Money Rules to Live By

More Americans are living in debt than ever before and with the weakened economy it is more important than ever to reach and maintain financial stability. Here are a few helpful money rules to live by.

Wants versus Needs

Everyone learned as a young student that your basic needs are food, shelter, and clothing. Just about everything else is a ‘want’. You must make choices about which ‘wants’ to fulfill and how to fulfill them as well as how best to fulfill those basic needs. For example, our food choices can be inexpensive pasta and tap water or steaks and champagne at a restaurant. Our housing options can also range from an inexpensive apartment or house to a multimillion dollar mansion. The point is to never bite off more than you can chew and make sure that what you purchase is something that you can comfortably afford to pay for while still having enough money left over to contribute to your savings account.

Opportunity Cost

Opportunity cost is what we give up in order to gain something else. In every financial choice you make, there is an opportunity cost. There are some wise decisions such as choosing to go to college, the opportunity costs is the lost income that you would have made working during those years you spent going to school. What makes this a wise decision is that once you’ve finished your degree you will likely make more money than you ever would have without the degree.

Equally, there are less wise decisions such as purchasing an item that you do not actually need which has an opportunity costs of what else you could have done with the money such as investing it or putting it in a savings account.

Understanding the logic with opportunity costs will better help you weight purchasing decisions and will help you make the right economic decisions.

Sunk Costs

A “sunk cost” is an expense that has already been incurred and that cannot be recovered. Man are fooled by “sunk cost fallacy” in which they believe that further investment of money, time or effort will somehow correct the value that has already disappeared. A stock investor is an easy example. Someone who hangs on to a declining stock hoping that the value will rise again. By hanging on to the shares and not selling, even if that means a loss, the investor is giving up the opportunity to invest elsewhere at a profit. Another example of opportunity costs.

Over Extended

If you have found yourself over extended and are in debt, take immediate corrective measures such as downsizing your home, cars, and other expenses. If debt collectors are already calling you, keep an accurate record of all communications and record the calls if you can. If the communications become derogatory or harassing in any way, contact a fair debt lawyer immediately. This type of behavior from debt collectors is illegal and many lawyers will offer their services for free if they believe you have a case.