Applied Lifecycle Economics Aa Aaron Stevens EC1 EC171 71 25 25 October tober 201 2011 1 Reca Recall: Econom Economics cs Goa oal in n Li Life fe Pi Pigging Ou Out (consump mption) Goofi fing Off Off (lei eisure) e)
Li Life- e-Cycle e Ec Economi onomics The conceptual framework to answer life’s financial questions: Household Composition Life-Cycle Sustainable Standard of Theory of Living Resources Saving and Consumption Annual financial plan Obligations (simple arithmetic) Recall: St Reca Standa ndard d of of Li Livi ving ng Stan St andar dard d of Living is a a meas asure of co consum umpt ption of go goods ds an and d serv ervices ces. Eco Economic mic theo heory ry pro provides vides a a prescript prescriptio ion for for your your econom economic h ic health ealth: • Ma Maximize your standard of living • Smo Smooth h yo your r st stan andard dard of li living g over er time me • Pro Protect ect yo your ur st stan andard dard of f livin living (i (in all states of nature) • Price Price yo your ur passio passions (cost in terms of std. of living) (c
Annua Annual Sugge Suggestions ons Ce Ceteris Paribus "all oth other th thin ings b bein ing e equal" A A ce ceteris paribus assumption i is fund fundamenta ntal to a l to any ny sc scienti ntifi fic i inqui nquiry. • when the inputs change, the outputs will definitely change • we can experiment by changing inputs, and observing the change in outputs
Ap Applied Li Life-Cy Cycle Econom Economics, cs, How ow-To To Ho How does a fi fina nanc ncial (or no non- n-fi fina nanc ncial) deci decisi sion on affect your affect your sustai sustainab able l e lifeti fetime st standa dard o rd of l f living? Wh What kinds of choices can we evaluate? Exa Exampl ple: e: Basi sic c Profi rofile Co Consider a married couple, Tommy 45, and Gi Gina 43, from NJ NJ. To Tommy y ear earns 50, 50,000; 000; Gina a ear earns 25, 25,000. 000. They They hav have e 2 2 ki kids ds, ag ages 12 and 10. They They pay pay $1 $1200/m 200/month h in ren ent. They They hav have e $3000 $3000 in regul egular ar as asset ets. To Tommy y an and d Gina a pl plan an wer ere e pl plan anning g to ret etire e at at age age 62. 62. Wh What’s s their standard of living? Ask ES ESPlanner! To Tommy y an and d Gina’s s family discretionary spending is $21,722 (liv (livin ing s standard o of $ $9,474 p per p person). ). • R Remember, 2 2 ad adults live as cheaply as 1.6 • Ch Children live as cheaply as about 0.4 adults Wh When the kids leave the house, Tommy and Gina will spend $1 $15, 5,159 59 per er year year (still $9, $9,474 474 per er adu adult).
Exa Exampl ple: e: Worki orking ng Longer Longer Co Consider a married couple, Tommy 45, and Gi Gina 43, from NJ NJ. To Tommy y ear earns 50, 50,000; 000; Gina a ear earns 25, 25,000. 000. They They hav have e 2 2 ki kids ds, ag ages 12 and 10. They They pay pay $1 $1200/m 200/month h in ren ent. To Tommy y an and d Gina a pl plan an wer ere e pl plan anning g to ret etire e at at age age 62. 62. Wh What’s s their standard of living? $9 $9,474 per person Wh What if Tommy and Gina work until 65 instead? Wh What’s s their standard of living? $1 $12,522 per person Ho How to interpret? Wo Working 3 years longer raises their living standard by 12 12522 - - 9 9474 2352 2352 = = = = 32 32% 94 9474 10 10170 Exa Exampl ple: e: Waiting ng to o Ta Take ke Soc Social Se Secur urity Be Bene nefits To Tommy y an and d Gina a pl plan an wer ere e pl plan anning g to ret etire e at at age age 62, 62, an and th they ju just st don on’t t want to work until 65... No Now suppose the hey stop working at age 62, 62, but wait to take social se soc securi rity ty bene nefi fits. ts. 11, 11,337 - - 9 9474 18 1863 = = = = 20 20% 94 9474 9474 9474 They They woul uld d still hav have e a a 20 20% higher standard of living, , for every ev ery singl gle e year year f from age 45 to age 100!
Exa Exampl ple: e: Waiting ng to o Ta Take ke Soc Social Se Secur urity Be Bene nefits Si Since the hey will wait to age 70 70 to receive So Social Se Security ben benefi efits, they hey will pay pay for r thei heir r co consum umpt ption by by spen pendi ding do down thei heir r as asset ets for r the he fi firs rst 8 8 years years of ret retirem remen ent: Wh What About Investing in Mo More Human Ca Capital? Should you go to (stay in) college? How can we do an apples-to-apples analysis?
Wh What You Learned Today • ES ESPlanner ca calculates our sustainable st standa dard o rd of l f living • A A fi financial plan is valid “ce ceteris paribus” • Ta Take on fi financial decisions which raise su sust stainable st standa dard o rd of l f living • Fi Find the “pr price” o of decisions in terms of st standa dard o rd of l f living. Announc Announceme ment nts and nd To o Do Do Rea eadings: • Deb ebt-Free ee U, chapter ers 1-4. . We’ll ll discuss on Th Thur ursday. sday. Homew mework 5: Crea eate e a fi financial plan using ES ESPl Planner er (due e today)
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