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Last Updated on August 1, 2017

Are You Spending or Investing Your Hard Earned Money?

Are You Spending or Investing Your Hard Earned Money?

According to Australian Millionaire, Tim Gurner, our inclination towards frivolous items such as Avocado Toast are the reason why millenials can’t afford to put a down payment on a home.

As outlandish as this observation may sound, there is some truth to it. I seriously doubt that your decision to eat avocados is going to deter you from ever buying a home. But the act of irresponsible spending certainly will. The future is some far-off, unknown entity, and those of us who like to live in the now tend to indulge instead of invest. And while that instant gratification feels oh so good, eventually it will catch up with us. We need to start planning ahead.

Don’t squander away your hard earned money

We’ve been hearing it over and over since we were children. Our parents would give us a small allowance and tell us, “don’t spend it all in one place.” We may have laughed it off, but they were trying to teach us a very valuable lesson: we need to spend our money wisely.

We have reached an era where adults between the age of 24-35, what used to be ample home-buying age, are not able to afford a home of their own. A number of factors contribute to this issue: Credit standards have become stricter, making it more difficult for people with faulty or no credit at all to get a loan. Student loans are on the rise, burying millenials in crippling debt. Lifestyle changes- people are delaying getting married and having children, no longer prioritizing this as their ultimate goal. Many millenials are not receiving salaries that make them able to afford a home; many of them are living hand to mouth. Individuals in this age group are inclined to move to inner cities, where the act of renting is more prevalent than buying.

Ultimately, you don’t have to save up your money in order to buy a flat or home. If that’s just not your style, then do what makes you happy. But still be aware of your spending habits. Like I said, you work hard for your money. By all means treat yourself, but also consider the time you’ve put into earning that cash. It won’t be instant, but investing in yourself now will pay off big time in the future.

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Avoid these money spending mistakes:

1. Don’t be a sucker for a seemingly “good deal.”

Imagine you’re in the market for a new television set, and you’ve narrowed it down to two choices. Both televisions are priced at $500, but one of them has been marked down from $800. Immediately you conclude that the one that has been marked down would be a better value. This thought process is known as Anchoring Bias. This means that we make decisions based on one piece of information (the anchor). In this case, the discount is the anchor. You don’t know why the store chose to discount this item, and what issues it may have.

I’m sure we’ve all been guilty of naming ourselves, “bargain shopper,” never being able to pass up a good deal or sale. Many of us fall victim to this marketing tactic during the holiday season. Everything is on sale! And since we can’t resist a good sale, we spend money we normally wouldn’t, on items we normally wouldn’t buy. The end result? We just end up with stuff. Stuff we don’t need, and doesn’t bring us any fulfillment. If anything it makes us feel empty, because everything new eventually loses it’s charm.

2. Buying the things we WANT, instead of what we NEED

Do you ever find yourself sifting through your bottomless closet, filled with nearly identical shirts and shoes, only to realize you have “nothing to wear? Shop Therapy make us feel good. But only momentarily. How good will you feel about those items when you realize you can’t pay your bills?

It is exciting to get something new, and in the moment, we believe that this new item will help to shape us into the person we want to be (this jacket makes me look professional, more people will take me seriously). But the truth is, these items won’t change us. And we’re likely to lose interest in them just after a few days.To avoid this dilemma, really consider how much you need an item before you buy it. Don’t buy it on impulse, wait until the next day and consider if you really need it. Chances are you’ll forget about the item.

3. Spending money we don’t have

You just got your first credit card, and your soaring high on the possibilities. You can just buy things without worrying about your account balance. So you buy. You buy until you max out your credit card. So what do you do? You apply for another credit card to support your spending habits. Next thing you know, you’ve racked up $20k in debt with no way to pay it off. Your credit score plummets and your phone is ringing off the hook with debt collectors.

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The money isn’t tangible, so you don’t feel any real loss as you’re spending. Credit cards make spending way too easy, and debt that much easier to fall into. You can easily miscalculate how much you can afford; or worse, go into denial about how much you’re spending.

