Incredibly grateful to have recently started earning my own money for the first time. Financial independence is such a common goal among us all (understandably so). I’ve also started learning a lot about investing, budgeting, and economics in general (the course I’m doing has micro and macro economics).
A trend I’ve noticed when I speak to people about finance is that everyone is desperately trying to make more money (not everyone, but quite a substantial amount). It almost doesn’t matter how much you have at the moment, our brains are just wired to try and make more. I’m not saying that it’s a good or bad thing, it’s just an observation.
In today’s post, I’d like to look at the psychology of economics, why we never seem to have enough, how I personally budget my income, on the shortness of life and why we should strive to be more generous.
The psychology of economics
Economic theories base their models off the assumption that people and organisations are rational. As a person myself, I can attest to the fact that we’re mostly impulsive, short-sighted and incredibly irrational.
Behavioural economics is a fascinating field of study relating to how people make decisions, based on economic, sociologic and psychological factors. What we need to understand here are a few main points (which all go against rationality):
- We are mostly risk averse / neutral (we fear losing more than our desire want to win)
- We are prone to psychological pricing (we think expensive things are of better quality)
- Nudge theory can easily be used to influence our decision making (where items are placed makes a difference)
- Our preferences are determined based on the options present – the framing effect (we buy things based on all the options available, not just what we need)
I’ve extracted the points above from the Crash Course video. Feel free to watch it for more information on behavioural economics. Let’s look at why we never seem to have enough money.
Another principle of economic theory is that we’re always competing within scarcity. There just isn’t an infinite amount of resources. We have to continuously make decisions that require trade-offs and opportunity costs. Sometimes though, it feels like there’s a lot more than we behave there is.
Linking the concept of scarcity back to human psychology, we are always trying to ensure that we have some kind of safety net. In economics, this is probably having financial wellness and independence. The problem with the human is psyche is that we always think of the worst-case scenario. We save money planning for disasters (rightfully so, given what Covid has taught us).
But does it reach a point where our safety net starts becoming a little suffocating? Where we start planning for the future like we’ll live forever? Why does it seem like we never have enough money? Why do always crave more money? What’s the point of having all this ‘stuff’?
I’m not answering those questions, but I just thought it would be some useful reflection points. Let’s talk a little more about effectively budgeting (as a young adult).
Living away from your parents/family teaches you a lot about how to be financially independent (given you’re not just dumped with a large allowance every month). What I’ve learned over the past few years is a way to balance my fixed expenses, operating costs and savings (speaking from a point of privilege).
The key here is to use percentages, as everyone has an incredibly unique financial model. We have similar types of expenses, but the values differ significantly based on our lifestyle and status.
First thing’s first, I’d recommend you download an app. I’m not trying to promote anything specific here, but you can find a number of really useful ones on your app store. Just search ‘Budgeting app’. Start tracking your income and expenses a little more carefully, not to become obsessive over it, but to get an understanding of what’s going on.
- Download a money budgeting app
- Put in your income and expenses (fixed and general) over the month
- Set out a specific % to save / invest
- Set out a specific % to donate
- Use the remainder to enjoy yourself / treat others
When you have that awareness of the trends you generally follow, set a certain % every month for savings, investments or just in case of emergencies. This should obviously be done after your core expenses have been paid out.
After that, carve out a % to spend on charity. This is where your ROI will be immeasurable. It’s how you bring blessings and true wealth into your life. You’ll genuinely start noticing an increase in abundance. The more you give, the more you get.
The last aspect is to use the remainder to enjoy yourself or to treat others. You don’t have to blast it, but you shouldn’t be miserly or stingy either. Be kinder. Give out more tips. Buy more gifts. Indulge a little more in quality, instead of always opting for the cheapest option (within your circumstances).
I’m not trying to tell you how to use your money. I’m merely indicating what has been working for me (in my incredibly short period of earning, haha). If you do have any other suggestions or disagree with anything mentioned, feel free to leave a comment. Let’s look at the last aspect that I’d like to discuss, Memento Mori.
My ethical compass constantly fluctuates between saving money for my future and spending money because I’m not guaranteed a future. I think the key aspect here is to find a right balance. Save enough to have a safety net and spend enough to live your best life.
The overarching theme though is that we’re not taking any of our possessions with us when we pass on. It’s a sobering thought, but one that we need to constantly be reminded of. We behave as if we’re 100% going to make to the next day, yet we are unsure of the next hour, minute and even second.
The lesson that I’m trying to incorporate for myself is that we should not be attached to our possessions. Let go more often. Give out things that you don’t use more often. We need to get out of this hording mentality. Where it’s just about more and more and more. Sometimes though, more is less.
Memento Mori: Remember that you too shall pass on someday. Don’t forget that fact. It’s the only thing in life that’s truly guaranteed.