Lesson 1 - Financial Planning - Part 3

Consumption and Savings

As part of the Financial Planning process, Consumption and Savings will play important roles in how we plan for our future goals.

Current Consumption is when we use a product or service within one year.  These Current Consumptions will measure the amount of products and services that we use for living.  A low consumption rate means that we use fewer products and services than the average individual or family.  However, Economists insist that having a higher consumption rate doesn’t necessarily mean that we live happier.  Economists often imply an important rule, principle of diminishing satisfaction, which basically means that for every 1 dollar we spend does not mean we get 1 unit of happiness.  Instead, the more we want 1 more unit of happiness, the more dollars it will take to achieve.

Future Consumption refers to products and services that will be used in the future, or beyond 1 year.  As people in our current society will always favor Current Consumption over Future Consumption.  Do you want 1 cookie now, or 2 cookies a week from now?  As most people will see throughout their lives, your income will generally be low in your early career and grow as you progress.  People who are 25 years old making 25,000 will hopefully be making more money by the time they are 50.  Knowing this important information we must try and restrain our Current Consumption to maximize our overall Consumption (both Current and Future).  For many this means that we will borrow much more money early in our careers compared to later on, as your income later will allow you to pay off those debts.

Savings is simply the amount of money that we are not using for current consumption.  An important reason for savings might be to use for Future Consumption.  But there are many more reasons that people will save money, such as leaving money for children, or taking a future vacation.