We have discussed the concept of utility and marginal utility from personal fiancé perspective in this article Maximise your lifetime utility.

In essence, the idea is the more you have of something, the less value it has to you. When you are hungry, the first slice of a pizza offers you much more value than the eight slice, your hunger has been satisfied by the six slice already. As we all know, left over pizza is delicious for breakfast the next morning when your hunger has reawakened.

Applying the principal of marginal utility, you would realise each additional dollar you spend at a specific point in time the value/return/happiness decreases. At certain times in your life your life you have a desperate need for money and in other times, you might have too much money. Think of an old person with a lot of savings, but no energy to enjoy it. He would be much better off if he could transfer some of that money to his/her younger self when they still had plenty of energy.

The logical conclusion which is slightly counter-intuitive, or shall we say not in line with traditional wisdom, is that you should not see borrowing and saving as negative or positive. Rather as only a transfer of spending across your lifetime. By borrowing, you are simply spending less in the future to spend more in the present. You should think of saving as spending less in the present to spend more in the future.

To convey the next point, we need to engage in a thought experiment. Assume you know exactly how much money you would make in your lifetime, from wages, to interest earned to inheritance, etc. Calculate your average lifetime income on a set time window, be it monthly.

The average you just calculated is the amount you should spend for each period of your life to maximise your lifetime utility. You are maximising your happiness, when the happiness generated by spending money is equal across your life. No periods of living in poverty, nor are there periods of excessive luxury.

After reading the article on utility, you should agree with the economic principle decreasing marginal utility. Specifically, around the spending pattern of money and impact on your utility. The logical conclusion of this thought experiment, spending the same amount of money in every time window of your life is what will make maximise your lifetime utility.
 

In terms of real estate liquidity risk is defined as the risk that arises when selling a property timely at a fair price. This risk balloons in times of weak real estate demand. These transactions take months to complete in a normal environment.

If it is a high-quality portfolio, the risk is less, especially if the leverage is low. Having low leverage provides the option of synthetic liquidity, by increasing the debt levels to generate cash. You can then use this cash as a bridge finance while they sell the property. This naturally brings other forms of risk.

The thought experiment established the principal, you would agree implementing a principal in actual life normally has some friction. It is not optimal to spend exactly the same amount each day because of the practical nature of our consumption patterns and the different stages of your life. Rather, think of it as a band of spending around your average lifetime income across the various life-stages.
 
For the general man in the street, one can break downs the person’s life into three financial stages:

• Stage one is the growing up and getting educated stage.
• Stage two is the working part of a person’s life,
• Stage three is retirement.

 
If your goal is to get as much as possible from life, maximise your lifetime utility, one optimal strategy would be to maintain the same level of consumption throughout your life. This could imply doing:

• By taking on debt early in life when income is low – Borrow from future self
• Increase savings in prime earning years when income is high – Lend to younger and older self
• Then reduce savings in later life when income is low – Borrow from your younger self

 
Practically, debt you incur when you are young to gain assets from education to durable goods such as a house should be seen as an investment. For example, if you were to purchase a house via a mortgage and pay it off over 20 or 30 years. The benefit of the house will also transfer to you when in retirement, as you will still be able to occupy it or rent it out for income.
Younger self borrowing from middle-aged self to increase living standard of both young and old self. Life cycle wealth theory implies you should be both a borrower and a lender. By being a borrower when you are young and investing in assets such as education and durable assets. You should be a lender when you are in the peak earning years of middle age. This is achieved by using financial instruments, such as checking accounts, mortgages, student loans, and mutual funds.

In terms of real estate liquidity risk is defined as the risk that arises when selling a property timely at a fair price. This risk balloons in times of weak real estate demand. These transactions take months to complete in a normal environment.

If it is a high-quality portfolio, the risk is less, especially if the leverage is low. Having low leverage provides the option of synthetic liquidity, by increasing the debt levels to generate cash. You can then use this cash as a bridge finance while they sell the property. This naturally brings other forms of risk.