Thursday, September 14, 2006

Ten Most Frugal American Cities (or, Do You Know How to Save Like San Jose?)

Forbes cites the second A. G. Edwards Nest Egg Index to determine the communities with the biggest savings performance. Criteria includes characteristics such as propensity to saving or invest, availability of pension plan or 401(k) by local employers, home ownership, debt level (including mortgage), net worth, household income and cost of living. Based on these criteria, the ten best cities were Los Alamos, NM; Fairfield County, CT; San Jose, CA; Torrington, CT; Minneapolis-St. Paul, MN; Barnstable Town, MA; Holland, MI; Washington, DC area; San Francisco-Oakland, CA and Edwards, CO. Through further investigation of the A. G. Edwards web page (linked in the Forbes article) New Jersey was the top-rated state; also, in general, the Midwest and Northeast tended to do best, although the West was improving.

Reading between the lines: education appears to be directly related to good Nest Egg performance while raising children appears to have at least a slight negative relation (my guess is that most of the cities listed above are cities where comparatively low proportions of adults are raising children). I would have liked more detail on how the criteria were applied.


Blogger Chris Silvey said...

I am posting this in your comments as a courtesy, since blogger doesn't have a trackback feature.

The top cities are places like San Jose, San Francisco, Los Alamos (NM), and Fairfield County (CT). You are quite right to think that education level has something to do with who is on this list, but I believe you are skipping an important link. During the acquisition of my degree in statistic I was exposed to the idea of interactions. Interactions are defined (non-technically)…

An effect of interaction occurs when a relation between (at least) two variables is modified by (at least one) other variable. In other words, the strength or the sign (direction) of a relation between (at least) two variables is different depending on the value (level) of some other variable(s). (The term interaction was first used by Fisher, 1926). Note that the term “modified” in this context does not imply causality but represents a simple fact that depending on what subset of observations (regarding the “modifier” variable(s)) you are looking at, the relation between the other variables will be different.

[ Yes I stole that definition…who memorizes statistics definitions ]

In this case the two variables you identify are education and propensity to save, a positive correlation (the more educated you are…the more money you tend to save). I submit that this explanation does not explain the results robustly. Think of all of the social work, english, and (insert your own random major) that are highly educated and utterly broke. A high education level with a low pay scale will never result in a large savings rate. In this case the more obvious reason for the higher savings rate is a higher income. Think about it. All of the areas listed have highly educated, highly compensated, people with large amounts of discretionary income to sock away from their tech, engineering, and government jobs. In this case you could say that education and income are correlated, education and savings rate are correlated, and income and savings rate are correlated. But it seems pretty obvious that income would be more strongly correlated to savings rate then education level (on average).

10:34 PM  

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