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The History of the LCH
Imagine it’s 1950 and you’re an economist looking to find the truth behind when you should spend and save throughout your life. Traditional personal finance laws state that you should save and invest a percentage of your income each month regardless of your age, but you’re looking to challenge the status quo.
The birth of the Life-Cycle Hypothesis was formulated in the 1950s around the idea that there are peak seasons in your life in which you should spend versus save. To put it simply, you should spend more in youth, maximize savings when you’re middle-aged, and then spend the remaining savings in retirement.
At the time, this was a revolutionary theory that said it was okay to go into debt in your youth at the prospect of a higher income later in life.
My Personal Take
Remember that this is only a theory but it makes sense for the majority of people. Many of us go into debt in our youth (think college) to have a chance at achieving a higher income later in life. However, I don’t necessarily agree with this theory.
As individuals, we should be maximizing our time in the market rather than when it’s convenient for us. An eighteen-year-old beginning to invest will look dramatically different compared to a thirty-three-year-old at retirement age. Compounding will take full advantage when time is on your side. Yes the subscriber of LCH will have more money to invest in general but what does that look like compared to the younger aged person? I don’t have an answer for that but food for thought.
At the end of the day, I personally say to keep saving and investing each paycheck you get. Don’t go into debt for the sake of going into debt.
Have a great week,
Jordan