Economics For All Your Decisions In Life - From Romance to Retirement

[MUSIC] One of the most stressful economic decisions we faced was about the future of our relationship. Relationships often face big decision points. Should you get married? Should you have kids? For us and many other dual career couples, our first big decision point was whether to restrict ourselves to only looking for jobs in the same city. The benefit of living in the same city is we would get to see each other every day. But the opportunity cost comes from the fact that it can be hard for two people, particularly academics, to each find the very best job for them in the same city. The decision was about how big those benefits of being in the same city were to us, versus the cost to our careers. Everyone will make the same decision we made, but the framework provided by economics can help you think through that decision. You want to compare the costs and the benefits and consider the opportunity cost and the interdependencies. The interdependence principle reminds us to think about how our choices today might impact our future choices. And I know that when it came to thinking about whether to live in the same city, I thought about how that might impact the future benefits of our relationship, as well as how it might impact each of our career trajectories for the rest of our lives. In the end, we've chosen to live in the same city, even though at various times it has meant one of us turning down better career opportunities. In today's episode of Think Like An Economist, we're going to look at some of the big life decisions many of us make and use the tools of economics to think through how to navigate these decisions. I'm Betsy Stevenson. And I'm Justin Malthus. Journalist and former economic student, Nazter and Tevacoli Far joins us. Justin, Betsy, turning down a job for a relationship is quite a big deal. Yeah, it's life-changing. A different set of decisions may have led to different career outcomes and different relationship outcomes. Yeah, you know, these big life questions can be so overwhelming. And I think a lot of us procrastinate or we just jump in without really thinking things through properly. Yeah, like a lot of people procrastinate saving money for retirement. It's not a well thought out choice. It's just that making a retirement plan seems so overwhelming. Yeah, and I have some friends who take that same approach when it comes to thinking about kids and starting a family. Figuring out if and when to have them can be so overwhelming. The economic toolkit we've built in this podcast can help make these kinds of decisions less overwhelming. You can use the principles we've learned for almost any life decision. It's like a supercharged way to make a pro and conless that can help lead you to the right decision for you. When you break things down, it can also help make those big life decisions seem a little bit easier to think through. I've already learnt some big life decisions through the podcast. Such as when it comes to savings, we shouldn't waste our time picking stocks or spending money on an analyst. Instead, we should put our money into some index funds and look for the ones with the lowest fees. I hope everyone is saving their time and money with that tip because that is what most economists do. Let's apply these principles to one of the early big life decisions we face and that's borrowing money for college. Betsy and Justin, I think you're the only people I've heard who tell students that they should borrow more money whilst they're students. I feel like generally society gives us the message that we should be frugal, especially when we're students and we're usually not earning any money. Throughout the course of think like an economist, we're trying to get everyone to approach decisions differently. So in one hand, you may think that borrowing more money means more debt as a student and now you see a bigger number on your loan statement. That means more money to pay back later. That's all true. But if you focus only on the debt, you're missing the most important part of thinking about when to borrow and when to save. What you're really making decisions about is when to spend your money. You aren't earning much money while you are a student and you will earn more money when you're older. The question is, would you be better off taking some money from your older, rich yourself and giving it to your younger self? Here's a tool that I think can be really helpful. I like to imagine my 30 year old self having a conversation with my 20 year old self. They get together and meet and try to decide how should we allocate our money between the two of us. The truth is, my 30 year old self was working, had a fair bit of money. My 20 year old self had a lot of opportunities, not much money and a great deal of needs. In that meeting, I think my 30 year old self would willingly give money to my 20 year old self. How do we do that? By borrowing money from my 20 and repaying it when we're 30. I know my 30 year old self in that meeting would tell my 20 year old self to spend responsibly. But I also wish that I'd been able to have that meeting and had agreed to send more money from my 30 year old self to my 20 year old self. I was a responsible borrower as a young person, but I did the thing that financial advisors tell you not to do. I borrowed money from my final year off a credit card. If I could go back and borrow even more, I would, because I remember skipping things that don't sound that expensive now, but at the time I was so broke, I had to give up on a lot of opportunities that I wish I could go back and get. But the thing is, debt sounds really scary and irresponsible. So instead, why not take on a part-time job and try to earn more money that way? That can definitely be part of the solution, but realize time, spend at work, comes with an important opportunity cost. It's time, not spend studying or doing other things. So make sure to balance those costs with the benefits. For some people, a part-time job is really important. And I know that I had one when I was in college, but I searched hard to try to find one where I could actually study while I worked or that would actually help my studies in some way. It's important that you value your time, because if you take that part-time job and it prevents you from completing your courses or doing as well as you could, you know, that's actually going to come with a pretty heavy financial cost down the road. Because college is something that builds human capital, a set of skills that leads to higher wages in the future. Remember, we've talked about the returns to education, which economists call human capital. By going to college, you have the opportunity to learn skills that'll make you more productive. That's why more education translates into higher pay. And that's also why if you give up your time while you're a student to work, that could be really important. You might need the cash and believe me, I understand that situation. But you could actually end up costing yourself a lot