Lecture 2: Managing Money with Life Cycle Theory

Managing Money with Life Cycle Theory ..........................................

Lecture 2

,

QHFRQRPLFVWKHIUDPHZRUNWKDWLVXVHGWRPDNH¿QDQFLDOGHFLVLRQVLV

NQRZQDVOLIHF\FOHWKHRU\8QOLNHPDQ\VFLHQWL¿FWKHRULHVWKLVRQHLV

IDLUO\HDV\WRXQGHUVWDQG%XWGHVSLWHLWVVLPSOLFLW\OLIHF\FOHWKHRU\LV

LQFUHGLEO\SRZHUIXODWKHOSLQJXVPDNHVHQVHRI¿QDQFLDOGHFLVLRQV7KH

EDVLFORJLFRIOLIHF\FOH¿QDQFHLVWKDW\RXVKRXOGVSHQG\RXUPRQH\ZKHQ

LWJLYHV\RXWKHPRVWKDSSLQHVVDQGVDYHLWLQWLPHVRISOHQW\%\WKHHQGRI

this lecture, you might have a completely different perspective about your

¿QDQFLDOOLIH

Assumptions of Life Cycle Theory

% ,I\RX¶UHJRLQJWREX\LQWROLIHF\FOHWKHRU\\RXKDYHWRXQGHUVWDQG

VRPHRILWVDVVXPSWLRQV1RQHRIWKHVHDVVXPSWLRQVDUHUDGLFDO

WKH\DOOPDNHVHQVH%XWFRPELQHWKHVHVHQVLEOHDVVXPSWLRQVLQWRD

IUDPHZRUNDQG\RXFDQJHWVRPHYHU\VXUSULVLQJUHVXOWV<RXPD\

¿QGWKDWEHKDYLRUV\RXWKRXJKWZHUHVHQVLEOHDUHQ¶WVRVHQVLEOH

XQGHUOLIHF\FOHWKHRU\$QG\RXPD\¿QGWKDW¿QDQFLDOFKRLFHVWKDW

VHHPHGXQUHDVRQDEOHDUHDFWXDOO\UDWLRQDO

% One assumption of life cycle theory is what economists call

GHFUHDVLQJPDUJLQDOXWLOLW\RIPRQH\ZKHUH³XWLOLW\ ́LVDQRWKHU

ZRUGIRUKDSSLQHVVDQG³PDUJLQDO ́PHDQVWKHDPRXQWRIKDSSLQHVV

ZH JHW IURP VSHQGLQJ HDFK DGGLWLRQDO GROODU 7KH GHFUHDVLQJ

marginal utility assumption says that we get a little less happiness

IURPHDFKDGGLWLRQDOGROODUZHVSHQG

% 7KDW¶VWKHHVVHQFHRIOLIHF\FOH¿QDQFH7KLQNRIERUURZLQJDQG

saving not as bad or good but as what it actually is—a transfer of

VSHQGLQJDFURVVRXUOLIHWLPH%RUURZLQJPHDQV\RXVSHQGOHVVLQ

WKHIXWXUHLQRUGHUWRVSHQGPRUHWRGD\6DYLQJPHDQV\RXVSHQG

OHVVWRGD\VR\RXFDQVSHQGPRUHLQWKHIXWXUH