A couple days ago, my boss directed my attention to this intriguing factoid about Sotomayor:
Sotomayor, an avid Yankees fan, lives modestly, reporting virtually no assets despite her $179,500 yearly salary.(Now, you may be thinking, shouldn't Miss Self-Important be finding these things for her boss instead of the other way around? Yes, but don't worry, incompetence is leaving the job in a couple months.) Greg Mankiw pointed out that having $30K in savings after several decades of earning a nearly $200K salary is not necessarily a sign of "living modestly." (He does point out that she could be stashing vast moneys in her retirement account, but she claims in the WaPo not to have any money, so it's unclear.) Next to that, there was Edmund Andrews's white-collar horror story of rich economics reporters who are apparently both spenders and suckers of a sort, and the ensuing accusations of even more spending and bankruptcy as "strategic debt management." Sotomayor seems not to be in debt, so even if she's not saving, she's at least not, like Andrews, living smugly beyond her means and passing the costs of her spendiness on to everyone else. (As in, "I was actually beginning to feel sorry for Chase. It seemed to be so flooded with defaulting borrowers that it didn’t have time to foreclose on my house.")
On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined.
During the previous four years, the money in the accounts at some points was listed as low as $30,000.
When asked recently how she managed to file such streamlined reports, Sotomayor, according to a source, replied, "When you don't have money, it's easy. There isn't anything there to report."
There has to be a better way to manage money than these models. On the other hand, as the 5402 concluded a while ago in our discussion of thrift, it's actually really difficult to pin down a compelling reason to save instead of spending (especially when one has no family obligations or debt to repay), particularly a reason that includes an idea of how much saving relative to spending is necessary or desirable. My default is the more, the better, but not so much that I have to give up buying my delicious cup of Southern Pecan coffee from Firehook three time a week. However, not washing my hair to save on shampoo could be good, and I also have on several occasions used Andrews's strategy of waiting 10 minutes on the Metro platform to save 50 cents on an off-peak fare. On the whole, that is a pretty incoherent philosophy.
7 comments:
There's a concept in economics called income smoothing, "balancing out spending and saving to attain and maintain the highest possible living standard over the course of one's life", which I don't think should be viewed as literally and perfectly true. But I believe it holds in many people's cases.
Basically, you are young and make less money than you expect to be in the future. (Or you less than you expect you and your future husband will make in the future.) So, you can spend more than save figuring paying off debt and saving will come in your 30s, 40, and 50s. During your retirement you'd then consume more than you make again. You smooth your consumption based upon what you expect to make over your lifetime, roughly speaking.
Contrary to what Mankiw writes, its really impossible to assess how much Sotomayor is saving without more information. For example, this article reports that
"Sotomayor owns a condominium in trendy Greenwich Village. She has had the property since at least 1998, and took out a $350,000 mortgage from JPMorgan Chase Bank last fall...Other units in the building have sold for $900,000 to $1.5 million over the past five years, city records show."This is not included in Mankiw's analysis and would add from between 550 thousand and 1.15 million to her savings, assuming none of the mortgage was paid down, and possibly more assuming some of it was.
On a side note, I do love Mankiw's update to his post. After going through some factors which compromise his analysis, he ends by noting his grandmother would not have been convinced! Perhaps I'll start using this trick whenever I argue: "Your arguments appear flawless to me, but my grandmother would have thought you are full of crap."
It was really hard to convince my grandmother of anything, you know.
I think making nearly $180k a year and not having any assets or savings is the opposite of living modestly (unless she's giving most of it to charity). What is she doing with all the money? Is it like the movie Brewster's Millions, where she's spending this money on things that have no long-term monetary value?
If you wait ten minutes to save fifty cents, you are saying your time is worth $3.00 an hour. So every hour you spend not-working-at-Hardees, when you could be making $7.15, is a loss of $4.15. dave.s.
Yes! Cheapness Studies has to happen. And Belle would be a fine addition to this as-yet-imaginary blog.
FLG: But income smoothing doesn't tell me what I should do, only what I will have done, generally, if I am an average person, 50 years from now looking back. How does that help me decide whether to buy a cup of coffee right now? From this vantage point, I may expect to make slightly more money in the future (or, with a combined income), but I also expect to have MANY more expenses (current status: no debt, no car, no house, no children), so wouldn't it be logical to assume I be saving as much as possible now, when I have relatively few demands on my income, for a time in the future, when I will have many demands on it?
Alex: Well, to be fair, Mankiw was not analyzing so much as quoting the WaPo. I don't know what exactly the reporter asked Sotomayor, but the quote that made it into the story about how it's easy to produce straightforward accounts when you have no money, does suggest that she is or wants to be viewed as someone with few assets. It's possible that's not strictly true b/c her pot of gold is hiding behind real estate or a TSP, but she could just say that if she wanted. I doubt anyone would hold it against her that she has been a careful investor and a diligent saver.
Dave S: Yes, I know how that calculation works. But actually, my time outside of work might very well be worth $3.00/hr. How can I know? I'm not paid to work on weekends or during non-work hours, so strictly speaking, my time then is worth nothing and $3/hr from waiting extra long for trains is a profit.
Phoebe: I am waiting. I even have an idea for a banner involving tight fists.
My wife was a major cheapskate when we met - I thought I was tightfisted, but she shamed me. Before we had kids, our goal was to save 50% of our gross income, which we mostly managed, although it didn't leave much after we paid taxes. But over the years, we got to the point that our investment income was a significant fraction of our earned income, which was encouraging. In general, I've always found it easier to not spend money than it is to stop spending it once I've started. But our spending has crept up over the years, and I hope that I don't have to give up my fancy jelly and never-frozen-fish, as losing those would be painful.
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