This is why so many adults are buried in debt. Since they don’t physically see the money leaving their bank accounts, they’ve disassociated the loss that comes with spending.

4. Buying instead of investing

Say that you’re an Instagram star, promoting a vegan lifestyle and the benefits it provides. You could spend $1000 on a new hand bag, OR, you could spend that money on a Nutrition Certification Course. Consider which is more beneficial to you: buying an expensive handbag that you’ve had your eye on, or investing in something that could potentially further your progress in life?

Sure, you’ll get that temporary high from buying that handbag, flaunt it around and be the envy of the town. But as soon as you’ve felt that satisfaction, that handbag no longer benefits you. It’s old news. However, if you spend it on the Nutrition Course, you could be well on your way to expert status on a subject that truly interests you. That is a benefit that will pay off for years to come; well after that ragged old handbag fell apart and became useless.

Never let the instant gratification trump you from investing something more rewardable.

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5. Trying to “buy” a relationship.

Your relationship has been on the rocks for a while, and you’re not really sure how to show them that you care. So you buy them tokens of your affection, showering them with gifts. This may temporarily fix the tension in the relationship, but the core issue is still there.

If your partner is only with you because of what you can offer them materialistically, then you should know it isn’t real. You shouldn’t have to buy your friends or romantic partners with extravagant items. If your partners love for you is determined by how much you spend on them, then they don’t love you for you. They love your money and what it can get them.

You are buying the relationship; an investment that will ultimately end in loss.

6. Opting not to invest in Health Care.

You take great care of your body. You eat right, work out daily, and take all of your vitamins. You feel great! There’s no need for health insurance, your health is just fine. One day on one of your runs through the park, you slip on some mud, fall awkwardly, and fracture your neck. An ambulance picks you up and takes you to the hospital. They perform x-rays, cat-scans, keep you overnight for observation, and provide you with painkillers to alleviate your suffering. When all is said and done, you now owe the hospital just shy of $30k. Your health was in great shape, but you just can’t predict these things. If you had health insurance, you wouldn’t have to worry about these costs on top of your injury. But now you do.

Millenials may feel that they don’t need to waste their money on Health insurance, because they’re still young and still have plenty of energy to spare. Health isn’t the first priority, because time and age is still yet to take a toll on us. But before we know it, our bodies start to give out on us. We eventually will age, sending our energy levels and health on the decline.

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Now, health insurance or not, you need to seek medical attention. And without coverage, your payments will be astronomical. An issue you never would have dealt with if you just sucked it up and made the monthly payments. Maybe you don’t need it now. But someday you will.

Invest in yourself and the future, and the payout will be well worth the sacrifice

When you really break it down and consider what is important, you realize you don’t actually need very much. What do you actually need? Your health, food (if that includes avocado toast so be it), water and shelter (clothing optional, but for the purpose of social norms I suppose we’ll include that as well).

Featured photo credit: Mashable via google.com

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Brian Lee

Chief of Product Management at Lifehack

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The Productivity Paradox: What Is It And How Can We Move Beyond It?

The Productivity Paradox: What Is It And How Can We Move Beyond It?

It’s a depressing adage we’ve all heard time and time again: An increase in technology does not necessarily translate to an increase in productivity.

Put another way by Robert Solow, a Nobel laureate in economics,

“You can see the computer age everywhere but in the productivity statistics.”

In other words, just because our computers are getting faster, that doesn’t mean that that we will have an equivalent leap in productivity. In fact, the opposite may be true!

New York Times writer Matt Richel wrote in an article for the paper back in 2008 that stated, “Statistical and anecdotal evidence mounts that the same technology tools that have led to improvements in productivity can be counterproductive if overused.”

There’s a strange paradox when it comes to productivity. Rather than an exponential curve, our productivity will eventually reach a plateau, even with advances in technology.

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So what does that mean for our personal levels of productivity? And what does this mean for our economy as a whole? Here’s what you should know about the productivity paradox, its causes, and what possible solutions we may have to combat it.

