Why you shouldn’t save money


My 401k has yet to see a cent of my paycheck (well …  after that auto-enrollment thing was corrected).

I have convinced myself that long-term savings for 20-somethings is an irrational choice and want to share my internal dialog on the subject.

Two principles I want to appeal to:

1) The marginal utility of a dollar spent varies within one’s lifetime. I can get a lot more pleasure out of $100 than my parents. A 15 year-old boy can get more pleasure out of $100 than me (because he can buy video games AND play them all day). In your early 20s, a dollar is worth a whole lot because there are plenty of nefarious ways to spend it. It is worth less when you are 50.

2) The marginal utility of a dollar spent decreases as you accumulate more dollars. This one should be familiar. A dollar is a big deal to a man begging on the street, but not to Bill Gates.

Alright …. with these two principles in hand, let’s take a look at the rationality of long-term savings in your 20s.

1) Even if there is more of it, that money is going to do you less good in 30 years than now (principle 1).

2) If you are successful in life and rich when you get older, the money saved when you were in your 20s will be icing on an already ridiculously sweet cake. You would have rather enjoyed it when you were poor and 24 (principle 2).

These are pretty common arguments. Let me toss in another dimension that is often ignored

Will the money even be there in 30 years? If so, will money be worth anything to anyone then?

Scenario 1) The world is much like it is now. Money is something desirable to have, grows in value, and is available for withdrawal.
Scenario 2) The world is a wonderful place. Everyone is happy. Money means nothing. Everyone has what they want
Scenario 3) The world is a terrible place (or blown up). Economies collapse. Savings don’t grow / dissapear / money otherwise useless.

I don’t want to try to predict the future, but it would be reasonable to clock the probabilities of each scenario at greater than 10%.

Breaking out the trusty consultant 3×2 matrix to help us make our decision:


As definitively shown above: Unless you think the probability of the world ending up in the green box in 30 years is pretty darn high, go liquidate your 401k and indulge your vice or take a trip. Nota bene: My birthday was fairly recently.

(on a serious note, you should divert all your 401k money to charity. I buy anti-malaria bednets, a proven cost-effective way to save lives , standards of living, and productivity. Would encourage you to do the same. Tom Lehman favors OxFam maize in the Rift Valley.  There is no future security for any of us until we get some traction in the fight against extreme poverty. Savings alone will not guarantee your future)


8 Responses to “Why you shouldn’t save money”

  1. Nic Says:

    I had no idea you were capable of rationalizing yourself into self-indulgence like that.

    First, to address your 3×2:
    For all of known human history, the world has fallen somewhere in between your two extremes, Terrible and Fantastic place. While that doesn’t make it a law quite as infallible as gravity, it does imply that the probability is likely higher than your other two options. And just in case you’re thinking of using the, “what’s the probability of tossing a coin to land on heads if it’s landed on tails 100 times straight” argument, this is a straight 1/3 probability of each of the options above happening. I would say that a very large number of men, women and children have a vested interest in that middle option continuing to be true. More than that, but the more powerful you are, the more likely you are to want this. I would say that the probability of that middle option happening is probably somewhere >95%.

    And to address your second point, there have been a number of studies that strongly suggest a leading indicator of financial success is the ability to postpone personal satisfaction. So, while you may assume financial success is a forgone conclusion, I would argue that your current financial irresponsibility reduces your chances of this actually being true.

    BTW. I max out my 401k and IRA contributions.

  2. Sam Says:

    Some economists think Phil is right: http://www.nytimes.com/2007/01/27/business/27money.html?_r=1&oref=slogin

  3. Phil Says:

    Response to Nic’s good thoughts:

    I can rationalize myself into almost any poor decision, but this one I feel surprisingly good about.

    Nic argues that the probability of the middle box (world continues to operate much as it had) is likely a good deal more probable than the extremes (terrible world, fantastic world).

