Tuesday, September 20, 2005

A Way of Thinking

Are some people better savers because of the way they think? How come one person is able to charge $1000 on their credit card without a moment's thought, when another knows that it would be better to stay out of debt?
Maybe it comes down to the logic and reasoning behind the two people. The first is driven by consumption in the present. He "needs" the new Ipod/stereo/tv/etc. He doesn't really need these things, but he wants these items. He can justify his wants by re-naming them as needs. The second person is thinking more about the future. Can he give up this present consumption in order to consume more in the future? (this is also where the time value of money comes into play).

Another thought involves opportunity costs. These costs can be explicit and implicit and involve money, time, or generally something that is given up for something else.
I just wanted to share a quick example. Let's say you get a speeding ticket and you need to go to court. The judge gives you an option: either pay a $500 fine or pay nothing and do ten hours of community service during the week. Which would you do? Many people would opt for the community service because it doesn't involve a cash outflow. But this does involve time, and your time is worth money. If your current salary is $70/hour, wouldn't it make sense to pay the fine? By doing the community service you are giving up $70/hour for ten hours = $700. (You could argue that the externalities, like helping the community, will offset the -$200 loss for doing the community service). This example just offers another way of looking at things.

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