is a theory of household consumption, called the life-cycle
theory of consumption, which says that households make decisions
to buy goods, services, and create assets, based on projections
of anticipated earnings over an entire lifetime.
In the early years of employment, individuals had a tendency
to consume more than they earn. Borrowing is an important
element in the financial plan during these years, and informal
means of funding, such as borrowing from parents, the employer,
as well as sou-sou are not uncommon.
This is also the time when hire purchase agreements are in
demand, for essential household items such as appliances and
furniture. In addition, any savings accumulated earlier on,
tends to be used up in what is called dissavings.
The net worth of many such households tends to be in the negative
arena. It is called negative wealth. This means that the total
amount of assets owned by the household is less than the total
amount of money owed to others. In fact, if they had to sell
everything to pay off their debts, they would not be able
to fill those obligations.
Some become helpless, pitiful and delinquent, unnecessarily
so, because others pursue doggedly onward and upwards.
Then there comes a time when the children grow into teenagers
and you think that will eat you out of house and home, but
there is light of the end of the tunnel!
Thats about the time when breadwinners mature into their
respective careers, and become the recipients of wage increases,
bonuses, supervisory appointments and money-minded career
offers, and the net result is more income.
The average propensity to consume becomes less in relation
to the income earned. The household is already saturated with
furniture and ornaments, the appliances have all been upgraded,
and you have run out of closet space!
Yes, it is true that according to the Keynesian consumption
theory consumption does increase with income, but not as much
as the income increases, and the result is net savings.
Critical illness plan
A good indicator of wastage, at this point in the consumption
cycle, is the closet space syndrome. If the household owns
more clothes and more shoes than it has space to conveniently
store, (does not include plastic storage bins and boxes) you
have to cut back and convert such excess into dollars.
While this is a low-level measure, clothes and shoes are expensive,
and you should calculate how much you would save if you didnt
shop for these items for two years. You may very well find
that after two years, you can throw out the old clothes and
get a brand new, more time-sensitive wardrobe.
Of course, this is also the time to dump lumpsums into your
pension, re-evaluate your income protection policies (life
insurance), and ensure that when your employer-sponsored health
plan expires, you have a personal critical illness plan with
concomitant and dedicated savings, at least up until age 75.
You should also acquire that second piece of real estate,
get in on some stocks, and fine art, to experience the comfort
of positive wealth.
Because the third stage in the life cycle theory is retirement,
when income is cut, and you lose your health plan, you can
only consume accumulated savings.
It is unlikely that people will still pay you to work for
long, but you can make your money work for you in retirement!
If you are unable to do this, you consume your accumulated
wealth. It would be thoroughly useful to understand how to
ensure that your accumulated wealth outlasts your biological
life cycle, without hampering your life style.
Continued next Sunday.