CHAPTER 25 Consumption and Saving
What will you do with your money?
Turn on a TV, skim through your news feed, or talk to an older relative, and you’ll be bombarded with advice about how you should spend, save, or borrow. Spend more, says one; avoid debt, says another. A talking head on TV warns of the perils of debt only hours before your financial aid officer proposes a package of student loans. As you read a newspaper bemoaning a student debt crisis, a low-balance text alert reminds you that you could really use a bit more money to help you through college. One budget guru advises you to avoid the perils of credit cards, while another urges you take out a credit card to improve your credit score. Your parents tell you to get a part-time job, but your academic advisor suggests that you borrow money so you can focus on your studies.
The reason for all the conflicting advice is because your best spending and saving choices depend on your personal situation, including your personal goals, life trajectory, and the risks you face along the way. This means that you’re the one who’s going to have to steer the ship. But there are some general principles that tend to guide people’s spending and saving decisions. We’ll carefully lay out the economic logic that will give you the tools you need to figure out the best spending, borrowing, and saving decisions for you. Along the way, we’ll also consider some common mistakes people make.
As you think through your own spending and saving decisions, you’ll gain insight into how other people think about theirs. The macroeconomy is simply the sum of the decisions of many individuals, and so this approach (known among economists as building from the micro foundations of macroeconomics) will give you an understanding of the broad drivers of consumption and saving across the whole economy.
We’ll begin the chapter by analyzing total consumer spending, or consumption, across the whole economy. Then we’ll zoom in on individual consumers—like you!—to assess how people tend to make consumption choices. We’ll then pan back, and assess what that means for the macroeconomy. Consumption and saving are linked, since what you don’t spend, you save. So we’ll conclude by exploring what all this means for saving—both your saving and national saving.