Welcome to this week’s edition of our Tuesday Top 5, Econ4U’s weekly tips post to help you manage your money in five easy steps.

If you’ve ever uncovered “found money” and decided to save most of it, you’re already acquainted with the idea of consumption smoothing. It’s the economic principle that people avoid abrupt swings in their standard of living, and income and saving go through cycles over a long period of time. There are many ways to use this theory to support a lifelong financial strategy:

1. Sock away about 90 percent of a windfall. Don’t let the extra money go to your head; you probably have some savings goals that could benefit from a boost. Have you maxed out your Roth IRA, assuming you qualify? Are you working on a down payment on a house? Divide the money among your various priorities, and think about which deserves the lion’s share.
2. Don’t deprive yourself… Especially in the event of an inheritance or work-related bonus, you should enjoy at least part of that money to respect the wishes of close friend or relative or as a reward for a job well done.
3. …but understand the usefulness of delayed gratification. One reason lottery winners so often go broke is that it feels like money will solve all their problems, and that such a large sum will never run out. However, without sound financial planning, neither assumption will be true in the long run.
4. Live like a college student for as long as possible. When your income is the lowest it will ever be, also committing to keeping your standard of living low will make it easier to save as you climb the job ladder and rack up raises. The younger you are when you strike the balance between saving and spending, the bigger your nest egg will be to sustain you when you’re older thanks to the power of compound interest.
5. Yet it’s never too late. Don’t get discouraged if you spent your 20s and 30s paying down college debt and trying to make ends meet for your young family. Income typically peaks around age 50, which puts most households in a great position to play catch-up. Take advantage of this upswing in your financial life-cycle and buckle down on savings when you’re best able to afford it.

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