In this blog post, we will examine the criteria for reasonable consumption through the balance between current and future consumption, time preference, and life cycle.
If you are wondering how much you should consume, historian Thomas Fuller would answer, “A bird in the hand is worth two in the bush,” while writer Samuel Johnson would argue, “Consume less, no matter what you have.” So, how would an economist answer? The purpose of making money is not to become rich. It is to feel satisfaction through consumption based on money. Since the ultimate satisfaction of human beings is to obtain pleasure through consumption, the concern of “how much money to earn” is no different from the concern of “how much to consume.”
From the perspective of economists, consumption goes beyond the simple use of money and is considered an important factor in determining the quality of life. The satisfaction gained through consumption is directly linked to individual happiness, which affects not only economic stability but also psychological and social stability. Therefore, economic analysis focuses not only on the quantity of consumption but also on its quality and efficiency. For example, the satisfaction gained from drinking a cup of coffee at a local café and the new cultural experiences gained while traveling can be seen as differences in the quality of consumption.
If you know how much you will earn in your lifetime, it is reasonable to spend all your money before you die. This is because there is no reason to earn money that you cannot spend in the first place. However, this is not the end of the story. In order to consume reasonably, we must specifically address the points raised by Thomas More and Samuel Johnson above. In other words, we must answer the question, “How much should we consume now and in the future to be reasonable?”
Therefore, in order to determine current and future consumption, we must calculate the income that an individual can earn in a lifetime. For example, before getting a job, you will have little or no income. Once you start working, you can estimate your average length of service and annual salary, and calculate your annual salary increase. Based on this, you can estimate your lifetime income. Now, let’s consider the optimal amount of consumption for the present and the future. First, we must understand that there is a trade-off between current consumption and future consumption. If we consume a lot now, we will have little to consume in the future, even if our lifetime income is fixed. If we set aside a portion of our current consumption for the future, we can save that amount. Over time, this will generate not only the principal but also additional income in the form of interest. In the future, we will be able to consume more thanks to the increase in interest on the principal.
Decisions about consumption and savings may vary depending on each individual’s lifestyle and goals. Some people may prioritize current consumption because they want to gain a lot of experience in their youth, while others may reduce current consumption and increase savings for a stable retirement. Therefore, financial planning that takes into account individual values and priorities is necessary. For example, if you like traveling, it is important to prepare travel funds in advance and make plans so that you can enjoy traveling even after retirement.
However, reducing current consumption is painful because, under the same conditions, people feel greater satisfaction from events that are happening now than from events that will happen in the distant future. For example, imagine a situation where you are giving chocolate on Valentine’s Day and asking, “Should I give it to you today or tomorrow?” Most people would say, “Give it to me today.” As the saying “better safe than sorry” suggests, people even try to experience pain first. This tendency to prefer the present over the future is called “time preference.” Therefore, if you reduce your current consumption and increase your savings, you will earn interest income for the future, but you will have to give up the pleasure of current consumption based on time preference.
In this regard, economics has developed various methods to measure and analyze people’s time preference. The time discount rate is one such method, which quantifies the extent to which people value the present more than the future. People with a high time discount rate prioritize current consumption, while those with a low time discount rate place more importance on future value. This difference has a significant impact on individuals’ financial management and consumption habits.
If the effects of interest income and time preference offset each other in the long run, then the optimal amount of consumption can be determined based solely on the satisfaction derived from current and future consumption. Ultimately, rational consumption over a lifetime means consuming the same amount today, tomorrow, and the day after tomorrow. Simply put, it is more reasonable to spread consumption evenly throughout one’s lifetime than to consume too much or too little in one’s youth, which makes sense when you think about it.
On the other hand, one of the important factors related to consumption is an individual’s life cycle and expected expenses. For example, the amount of money needed for each major stage of life, such as education, home purchase, child-rearing, and retirement, varies. It is necessary to make plans in preparation for these important moments. In addition, you should also consider setting aside emergency funds for unexpected situations. This will allow you to prepare for various variables, such as sudden medical expenses, job loss, and natural disasters. Ultimately, reasonable consumption is not just about balancing the present and the future, but also includes preparing to respond flexibly to various situations. This is an essential process for lifelong financial stability and happiness.
Finally, social and cultural factors also play a major role in shaping consumption habits. Advertising and marketing, the influence of family and friends, and social expectations are important factors that influence our consumption decisions. Therefore, it is important to be aware of these external factors and consume in accordance with your actual needs and desires.
