Consumption Smoothing

What is '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.

BREAKING DOWN '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. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  3. Money Management

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

    An economic term describing how an individual's current decisions ...
  5. Adjusted EBITDA

    Adjusted EBITDA is a measure computed for a company that looks ...
  6. Liability

    A company's legal debts or obligations that arise during the ...
Related Articles
  1. Retirement

    Delay In Retirement Savings Costs More In The Long Run

    The effects of compounding make it cheaper over the long term to save for retirement.
  2. Retirement

    Two Roads: Debt Or Financial Independence?

    A higher income won't make you richer - unless you learn to live on less.
  3. Fundamental Analysis

    Standard Of Living Vs. Quality Of Life

    What is the difference between a standard of living and quality of life? Find out in this breakdown.
  4. Options & Futures

    Retirement Planning Basics

    Realizing your post-work goals need not be daunting. We'll tell you everything you need to know to get - and stay - on track.
  5. Investing News

    Amazon Stock Declines Ahead of Earnings (AMZN)

    Investors have gotten gun-shy about what Amazon, given its high spending history, might reveal in its earnings report Thursday.
  6. Home & Auto

    Where Rents Are Rising Most (Or Not So Much)

    If you’re in the market for rental housing, rents are rising more slowly in major metro areas; secondary-market rents, however, are growing faster.
  7. Savings

    Do Big Soccer Tournaments Boost Market Performance?

    See why the conventional wisdom about the World Cup — that it boosts economic activity and helps local stock markets — is probably wrong.
  8. Investing News

    Will PayPal Pay on Solid Earnings? (PYPL)

    The company has grown its active accounts by double digit percentage points year over year. A fall to single digits may weigh heavily on the stock.
  9. Investing

    ConAgra Stock to Trade Ex-Dividend (CAG)

    The company has found ways to beat Wall Street earnings estimates in the previous two quarters by an average of 8 cents per share.
  10. Investing News

    Chipotle Earnings Coming Up, What to Expect? (CMG)

    True, the free burritos have helped get some customers back into its restaurants. But it's also costing Chipotle $70 million in free food. It it worth it?
RELATED FAQS
  1. How can I budget for both short-term expenses and long-term goals?

    The first step in planning for long-term goals is actually determining how much you spend on short-term expenses. Once you ... Read Answer >>
  2. What is a good debt ratio, and what is a bad debt ratio?

    Learn about the factors that influence how investors and lenders evaluate the debt ratio for a company and why the answer ... Read Answer >>
  3. What is the 50/20/30 budget rule?

    Learn about Elizabeth Warren's 50/30/20 budget rule, a simple and effective plan for personal money management and wealth ... Read Answer >>
  4. Can working capital be depreciated?

    Learn the difference between expensing and depreciation for current and long-term assets, and how working capital can be ... Read Answer >>
  5. Do working capital funds expire?

    Find out how and why a company's working capital can change over time, though the fund does not actually expire, and how ... Read Answer >>
  6. How much working capital does a small business need?

    Learn about the three primary factors that determine how much working capital is needed by a small business, including business ... Read Answer >>
Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center