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April 28, 2013

Slate: A better way to manage your household budget

(Continued)

CHICAGO —

In fact, whether it's due to the envelope system or something else, many, many people make a version of this last mistake. Research shows that the majority of people who carry credit card debt also have significant liquid savings, money which they could use to pay down their debt. One interpretation of why people do not do this is they think of their savings money as special — different — and don't want to violate the sanctity of savings to pay down debt. But money is money is money, and if you make this mistake, you'll end up with less of it.

So what to do? Dave Ramsey at least has some practical advice. All I have is criticism. In practice, some form of budgeting like this may be an easy way to track spending. But what economics tells us is that ultimately you should have your eye on the bottom line.

Case in point: A few months ago my in-laws were shopping for flights to visit us. They found flights, but wanted to wait a few days to buy them because my mother-in-law adheres to the policy of keeping her monthly credit card bill under a certain amount. They had to wait until the month rolled over — even though they were going to spend the money anyway. And when they went back, tickets were significantly more expensive. Adhering to budgeting rules shouldn't trump good decision-making.

Oster is an associate professor of economics at the University of Chicago Booth School. Her forthcoming book is "Expecting Better: How To Fight the Pregnancy Establishment With Facts."

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