Some economists think you should go into debt in your twenties. here’s why

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Should we listen to this unexpected advice?

Key points

  • Most financial experts suggest limiting the amount you borrow, but some economists take the opposite approach.
  • Some think it’s better to borrow when you’re young if you’re on the right track to making more money later.
  • One problem with this idea is that if you don’t start saving when you’re young, you may not develop the habit – and your income may not be as high as you hope to catch up.

Getting into debt is generally considered a bad thing. In fact, the advice many financial experts will give you is to limit your lending or avoid borrowing altogether. This is especially true when it comes to borrowing for things like vacations or fun purchases rather than things that improve your net worth over time (like a mortgage).

Some economists, however, believe there is nothing wrong with borrowing money when you are young and, in fact, it may be financially smart to do so. Here’s why that’s the case.

Consumption smoothing could be a reason to borrow when you’re young

Some economists actually recommend saving little or even borrowing money in your twenties in order to accomplish something called “consumption smoothing.”

You see, most people don’t have a lot of money when they’re young, but they could have substantial earning potential. In this situation, you could deprive yourself of pleasure as a youngster and end up with a surplus of funds later. To avoid this, some economists suggest that you instead borrow from your future wealthier self in order to have a higher overall standard of living for longer.

The theory is that if you want to enjoy life as much as possible, it doesn’t make sense to pass up opportunities or experiences at a younger age due to a lack of money – especially if you could end up with more money than you actually are. need to enjoy your life later. Instead, you’re better off saving nothing and even borrowing when your earning capacity is lower, then paying off that debt with the extra funds you earn as your income increases.

“You don’t want to be starving one period and having too much the next,” Yale financial economist James Choi told NPR. “You want to smooth that out over time.”

This theory could especially make sense for people who earn degrees that give them the ability to earn a predictably high income later on.

Is it a good idea to follow this advice?

The theory that you should smooth out your intake over your lifetime might have some merit. After all, you’re only young once, and it really doesn’t make sense to give up enjoying the experience due to a financial shortfall to have more money than necessary for a level of life raised later.

At the same time, however, there are many risks to this approach. For one thing, your income might not be as high as you hoped, so you might end up with very difficult debt to pay off. On the other hand, having to pay for your youthful adventures in middle age could cause you to lose out on other things that are important to you, like buying a house.

If you spend a ton of money when you’re young, you might also have a harder time developing good financial habits later in life – which may mean you won’t end up with a big surplus of funds even afterwards. your income will be gone. at the top.

In the end, it’s probably best to try to find a reasonable balance. You probably don’t want to spend your 20s living on ramen noodles, passing up the chance to study abroad or hanging out with friends, or living in a cheap and unsafe apartment if you really have the potential to earn a lot of money later. on. But spending frivolously could be something you really regret. In short, don’t overspend just because some economists say you can.

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