What people believe they’ll earn tomorrow affects what they spend today.
In macroeconomics, an underlying assumption is the consumption-smoothing motive, which means that people generally want a rather even level of spending over time, rather than periods of high spending alternating with poverty.
That means that a person’s expectations for future income will affect his or her spending today.
For instance, say John is promised a bonus of $5,000 next year. He has it in writing in a legal contract, so there’s no doubt that he will receive this money.
He might wait until he has the money next year to begin spending it. But more likely, his spending this year will also increase compared to what he would have spent if he didn’t know he would get a raise.
This basically means that he will save less money this year. Some of the money that he would have saved for the future, he will instead spend on purchases this year, because he anticipates he’ll have that bonus check next year.
Or consider the opposite scenario. If Susan knows that next year, there’s a high probability she will lose her job, and that her future income will therefore decrease dramatically, she will probably start saving more money this year.
The examples of John and Susan demonstrate the consumption-smoothing motive. Both of them act in ways to even out their spending over the present and the future, based on their current and expected future incomes.
In a person’s finances, there’s a constant trade-off between present and future spending. Any dollar that you make today, you can either spend immediately, or save it to spend in the future (with interest).
Different people will save different percentages of their income, depending on their marginal propensity to save. Saving rates depend on a number of factors, including personal preferences, job situation, family situation, and the society you live in (people in the U.S. generally save a smaller percentage of their income, compared to people in some other countries).
But in general, the consumption-smoothing motive will also have an effect. If you expect your income to change, either for the better or for the worse, in the future, it is likely that you will start either saving less or more in anticipation for that upcoming income change.
One thing to note is that economists can’t measure expected future income directly. They can approximate it, though, by surveying consumers and asking them about their expectations.