Question

The Smith family would rather spend their money on luxuries now than put it in a retirement account. This preference describes their ____________ rate.

Answer 1

The Smith family's preference for spending on current luxuries over retirement savings is indicative of a high time preference rate, a concept in financial decision-making that reflects how much value individuals place on present consumption compared to future savings.

Step-by-step explanation:

The preference described by the Smith family opting to spend money on luxuries now rather than saving for retirement is their time preference rate. This is a concept in finance and economics that refers to the relative valuation placed on a good or service at present versus the future. Families like the Smiths, who prefer immediate gratification over future savings, have a high time preference rate. They choose to take advantage of the enjoyment that comes from spending now instead of accumulating wealth for later years. This behavior contrasts with that of individuals who would rather save more today to secure a financially comfortable retirement, reflecting a low time preference rate.

Overall, time preference rates influence how households determine how much to consume in the present and how much to save for the future. Changes in income, perceived future situations, or the availability of programs like Social Security can affect these preferences and the resulting behaviors in terms of saving or spending.

Answer 2

Investing money on luxuries rather than putting your hard earned money in a retirement fund means that the Smith Family have already settled their monthly obligations and debts and probably they already saved a lot on their savings account and even their emergency fund. This also means that the family has more liquid assets to use. It shows their liquidity rate.