down the line. A college graduate will earn a million dollars more than a non-graduate over their lifetime on average. So every year of your college degree, well, those years are actually among the highest paying years of your entire career, you're generating hundreds of thousands of future dollars. You don't want to miss the opportunity to get those kinds of gains. Remember that it's not just from completing the degree. It's actually what you're learning while you're there. So if you don't learn as much, well, your returns might not be as big as those from someone who's able to actually focus on their studies. That's why you've got to think about your time and your money over time, not just thinking about money today. But is it worth pulling some money for the future so you can focus more on your studies? The bottom line is that you need to think of college as an investment that you pay off over the rest of your life. And realize that when you borrow money today, you're also making a commitment to pay that debt off. You can live a better life as a student if you live a somewhat worse life when you're working. Given the income gap between your 20-year-old and 30-year-old selves, it just might be a trade-off worth making. I know that when I graduated from college, I couldn't spend all this newfound money I was earning because I had to pay off that credit card debt. It was a trade-off that I thought was worth making. The next big life decision we're going to look at is when to have a child. This is a big deal for everyone, but due to biology, it's something that a lot of women have to think about seriously and also very carefully as well. Well, if you want the cliff notes version of what I'm about to say, my advice to women in their late 20s is if you aren't ready to have a kid freeze your eggs. Okay, that's what I wish I would have done, but since this podcast isn't about telling you what to do, we should maybe have a more detailed conversation. Right, it's about learning how to think about the problem. So let's get into this. Let's start by using the Cost Benefit Principle. When you're thinking about when to have a child, you need to weigh up the costs and the benefits of having a child sooner versus waiting to have a child later. The cost of waiting to have a child later saying your late 30s, which I'll be honest here is what I did, is your fertility declines. It'll be harder for you to conceive and you run an increased risk of miscarriage or health problems with the baby. But the benefit of waiting is that it gives you more time to establish your career. Every year that women to life fertility has a big impact on their entire career trajectory. Research shows that as soon as women have kids, their whole wage earnings career profile just starts to flatten out. They don't get promotions as quickly. They don't get raises as quickly. Every year you postpone having a child ends up having huge benefits later on in your career. So it's not just about what happens while you're pregnant or while you're nursing. It's the trajectory that's affected for the rest of your life. It's sad but true. We just haven't figured out as a society how to have women slow down their career and then speed it back up and get to the same place they were going to get to. The other major benefit of waiting to have a baby is it gives you more time to search for the perfect partner, right, Bits? Right, Justin. The more time you have to search for a partner, the more likely you're going to find someone that you're going to be happy parenting with for the next 18 years or so. Research gives us some insight into this as well. What we see is that marriages that start in your 30s last longer than marriages that start in your 20s. Part of this is you give yourself a longer run way to search for the perfect partner. Part of it is you take longer and get to really know someone before you commit to parenthood. And part of it is as you age you get to know yourself a little better. And so maybe you approach parenthood with a bit more self-knowledge and maturity. I made the decision in my early 20s that I really didn't want to have kids until I was in my late 30s. And I knew it was a big risk, but I also knew that being able to build my career was important to me. And it was worth the risk of not being able to have my own biological child. And the whole point to our listeners is that this isn't us telling you what to do. You don't necessarily want to make the choices we made. The whole point of think like an economist is to give you the tools to decide what's best for you. And so for Betsy delaying motherhood so she could focus on her career was a risk worth taking for her. Betsy at the start of the section you said the cliff notes were egg freezing. You know technology is always advancing and these medical advances have made it easier for women to have children at older ages. But it's also the case that now women can freeze their eggs and then conceive with a partner that they've had more time to choose via method like IVF. Now we've been looking at when to have a child, but a more fundamental question may even be should you have a child at all because we can't assume that starting a family is the best decision for everyone. Of course, there's no obligation for everyone to start a family. You know, Betsy and I debated this at length too. This whole question of should we even have children in the first place? So like good economists we gathered lots of data. We really did. I have on my hard drive hundreds of thousands of responses to surveys from people all around the world asking them things about how happy they are, how much income they have and importantly whether they were parents or not. And overwhelmingly I kept finding that parents were in fact less happy than non parents. But you know, there's actually more to life than being happy when I talked to parents and I asked parents are you glad that you had children? Most parents say yes, they said that it filled their life with meaning and purpose and that they felt richer. There's an important lesson here for us as economists. This time parents were teaching us economics. And it was that there's something bigger for many of us than just happiness, purpose and many are important and there are a lot of things that people around the world willingly do that won't make them happy but add to meaning in their lives. And so the fact that people who were parents still recommended it says to me that something matters beyond happiness. And that's a lesson that applies not just to parenting but to running a successful economy too. The final big decision we're going to look at is about retirement and more specifically we're going to look at when you should start saving money for retirement. This is an important and scary decision. Retirement always feels so far away but for each of us it's something you've got to start thinking about seriously. The right way to think about retirement is to think about that conversation that your 20 year old self and 30 year old self had about how to divvy up the money between