What is the productivity paradox?

There is a discrepancy between the investment in IT growth and the national level of productivity and productive output. The term “productivity paradox” became popularized after being used in the title of a 1993 paper by MIT’s Erik Brynjolfsson, a Professor of Management at the MIT Sloan School of Management, and the Director of the MIT Center for Digital Business.

In his paper, Brynjolfsson argued that while there doesn’t seem to be a direct, measurable correlation between improvements in IT and improvements in output, this might be more of a reflection on how productive output is measured and tracked.[1]

He wrote in his conclusion:

“Intangibles such as better responsiveness to customers and increased coordination with suppliers do not always increase the amount or even intrinsic quality of output, but they do help make sure it arrives at the right time, at the right place, with the right attributes for each customer.

Just as managers look beyond “productivity” for some of the benefits of IT, so must researchers be prepared to look beyond conventional productivity measurement techniques.”

How do we measure productivity anyway?

And this brings up a good point. How exactly is productivity measured?

In the case of the US Bureau of Labor Statistics, productivity gain is measured as the percentage change in gross domestic product per hour of labor.

But other publications such as US Today, argue that this is not the best way to track productivity, and instead use something called Total Factor Productivity (TFP). According to US Today, TFP “examines revenue per employee after subtracting productivity improvements that result from increases in capital assets, under the assumption that an investment in modern plants, equipment and technology automatically improves productivity.”[2]

In other words, this method weighs productivity changes by how much improvement there is since the last time productivity stats were gathered.

But if we can’t even agree on the best way to track productivity, then how can we know for certain if we’ve entered the productivity paradox?

Possible causes of the productivity paradox

Brynjolfsson argued that there are four probable causes for the paradox:

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  • Mis-measurement – The gains are real but our current measures miss them.
  • Redistribution – There are private gains, but they come at the expense of other firms and individuals, leaving little net gain.
  • Time lags – The gains take a long time to show up.
  • Mismanagement – There are no gains because of the unusual difficulties in managing IT or information itself.

There seems to be some evidence to support the mis-measurement theory as shown above. Another promising candidate is the time lag, which is supported by the work of Paul David, an economist at Oxford University.

According to an article in The Economist, his research has shown that productivity growth did not accelerate until 40 years after the introduction of electric power in the early 1880s.[3] This was partly because it took until 1920 for at least half of American industrial machinery to be powered by electricity.”

Therefore, he argues, we won’t see major leaps in productivity until both the US and major global powers have all reached at least a 50% penetration rate for computer use. The US only hit that mark a decade ago, and many other countries are far behind that level of growth.

The paradox and the recession

The productivity paradox has another effect on the recession economy. According to Neil Irwin,[4]

“Sky-high productivity has meant that business output has barely declined, making it less necessary to hire back laid-off workers…businesses are producing only 3 percent fewer goods and services than they were at the end of 2007, yet Americans are working nearly 10 percent fewer hours because of a mix of layoffs and cutbacks in the workweek.”

This means that more and more companies are trying to do less with more, and that means squeezing two or three people’s worth of work from a single employee in some cases.

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According to Irwin, “workers, frightened for their job security, squeezed more productivity out of every hour [in 2010].”

Looking forward

A recent article on Slate puts it all into perspective with one succinct observation:

“Perhaps the Internet is just not as revolutionary as we think it is. Sure, people might derive endless pleasure from it—its tendency to improve people’s quality of life is undeniable. And sure, it might have revolutionized how we find, buy, and sell goods and services. But that still does not necessarily mean it is as transformative of an economy as, say, railroads were.”

Still, Brynjolfsson argues that mismeasurement of productivity can really skew the results of people studying the paradox, perhaps more than any other factor.

“Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we’re not listening to less music. There’s more music consumed than before.

On paper, the way GDP is calculated, the music industry is disappearing, but in reality it’s not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music.”

Perhaps the paradox isn’t a death sentence for our productivity after all. Only time (and perhaps improved measuring techniques) will tell.

Featured photo credit: Pexels via pexels.com

Reference

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