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October 07, 2009

The life cycle of borrowing and saving

There's evidence today that the recession is motivating households to borrow less and save more. While the condition of the economy may certainly affect our financial habits, are there some other fundamental factors at work too?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There really are. We can really see a pattern in how people borrow and save over their lifetime. Let me present it to you. When a household is young and their income is relatively low because they're just starting out in their job, oftentimes their spending needs are very high. They may be starting out with a family. They may want to buy a house, appliances, car. So oftentimes what you see is young households will borrow. And essentially what they're doing is borrowing against their future income in order to finance those things they feel they need now. So we see borrowing rates very high among young households. Then when they get to middle age, that's usually the time of their peak earning years, and they use that time to pay off past debts as well as save for their future retirement. So savings rates tend to be highest for middle-aged households. And then you go back the other way when you get to old age, where you obviously - this is sad to say - have a limited period of time to live, we tend to see spending go up and saving go down as people live out the rest of their lives. Now, everyone is not going to follow this pattern, but it is significant enough that we see most households do fit into this life cycle of borrowing and saving."

Posted by Dave at October 7, 2009 08:00 AM