Personal economics is centered around tradeoffs and opportunity costs.
When you go to the farmers market, you voluntarily exchange one scarce resource (money) for produce, another scarce resource. The seller is valuing his labor and capital for the agreed upon price. Your trade-off of dollars for produce necessarily means you have to forgo other opportunities competing for the same dollars.
You obtain something you value, (produce), and the seller receives something he values, (money). Both sides benefit, so this is called a positive-sum exchange.
WHY POLITICIANS SEEK TO DIVIDE
Everyone is influenced to some degree by politics. Unfortunately, most of the day-to-day political discourse drowns out positive-sum games in favor of zero-sum games. Instead of focusing on growing wealth, politicians concentrate on dividing up wealth among different groups.
Trying to pit generations against each other is a central theme today in government economic and tax policies. One reason is the wide differences among the generations in wealth terms.
Baby Boomers (born 1946-64) own about 52% of total assets in the U.S. followed by Generation X (born 1965-80). These two generations comprise about 42% of the population, but own 80% of all wealth according to Federal Reserve data.
Millennials (born 1981-96) make up 22% of the population but have only 6% of the wealth. Of course, as this group ages, their share of wealth will rise as their incomes increase and debt loads decrease.
The Silent Generation, (born prior to 1946) once held almost 80% of total assets, but today they own about 14%. Every generation’s share naturally rises as income increases and falls as they spend in retirement.
HOW YOUR CHOICES DIFFER FROM OTHERS
Just like the farmers market example above, financial markets operate as positive-sum exchanges. When you sell a stock because you think the price is too high, someone else is on the opposite side of that transaction buying the stock because they believe the price is too low.
Your money choices differ from others and that’s what makes economics work. It’s more than just numbers, it’s human emotions which tend to be both error-prone and predictable.
Nobel laureate Richard Thaler writes in Misbehaving “humans pay attention to factors which are rationally irrelevant.” For instance, we respond to “sale” prices versus regular prices because we perceive greater value when an item is on sale. Since this isn’t rational, it’s a “money misbehavior.”
In its purest sense, money decisions come down to a choice to consume or to save. When you make these choices, focus on what you value most and tune out everything else. Start there.
Related: The One Retirement Question You Must Answer Correctly