Permanent income hypothesis
The permanent income hypothesis is like having a piggy bank to help you save money. Just like a piggy bank, people save money for the future by setting aside a part of their income or allowance. But, instead of saving all the money they receive, people only save a portion of the money they expect to earn in the future.
It works like this: imagine that you have a friend who always has $20 in their piggy bank. Your friend always saves $2 from their allowance each week. You notice that some weeks they put more money into their piggy bank than other weeks. However, your friend always keeps a consistent amount in their piggy bank—that is their permanent income.
In other words, temporary changes in their income affect how much money they save each week but not the total amount they eventually save. People save based on their assumption of how much money they will earn over the long term, not just what they earned last week.
This hypothesis suggests that people make financial decisions based on their expected future income rather than their current income. People do this to avoid running out of money in the future or to accumulate wealth that can be used later. So, if a person expects to earn more money in the future, they might decide to save more money now to prepare for it.
So, the permanent income hypothesis is a way of looking at how people save their money by analyzing their habits over time. It helps us understand how people make financial decisions and how they plan for the future.
It works like this: imagine that you have a friend who always has $20 in their piggy bank. Your friend always saves $2 from their allowance each week. You notice that some weeks they put more money into their piggy bank than other weeks. However, your friend always keeps a consistent amount in their piggy bank—that is their permanent income.
In other words, temporary changes in their income affect how much money they save each week but not the total amount they eventually save. People save based on their assumption of how much money they will earn over the long term, not just what they earned last week.
This hypothesis suggests that people make financial decisions based on their expected future income rather than their current income. People do this to avoid running out of money in the future or to accumulate wealth that can be used later. So, if a person expects to earn more money in the future, they might decide to save more money now to prepare for it.
So, the permanent income hypothesis is a way of looking at how people save their money by analyzing their habits over time. It helps us understand how people make financial decisions and how they plan for the future.
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