Consumption Smoothing and the consumer

It is nothing new and perhaps you have heard of it so many times before that you need to have substantial savings for your retirement years. Followed by this there are other things such as not getting into so much debt as to consult the debt relief programs or to live within your means. The percentage of amount that you may have to save during your lifetime will depend on the time of your retirement; it will also depend on your lifestyle during the leisure years. Following the principles of money management is easier said than done. Life is ever changing and over a period of time your needs may change as well. For instance, your financial needs will increase as you get married and have kids. It is only common to succumb to the sheer pressure of financial discrepancies. However, instead of giving up under the circumstances of financial stress let us get into the concept of Consumption Smoothing. This concept is related to Macroeconomics which implies that a consumer’s earnings should be balanced in order to be able to maintain the best standards of living. The basic idea of the concept is to rationalize the spending and saving strategies so that the consumers are able to have a consistent lifestyle over the period of time. The dangers of over spending have surfaced during recession and all of you are familiar with it. Unlike the common idea that one should keep on with the savings target to enjoy during retirement rather than being indigent is not what is stressed by Consumption smoothing. It simply states that the level of spending should be even and you will automatically enjoy your retirement years. The financial experts may however have a different view towards this concept. A noted economist has discouraged the use of this concept citing two reasons:

·           1) Firstly, it is too difficult to understand the saving and spending strategies in one’s time and it is essentially complex.

·          2)It may not arouse motivation in your financial management.

 Some people may simply use the concept of Consumption Smoothing to procrastinate their financial goals particularly saving. In that case, you will have to save more to compensate for the future needs and it is better to stick to the age old tradition of saving and spending.