WHEN I TAUGHT economics, I would present students with the financial misunderstandings that people often have—and which the study of economics can help them avoid. Examples? Here are five widespread misconceptions:
Mistake No. 1: The rarer something is, the more valuable it is. Economics really doesn’t care about rare things—meaning those things that are few in number. Instead, economics deals with scarce things, which are things for which there’s greater demand than current ways to fulfill that demand.
Why does this matter? People get tricked all the time into buying things because there aren’t many of them or because they may not be around tomorrow. How often is your interest piqued by the phrases “limited offer” or “for a limited time”? The items involved may indeed be rare. But for them to be scarce, you need to actually want them. Do you? Or have the marketers prompted you to feel a false sense of urgency for something you don’t really desire?
Mistake No. 2: Comparing choices is about comparing benefits. There’s a reason it’s called cost/benefit analysis. You need to consider not just the benefits of each choice, but also the costs. Everything has a cost—including not only the initial price and any ongoing expense, but also the lost benefit from not opting for the other choice.
Mistake No. 3: You borrow from others. When I ask students who they borrow from when they charge something to a credit card, most will say “the bank.” But the right answer is “your future self.” The debt will have to be repaid by your future self, along with any interest owed. In effect, you’re betting that the money you borrow is worth more to you today than it is to your future self.
Mistake No. 4: Savings are what are left when you don’t spend. When people get money, they look to spend it. If they can’t find anything they immediately want to buy, they hold on to it. This makes saving money seem like the last choice, the fallback option after looking at all the shiny objects currently on offer.
A better way to think about savings: View them as future spending. Do I want to spend now or delay spending until later, when—thanks to prudent investing—the money might have more buying power? By framing the issue this way, you also remind yourself that you won’t be the same person in the future—and that your future self will likely have greater financial needs and more expensive tastes.
Mistake No. 5: The goal is always greater wealth. Today, many financial services are about “wealth management.” But in the end, we don’t want more money, but rather greater contentment, satisfaction and even happiness.
Money is merely a tool. To use economic jargon, it’s a factor in the production of your happiness. Figure out your goals and then figure out how money can help you get there. It might even be that earning less money, and perhaps spending more time with family, is what you should really be aiming for.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. His previous articles for HumbleDollar were Spoonful of Advice, Under the Influence and Gaming the System. Jim’s three-book series on teaching behavioral economics and media literacy, Media, Marketing, and Me, will be published in early 2019. Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at YourThirdLife.com.
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