your 30 year old self and your 20 year old self but now you want to let your 70 year old self in on that conversation too. Because what retirement is also making a decision about what you're going to spend in the years and what you can't earn a lot of money so it's a lot like the decision you're making in your 20s. This is what consumption smoothing is about. That's the term that economists use for the idea that you want to have a roughly similar quality and standard of living throughout your lifetime. The idea here is that you don't want to have any period in your life when you're just scraping to get by. Rather you want to take whatever income you earn throughout your life. Have a meeting with your 20 year old and 70 year old and 30 year old self and allocate that money across time in a way that makes sense for each of those future selves. This is why economists focus so much and that marginal principle thinking on the margin. If I spend one more dollar today, how much joy will I get from that extra dollar today versus how much joy would I get from it if I was able to spend it when I was 70 in retirement. So that's the trade off your face. Spin today versus spin tomorrow. So just in just described something that sounds kind of simple, but I have to admit is really hard because you have to be able to answer questions like what will I want to do when I'm 70. Will I be ready to be retired or will I be happy to keep working or will I want to travel the world. So you do have to try to figure out how you're going to want to spend your money and how long you're going to want to work in order to be able to make good decisions about how much money to save for retirement. Perhaps the most important uncertainty you face when thinking about retirement is none of us know how long we're going to live. It's a very funny thing to say you face this huge risk you could live a long time. It is a risk though because if you live a long time you're running the risk of out living your savings. Let me be clear about that risk. You don't actually really want to save to live for a really, really long time. Like somebody listening to this episode right now is going to live to be 110. If we all saved as if we were going to live to 110, then we'd all sort of be spending too little during our living years because we all unfortunately pass away without actually running out of savings with a lot of savings left over. The thing I like about you Betsy is you're just as willing to admit that there's a risk of spending too little as a risk of spending too much. Yeah, there is a risk of spending too little and that's just where actually insurance can step in and help us out. It's actually what a lot of government insurance schemes do is provide us something like it's called an annuity. It's going to be a fixed amount of money that we get every year until we die. But even if you don't get that through like a government or work-based pension, you can often buy annuities in the private sector. So you give up a certain amount of money today in order to get a stream of payments for the rest of your life. And that is insurance that's worth having because none of us know who is going to pull the lucky card of living a truly, truly long life. So we've looked at a few really big decisions in this episode, borrowing more money as a student, when to have children and if you should even start a family. And also about when to start saving for retirement. What is so interesting is that we can apply economic tools to so many big decisions we have to make in life. I'd like to think you can apply them to every decision in your life. And that's not to say that every decision is purely economics. It's that the economic toolkit gives you a clearer lens. So you can see the underlying trade-offs a little better and hopefully make the right decisions for you. If you think about those four principles that we outlined in our very first season at the very beginning, you know we tell you things like think on the margin. That's our marginal principle and we talked about thinking about the marginal benefit to you of a dollar as a student versus as a 30 year old earning much bigger bucks or as a 70 year old in retirement. And we talked on you know when you think about whether to have kids or not, you might be thinking should I have one kid, two kid, three kid. Again, we can sort of use the toolkit to think and break it down and think about each kid on the margin. So that marginal principle is something that we use with almost every decision. Fun fact actually our youngest child is called marginal child. And as we were trying to side whether to have marginal child or not, what did we do? We looked deeply into each other's eyes on a candlelit evening and said let's think about the costs and the benefits. True words have never been spoken. And of course, in order to think through the costs and benefits, the first thing to start with is the opportunity cost. So thinking through that opportunity cost was really important to me because truth is actually really love having kids. And if I didn't think like an economist, we might have a whole pack of them. And so listen, don't ever let anyone tell you economics is romantic. Is romantic? It's not romantic, but it's going to lead you to better and more clear-eyed decisions. You meant isn't romantic. You told me. It is romantic. Well, it lets you live the best life in a medium to long-time. It lets you live the best life ever. So economics helps you think about making those choices. And of course, all of our choices are interconnected. So that interdependence principle that tells us to think through. If I make this decision, how's it going to constrain my future choices? How's it going to affect people around you? And how's it going to affect people around me? And of course, as we started this episode, Justin, I had to think hard about the interdependence principle when we made our decision to stick together as a couple living in the same city and turning down some good job opportunities to prioritize our relationship. And so now we really can conclude that economics is romantic. So this is the final episode of season three. And until we next meet, I'm actually really excited to start applying a lot of these tools to all sorts of decisions from everyday things to some of the biggest decisions I'm going to have to make. And that's where I want to come to today's homework for our listeners. What are some of the big decisions you're facing right now and what are some ways you can use these tools to make better decisions? We'd love to hear how you're using the tools of economics to make big life decisions. So if you want to share, please tag us on Twitter. I'm @BetsyStevenson. I'm @Justamolvers. And I'm @NTavakirlifa. And I'm actually really excited to hear how people are going to be using these tools. So do send those to us. Betsy Justin, thanks so much. You've given us so much to think about and to start applying so that we can live our best lives. Looking forward to hearing what people are up to. Thanks, Nez. It's great fun as always.