Updated: 10/27/2011 12:14 PM ET|
9 money rules to live by
The good news, of course, is that even with opportunity costs, college is a slam-dunk for most people. The average college graduate makes about 70% more over his or her lifetime than someone who stops with a high school diploma.
If, however, you train for a career that has little demand and wind up making the same amount as a high school grad or trailing huge amounts of student loan debt you can never repay, you may regret the money spent on school and the foregone income.
Understanding that our choices have opportunity costs, and examining what those costs are, should help us make better economic decisions.
5. Why supply and demand rule
For the most part, prices are set by the interaction between supply and demand. If demand for something suddenly shoots up and the available supply of that something doesn't change, then prices will increase. If demand drops or supply increases, prices typically fall.
Here's an example. Say rock star Brittany Amber Tiffany is photographed wearing a cap with the brand name of a Midwestern seed company. Suddenly, all her fans and half the people reading Us magazine decide they, too, need the Midwestern seed company's hat. The farm supply companies that stock these hats figure out a good thing when they see it, and double, then triple, the price. The hat actually worn by Brittany sells for a mint on eBay, earning a notice in mainstream newspapers and furthering the craze.
The Midwestern seed company wants a piece of this action and starts cranking out hats by the ton. Suddenly you can find one in every Target and Wal-Mart. The retailers can no longer command a premium for having a rare item, thanks to the increase in supply. In fact, the hats start seeming a heck of a lot less cool, lowering demand; Target and Wal-Mart slash the price still further to get rid of their unwanted supply.
The interplay of supply and demand is also why one-day gas boycotts don't work. Even if a lot of people participated, overall demand wouldn't change; the boycotters would likely gas up before or after the selected day. Only a big increase in supply or a sustained decline in demand is likely to affect prices.
Supply and demand have a lot to do with our incomes as well. If we have rare skills that are in high demand by employers, we can negotiate higher pay. If, on the other hand, a lot of people can do what we do or the employer need for what we do is limited, our incomes are likely to be stunted.
6. Throw no good money after bad
"Sunk costs" are expenses that have already been incurred and can't be recovered to any appreciable extent. "Sunk cost fallacy" means an irrational belief that a further investment of time, money or effort will somehow resurrect the value that's already disappeared.
A classic example is the investor whose stock has plunged because the prospects of the company have worsened. The investor wouldn't buy the same stock today, yet continues to hang on to the shares rather than sell them and take the loss. The investor may offer the excuse that he or she wants to at least "break even" before selling, but of course the stock market doesn't care about the investor getting the money back, and all the wishing in the world won't bring the stock price back up.
By hanging on to the shares, the investor is giving up the opportunity to invest elsewhere at a profit -- an opportunity cost.
7. The role risk plays
Every human endeavor carries some risk, and investments are no exception. What differs is the amount and type of risk and how you're compensated for taking it.
The 30-day Treasury bill, for example, is one of the "safest" investments around if you're solely concerned with getting back your original investment. The T-bill is backed by the full faith and credit of the U.S. government. But the average return on a 30-day T-bill over the past 80 years is just 3.7%, according to Ibbotson Associates. That's just above the historical 3% inflation rate for the same period; if you factor in taxes, you probably lost money.
Large-company stocks, by contrast, returned an average 10.4% annually during the same period. That handily beats inflation, but as everyone who has invested in the past decade knows, stocks aren't a sure thing. There were plenty of years along the way that the market for large-company stocks dived, and if you invested all your money in a single stock -- say, Enron -- you could have been wiped out. That's called market risk.
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Don't buy new until the old is completely useless. Look for specials in your grocery ad.
Plan your meals and use coupons for your groceries (don't limit yourself to paper ads, use online saving clubs like ever save, saving star, where the hot deals are, couponsuzy and such)
Use your TV time to earn extra income with online surveys. It's a super easy way of getting extra cash (you can use free info places like survey jet, monkey surveys or zee sais to get started). Budget your spending and enjoy the things you have, don't dwell on things you don't have. Bee happy!
By all means I have no idea what this statement #4 wants to achive:
"Opportunity cost," very simply, means what we give up to get something else. In every choice, there's an opportunity cost. If you decide to go to college, for example, you're giving up the income you could have earned by working full-time during those years plus whatever you could have purchased with the money used to attend school."
Go to school, get educated!
Good ideas for budgeting. I like to set up auto savings myself. Also look for group deals that I will actually use.
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