on yourself, or earning just the minimum.
    - WJW 5y ago
      > Also, the only companies who put intergenerational wealth building into their advertising material are the expensive watch manufacturers. Of course, because companies have a vested interest in consumers spending more rather than less. But there are reasons to do something other than "some company advertised that I should do this". Every family that built up generational wealth has had (by definition) at least one generation who earned more than they spent.
phgn 5y ago
Savings allow you freedom from having to earn money, the opposite of debt. For example, you can temporarily "retire" for a few years and do what you want without pressure. Either directly or indirectly, I think having debt limits you to the path & earnings you've "forecasted" - the opposite of freedom. At least that's the case for me.
- maccard 5y ago
  > you can temporarily "retire" for a few years and do what you want without pressure Not everyone strives to min max their time to the extent that they _can't_ be working while doing what they want. Assuming you're a white collar worker in tech, there are plenty of opportunities for you to make oodles of money, while having a balance between a job and life. Given the choice between being mortgage free in my 30s with an apartment in a cheaper part of town, and being able to quit work to travel/work on my carpentry for 3-5 years, or having a balanced life over the next decade, spending time and having experiences with family & friends, I'll pick the balanced lifestyle every single time.

pjc50 5y ago

> rationally priced in their future earnings, they'd be in debt more often, for longer and earlier in their life Future generations may not be offered a choice in this. After all, why should student debt start at age 18 and not age 5? Ouch.

kamaal 5y ago
You have presented a good edge case. But consider this. If you wouldn't want to go into debt at age 5. Would you want do it at age 45/55?

roland35 5y ago

I think it is good to be conservative with your retirement savings though! It is much better to leave behind a large estate for your children/charities/whatever than risk spending the last years of your life pennyless due to a market crash or large medical expenses.

ZephyrBlu 5y ago

The problem is, how do you price your future earnings appropriately?

kamaal 5y ago

This comment is gold. Debt phobia is real. But the facts here are big investments like buying a home, are not possible without debt, and earlier you go into a debt and earlier you can clear it. The earlier you will have that asset. The same logic continues for multiple properties too. Another big factor in this is Change jobs often is not a workable strategy here. Anybody with regular focus on their health and investments will tell you. You just can't raise money for making big investments(like above) when you don't have a stable job. Same happens with health too. Unfortunately most people often equate rapid changes to a process with progress. Whereas big progress is often a result of consistent improvement to a single process over long periods of time. In an economic system with Inflation, increasing responsibilities and biology making aging and being healthy hard. Hoping to save up to buy some thing later is strategy that just doesn't work. Simple reasoning tells us you need to go into debt a lot, early and often.

WJW 5y ago

> a huge nest egg they end up carrying to their grave Oh no! The tragedy of not spending everything you own! Sarcasm aside though, almost everyone will mispredict how much they are likely to earn in their lifetime and the opinion of your friend falters a bit in the presence of significant randomness. Estimating your future earnings too low is not really a problem, estimating too high can lead to serious problems when faced with unexpected expenses. Since there is only limited downside to being conservative with debt and serious downsides to being too extravagant, I don't think that potential high-earners are being all that irrational by avoiding debt. Of course, if you are psychologically a "maximizer" then you might want to skate closer to that edge and risk falling off in exchange for potentially squeezing every last dollar out of your life. If your psychological profile is closer to being a "satisficer" then avoiding risk to maintain your current lifestyle is probably better for you. In personal finance, no solution is correct for everyone.

andi999 5y ago
I am shocked as well that intergenerational wealth building is not a thing. I mean do people really think 'I was poor/had to earn everything so my kids should have it the same way'?
- pjc50 5y ago
  Not everybody even wants to have kids. shrug Also, the only companies who put intergenerational wealth building into their advertising material are the expensive watch manufacturers.
  - jhanschoo 5y ago
    If you don't have kids, and are rationally altruistic, it can be argued that you can create more expected pleasure by willing your fortune to charity than spending it on yourself, or earning just the minimum.
  - WJW 5y ago
    > Also, the only companies who put intergenerational wealth building into their advertising material are the expensive watch manufacturers. Of course, because companies have a vested interest in consumers spending more rather than less. But there are reasons to do something other than "some company advertised that I should do this". Every family that built up generational wealth has had (by definition) at least one generation who earned more than they spent.

phgn 5y ago

Savings allow you freedom from having to earn money, the opposite of debt. For example, you can temporarily "retire" for a few years and do what you want without pressure. Either directly or indirectly, I think having debt limits you to the path & earnings you've "forecasted" - the opposite of freedom. At least that's the case for me.

maccard 5y ago
> you can temporarily "retire" for a few years and do what you want without pressure Not everyone strives to min max their time to the extent that they _can't_ be working while doing what they want. Assuming you're a white collar worker in tech, there are plenty of opportunities for you to make oodles of money, while having a balance between a job and life. Given the choice between being mortgage free in my 30s with an apartment in a cheaper part of town, and being able to quit work to travel/work on my carpentry for 3-5 years, or having a balanced life over the next decade, spending time and having experiences with family & friends, I'll pick the balanced lifestyle every single time.