Personal finance: Life cycle aproach - Essay Example

PERSONAL FINANCE: LIFE CYCLE APPROACH Task: Personal Finance: Life Cycle Approach Life Cycle model presents critical concepts that aid in explaining consumer spending and saving modes. Understanding consumers’ purchase patterns helps the business in developing effective strategies that ensure maximum utilization and exploration of the target group. It is also a tool explaining consumers’ patterns, which are crucial in financial budgeting. Knowledge of the patterns associated customers helps the business in avoiding unviable investments (Shaw & Schaubroeck 2003).

It makes a company offer services that attracts spending when the customer is at the spending stage and navigate together with the customer’s need in future. However, understanding customers’ habit may be challenging since auxiliary issues adjusts such patterns. Therefore, this script examines the life cycle approach and its usefulness when understanding consumer patterns. Furthermore, it deduces the lessons arising from such patterns. Life cycle approach centers on personal spending and savings in an individual’s livelihood.

Customers present dynamic habits influenced by the preferences at each level of life. Normally, personal finances are low at young age; however, they increase with career’s achievement and drop with retirement. Although deviations may occur, consumption responds to forces emanating from such variants. Indeed, consumption may fail to vary with transient changes in earnings but contemporary preferences and future expectations define habits (Gitman, Joehnk, & Billingsley 2011). Consequently, individuals at young stages exude high borrowing rates tagged against their future incomes to counterbalance debt and minimize the fissure between utilization and earnings.

Additionally, the group exudes heterogeneous spending patterns. As such, a young group seizes few liquid assets since it tries to become stable. At this stage, the customer understands the need for saving; however, low income and distorted priorities fails to favor the practice. A common perception is that the consumer pushes the idea of saving into future levels, which he/she associates with income rise. The life cycle ideology indicates that excessive spending comparative to the incomes of young people is steadily changing into savings as earnings rise with age.

This means that a substantial amount of savings accrues at the latter half of the working life as persons expect to retire (Shaw & Schaubroeck 2003). At the middle age, consumers accumulate wealth and reimburse debts. The stage is associated with pronounced income growth and consumers are aggressively involved in investment and saving schemes. The life cycle approach indicates that households at this level repay while borrowing from savings to address expected decline during retirement. According to Gitman, Joehnk, & Billingsley (2011), in the middle age stage, consumers prioritize durable expenditures while liquid assets attract little attention.

Importantly, individuals base decisions on incidences that are certain. Since income is variable or uncertain, individuals tend to prepare themselves for crisis by accruing properties or by borrowing to correct income fluctuations. According to Shaw & Schaubroeck (2003), the amount of earnings saved presently is dependent on the anticipated lifetime non-outlay pattern. For instance, individuals who are certain that their incomes will augment considerably in future may sensibly fail to hoard for retirements until 25 years prior to retirement.

Nevertheless, insecurity in future earnings and retreat times fuels early savings. Importantly, the late age is manly an expenditure stage; although individuals have retired, they constantly source incomes from earlier investments. Characters present low saving habits at this stage. Indeed, spending at late ages is uniform and organized (Gitman, Joehnk, & Billingsley 2011). Lessons from Life Cycle Spending and Saving Habits Life Cycle schemes offer a clear knowledge of the probable consumer patterns.

The scheme explains successfully how investments change over the life phases. The model reveals that spending and savings vary considerably in different stages of life. Events and priorities at each stage define the amount of expenditures and savings at each level (Gitman, Joehnk, & Billingsley 2011). Therefore, an effectual accounting arrangement should clearly understand variables defining the state. We can construe important lessons for the life cycle patterns. Young ages may present high expenditures; however, spending is mainly on necessities with minimal funds focusing on investments.

The group activities mainly comprises of primary and secondly life events such as; opening fast saving account, managing allowance, getting part-time job and purchasing small basic commodities. Middle age groups present low over-expenditures and the group concentrates on rational long-term investments. Indeed, liquid assets are not fundamental to the group. Indeed, long-term and increased investments are common in the group. Lastly, the old group presents an organized spending pattern. However, the group hardly embraces saving models with their investments defining the expenditure rates.

For instance, an individual with many investments that bring huge returns tend to have higher spending rates (Gitman, Joehnk, & Billingsley 2011). In conclusion, Life Cycles Approaches is an efficient approach that explores consumer spending and saving habits. Accountants can capitalize on the model in establishing effective stratagems for capturing customers. A plan that accounts for the ideas formulated by the model is influential in accessing individual finance. List of References Gitman, L J, Joehnk, M, & Billingsley, R 2011, Personal financial planning, Southwestern Cengage Learning, Ohio Shaw, J.D. & Schaubroeck, J.

2003, "Spending behavior patterns and compensation system preferences: An individual difference perspective", Journal of Managerial Issues, vol. 15, no. 3, pp. 267-282.