    Two responses:

    1) Although the world as a whole has roughly fallen within the two extremes, that is not true in every locality. Native Americans were cruising along until small pox showed up. Rome was looking pretty nice until the Goths started knocking on the door too frequently. I also cite Mel Gibson’s seminal work, Apocalypto (surprisingly good movie!). Civilizations do rise and fall. Entities on a smaller scale, even more so. Nuclear Winter is not the only scenario for which your savings become useless. Financial crisis, world war, premature death, asteroids are others. These have all happened before and it is not unreasonable to think they will happen again

    2) Something tells me we are at an inflection point in pushing the world towards one of the extremes (fantastic place, terrible place). Individual countries, and perhaps even people, now have the ability to make the world a pretty terrible place. In the past, this wasn’t true. On the flip side, think technology in all its exponentially growing glory could conceivably make the world an unimaginably better in the next 30 years. If that is the case, I would discount the value of a loaded 401k account.

  4. Nic Says:

    Response to Sam:

    If I read the article correctly, I don’t think they’re agreeing with Phil (please feel free to set me straight if you disagree).
    What they’re arguing is you don’t need as much as previously thought for retirement. They quote $2.1M as the number required in assets to retire, but argue it may be overstated.

    I think Phil’s point was that saving early and often isn’t necessary, because you can make up the rest of the money during your lifetime if you’re successful, or, there is a high enough likelihood that wealth isn’t going to matter as much anyway by the time we retire, so why bother. Is that right Phil?

    I can’t argue with the basic premise that the way the world looks now may not be the way it looks tomorrow. Change happens. I’m ok with that. It’s the question of possibility, and whether it makes sense to prepare for the remote possibility, or the likely possibility.
    Phil, in your examples above you mention two human based civilizational changes (one conquering another) and the third is disease based.
    We don’t have many independent economies left in the world that don’t rely on some transferable means of commonly accepted value – i.e., money. There are probably a few southern African tribes that still use cattle as the major measure of wealth, but the likelihood of them taking over and rendering your 401k valueless is probably low. There is no risk on earth (and I’ll concede, ‘that we know of’) that is likely to do this any time soon.
    What about disease? You mentioned small pox. I would argue that small pox, or some other fatal disease, renders all the boxes you have in your example as equally useless, because you’re dead.

    It feels like if you boil it all down, your article comes down to: “Something tells me we are at an inflection point”. And that may just be the answer.

  5. Sam Says:


    One take away from the article is that if you have a good job and expect raises, you can start saving in your thirties and have plenty for retirement. I think Phil also makes a good point that you may enjoy consumption more now than when you’re old and stodgy. Or you may enjoy charity, as Phil points out.

    On the bulk of your disagreement, i.e. the probability of doomstay or utopia rendering savings useless, I think Phil is as crazy as you do. But it’s an entertaining kind of crazy. Stick to your guns, Phil. On a side note, if I knew some catastrophe were going to happen, I would be more likely to save today in an effort to have the resources to survive. A new IPhone would seem pretty silly if I needed an extra $400 to escape the rath of a Southern African tribe.

  6. Tom L Says:

    Just stumbled on this (thanks for the shoutout!)

    One question: why a zero savings rate? I.e., if you really believed what you were saying, why not have a NEGATIVE savings rate (i.e., borrow money to finance current consumption)?

    I don’t see anything in your argument that implies that you should turn down the 5-8% return you get from the stock market while accepting the 15% “return” you get by not taking on credit card debt.

    I would be VERY surprised if the optimal rate of savings were EXACTLY zero.

  7. phil Says:

    Excellent point Tom! You are absolutely right that the optimal value has no reason to fall to exactly 0 (aside from the dislocation in return going from savings rates to borrowing rates)

    Though you would have to believe that you can put off the additional negative effects of debt accumulation (bankrupcy, increased borrowing rate, severed digits) until the utopia or apocalypse hits. The asymmetry between borrowing and saving is that the cost of borrowing increases with the amount you borrow while the return on savings (in a 401k at least) increases to a lesser degree.

  8. credit card stimulus Says:

    I got messy wit hmy burden of credit card debt. Could you give me some advice for beat it. Thank you

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