Course Overview

  • What is your sustainable standard of living?
  • How much of your income do you need to save each year to smooth out of your standard of living over time?
  • How can you maximize your standard of living?
  • What do you need to do to protect your standard of living?

Every financial, human capital, and demographic choice entails benefits and costs, and your decisions will affect your lifetime standard of living. The life-cycle model provides a framework for making financial decisions along one's life path, and recognizing and valuing the financial aspects of seemingly non-financial decisions. The framework is standard microeconomic theory of household behavior, extended to deal with decision making that occurs over time as well as across times -- good times and bad times.

EC171 is an introduction to applied economics, which applies the life-cycle model to personal economic decisions including spending, saving, and borrowing; matriculation and choosing careers, jobs, and where to live; marrying, having children, and divorcing; retiring, retirement accounts, taking Social Security; and investing in stocks and bonds.

Topics

  • What is your human capital worth? How can you maximize and protect your human capital investment?
  • How much of your income should you consume versus save?
  • Smoothing your living standard through time and across good times and bad.
  • The time value of money and the effects of inflation.
  • Taxes and the impact of taxes on consumption decisions.
  • Should you go to college? What should you study? How to pay for college?
  • Which job to take? Is grad school worth it?
  • Where should you live? Should you buy or rent your housing?
  • Should you get married? have kids? get divorced?
  • Why buy insurance, and how much do you need?
  • How much should you save for retirement? How should that money be invested?
  • What are risk-free and risky investments? Which should you choose?
  • When should you start taking social security?
  • How to draw down your assets in retirement.

Books

Required Personal Life-Cycle Economics, Aaron Stevens, Draft Edition Fall 2013. ISBN 1475292368.
Recommended Spend ‘Til The End, Laurence J. Kotlikoff and Scott Burns, 2010. ISBN 1416548912.
Get a Financial Life, Beth Kobliner, 2009. ISBN 0743264363.
Debt-Free U, Zak Bissonnett, 2010. ISBN 1591842980.

Software

We will use Microsoft Excel (available at all BU computing labs) in class and for several homework assignments. It is recommended that you bring your laptop computer with Excel (or iPad with Numbers) to class. Web-based tools and calculators will be assigned and discussed in class.

Economic Background

Starting with the path-breaking work of Yale's Irving Fisher, economists, including six Nobel Laureates, have spent close to a century developing the life-cycle model of saving and consumption. The life-cycle model provides a real-life framework for making financial decisions along your life’s path, and recognizing and valuing the financial aspects of seemingly non-financial decisions. The shorthand for this framework is life-cycle consumption smoothing, where "smoothing" references the need to spread your economic resources over your lifetime, taking into account that your future is highly uncertain. The framework is standard microeconomic theory of household behavior, extended to deal with decision making that occurs over time as well as across times – good times and bad times.

Every choice you make about education, career, where to live, housing, and family, and investments entails economic benefits and costs. The decisions you make will affect your lifetime standard of living. The emphasis of the course is the development and application of the life-cycle model as the framework for evaluating all of your personal finance decisions and getting the best economic deal in life.

To put it politely, most personal financial advice – whether from trade books, textbooks, television talk show pundits, or professional personal financial advisors – is not substantiated by the body of economic science. There are studies in health care indicating that medical doctors can give bad advice because they believe in the therapy. Similar to surgeons, financial practitioners can give bad advice because of ignorance or potential conflicts of interest.

EC171 is an introduction to applied economics, which applies the life-cycle model to personal economic decisions including spending, saving, and borrowing; matriculation and choosing careers, jobs, and where to live; marrying, having children, and divorcing; retiring, retirement accounts, taking Social Security; and investing in stocks and bonds.

Want more information?

Contact the instructor, Aaron Stevens [azs@bu.edu].


http://people.bu.edu/azs/teaching/ec171/
Updated 8/30/2013