Consumption Smoothing: Friend Later, Foe Now

An article from Sunday’s Boston Globe (story) got me thinking about the principle of consumption smoothing for the first time since I took Econ 101 about seven years ago. If I remember correctly, it basically states that after reaching a certain age or point in life, the things we need to buy begin to taper off until they reach a constant annual level.

For example, when we first buy a house we need furnishings to go in it and tools to take care of it. As we accumulate these things, however, we won’t need to buy them again. For most people, once the house is paid for and the kids are out of college, our annual living expenses are much less than they once were, and they tend not to fluctuate.

On the flip side, however, is the undeniable truth that as young professionals, our consumption habits are growing, not smoothing. The trick is to keep their growth in check so that it does not outpace our earnings, or the result is debt. (Or more debt, as the case may be).

The reason I wanted to post on this, however, is the motivation this principle SHOULD present to us twenty-somethings to get out of debt now. Our consumption curves are still climbing. Until we buy a home and have kids, we have a lot more spending ahead of us. All the more reason to take the extra money we have now and save it or pay down debt so that we will be in sounder financial shape when it comes time to make the big purchases of our lives.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.