GMR 50: Economics and your Personal Finances
Episode 50
We hear a lot about the economy and how it’s fluctuating and impacting our buying power, but do you really understand how economics is affecting your personal finances? In this episode we discuss certain economic terms that have a significant impact in the way we think and make financial decisions. Having knowledge and insight about these terms will help you better manage your finances.
SHOW NOTES
Economics: The study of what constitutes rational human behavior in the endeavor to fulfill needs and wants given a world with scarce resources.
“There is an infinite amount of choices, but a limited amount of resources.”
Free
It doesn’t exist. Even the brightest economists will tell you, “There’s no such thing as a free lunch,” meaning nothing is entirely free of cost. One speculation of where the phrase originated is when saloons would give free lunch to anyone who bought a beer. They’d serve the men the saltiest foods so they’d end up buying more beer, thus making the meal cost something. Today, the concept isn’t too much different. If you think you’re getting something for free, you’re probably paying for it through hidden costs or costs that are distributed to someone else or society.
0% Interest
Trading up in car when you don’t need to because of the 0% interest appealing offer. Truth: no business can stay in business without making money. One way or another, a car dealership will make money on the car whether you have a 0% loan or not.
Need excellent credit to qualify.
Only cars on the lot qualify.
Shorter term loan and higher payments.
Less negotiating on the price with % percent financing.
Often have to choose between cash rebates or 0% offer.
Electric Vehicles
Low cost energy
Low maintenance cost
High price of car
High price of battery
There will be a break even in 2020’s
Opportunity Costs
The opportunity to do one thing, costs you the opportunity to do something else. A resource can’t be used in two different places.
Education
Money
Relationship
Small Business vs Job
Investing
Etc
Education: Take a job out of high school earning $30K VS go to college, gain higher level of employment with a $50K starting income.
Investing: 401(k) loan, IRA loan….sold as a good easy loan that you pay yourself back with. You lose out on the returns. You also lose out on the pain that causes you to actually change your habits. Most important, you miss out on compound interest.
Example:
$20,000 401k loan… at 10% interest over 30yrs, would’ve been $350,000 if you hadn’t taken it out.
Paying yourself back the 4% interest rate, means you’d have $2,100 at the end of 5yrs… for a total of $22,100.
$22,100 for 25 years… at 10% equals $240,000
Paying off the card, you’d pay $8,000 interest over five years, but you never drain your 401(k). So you pay the bank $8,000 instead of losing $110,000 in earned interest. Plus you maintain the intensity of attacking debt and gain frustration with debt that causes you to never go into debt again.