Consumption Smoothing

AAA

DEFINITION of 'Consumption Smoothing'

The ways in which people try to optimize their lifetime standard of living by ensuring a proper balance of spending and saving during the different phases of their life. Those who overspend and put off saving for retirement to enjoy a higher standard of living often have to work longer or reduce their standard of living in retirement. Those who over save will live a more frugal lifestyle while working to enjoy a better lifestyle while retired. In each case, the overall standard of living is less than optimal.

INVESTOPEDIA EXPLAINS 'Consumption Smoothing'

Saving for retirement is a delicate balancing act. By having a a better understanding of the saving and spending requirements to smooth out standard of living, one can have a a better overall standard of living, at least in theory. But this is easier said than done, and striking this balance is one of the major challenges of financial planning.

RELATED TERMS
  1. Personal Consumption Expenditures ...

    A measure of price changes in consumer goods and services. Personal ...
  2. Money Management

    The process of budgeting, saving, investing, spending or otherwise ...
  3. Intertemporal Choice

    An economic term describing how an individual's current decisions ...
  4. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  5. Book Value Reduction

    Reducing the value at which an asset is carried on the books ...
  6. Inherent Risk

    The risk posed by an error or omission in a financial statement ...
Related Articles
  1. Delay In Retirement Savings Costs More ...
    Retirement

    Delay In Retirement Savings Costs More ...

  2. Two Roads: Debt Or Financial Independence?
    Retirement

    Two Roads: Debt Or Financial Independence?

  3. Standard Of Living Vs. Quality Of Life
    Fundamental Analysis

    Standard Of Living Vs. Quality Of Life

  4. Retirement Planning Basics
    Options & Futures

    Retirement Planning Basics

comments powered by Disqus
Hot Definitions
  1. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  2. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  3. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  4. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  5. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
  6. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
Trading Center