Application Exercise 1k: Consume now or save for the future?
1. This is because the more we save today, the less we can consume (i.e. spend on goods and services) today
from any given level of income. However, savings accumulate and facilitate more spending (i.e. consumption) in the future.
2. By saving more today it effectively means that we are trading off current consumption for future consumption. For example, if I save an additional $1000 today it means that I am forgoing the purchase of $1000 worth of goods and services and effectively trading this off for the purchase of $1000 (or more once interest is factored in) of goods and services in the future.
3. Saving less today will improve current living standards because it enables more of our income to be devoted
current consumption. However, it will necessarily mean that future living standards will be lower (e.g. during a period of time when financial stresses begin to build or upon retirement from the workforce) because we have not accumulated a stockpile of wealth from earlier savings.
4. A person can increase their wealth over time via a number of different avenues. For example, a person can increase their willingness to save a portion of their income and deposit (or invest) the money in a savings account with a banking institution. However, bank deposits represent only one of many examples of (financial) investment. Instead of ‘investing’ the money in a bank account (which earns a relatively low rate of interest), a person might instead decide to invest in an alternative ‘asset’, such as property or shares.
5. This is simply another way of saying that if we consume too much (or save too little) today we effectively forego the opportunity to consume more in the future.