Life Cycle Theory

Life Cycle Theory is a concept that describes how individuals manage their finances and consumption over different stages of life. It suggests that people tend to save and spend in a way that smooths out their economic well-being throughout their lives. For example, young individuals may borrow or save less, while middle-aged persons typically earn more and save for retirement. In retirement, they draw on savings. The theory emphasizes planning for long-term financial security, highlighting the importance of saving during working years to support later stages of life when income may decrease.