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Young people may save less
Saving tracks income
The general point is to save more when income is higher and save less when income is lower. Young people usually earn less, so they may not need to save as much as the pressure from parents and society tells them. That pressure covers saving for retirement and saving to buy a home, and not saving can feel irresponsible.
The habit problem
The subject is tricky because of habits. Someone who spends all of their income and never makes the shift toward saving ends up in a difficult position later. At 50, a person who never saved has to save a lot to build any wealth, while someone who already has savings can turn to other topics.
Compounding over time
Wealth compounds over time, so saving too little costs the compounding, and catching up gets a lot harder than starting earlier. Some people wake up at 50, 55, or even 60 and find there is little they can do.
Why might saving less when young make sense?
Franco Modigliani and Richard Brumberg proposed the life-cycle hypothesis in the 1950s: people aim to keep spending smooth across life by borrowing when young, saving in peak earning years, and drawing down in retirement. Modigliani won the 1985 Nobel Prize in economics partly for it. Milton Friedman's permanent income hypothesis, published in 1957, made a related argument that people spend according to long-run expected income.
How do early habits shape later saving?
In the Save More Tomorrow program, designed by Richard Thaler and Shlomo Benartzi and described in a 2004 paper in the Journal of Political Economy, employees committed in advance to raise their savings rate with each future raise. Participants' average savings rates rose from 3.5 percent to 13.6 percent over 40 months at the first company studied. The increases arrived when pay rose, so no paycheck ever shrank.
Why do earnings rise so steeply early on?
US earnings data show a hump-shaped profile: pay climbs fastest through the twenties and thirties, then flattens in the late forties and fifties. Economist Jacob Mincer's work in the 1970s showed that experience adds to earnings, but at a decreasing rate. Much of the growth comes from accumulated skills.
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