Beating Broke

Personal Finance from the Broke Perspective

Money is a Finite Resource

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Perhaps you’ve heard the saying “You can always make more money”, or the one that goes something like “They’re always printing more”. Perhaps you’ve bought into the guru’s advice that if you work extra hard, and save every penny, you can make way more money than you’ve ever dreamed of. If so, there’s a small problem.

Money is a finite resource.

Oklahoma Sunset, Oil Well 2 © by Clinton Steeds

Just like oil, coal, water and a bunch of other natural resources that we recycle and reuse regularly to conserve, money must be conserved.  Because, just like those natural resources, it has a finite limit.  And, until you start treating it that way, it will always have the best of you.

I think the key is in the conservation of money.  Yes, we need money to pay our bills, buy supplies that we need, and even to splurge once in a while.  But, we have to learn to conserve what we have.  Just like a natural resource, we have to learn to use our monetary resources wisely, and in a way that will not deplete the reserves that we have.  Because, at the end of the day, if we deplete our reserves, there might not be any more money to earn.

Many of us take for granted that there will be enough clean water to drink for many lifetimes.  But, if we don’t learn to conserve our water, and keep it clean by using it wisely, there might be a day, in our lifetimes, where there are severe water shortages.  In some parts of the world, that already happens.  If we aren’t careful with our usage of money, we might find ourselves in a situation where more money cannot be earned.  We might lose our jobs, have a health emergency, or just outspend our income, and our ability to earn more money will be outstripped.

My point is that if we continually treat money as an infinite resource that we can always earn more of, we aren’t being careful stewards of that resource.  Yes, you should try and earn more, but you also should stay vigilant in how you’re spending your money so that your lifestyle doesn’t expand to meet that new earning capability.

How do you treat your money?  As an infinite or finite resource?

Isolationism and Stagnation

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Isolationism isn’t a new idea.  At it’s root, it is the idea of being alone.  Isolated.  There have been a few countries that have used Isolationism to cut their country almost completely off from other countries.  China, Japan and North Korea all are examples.  China and Japan have opened up, but North Korea is still cut off from most of the world.  (OT: Did you know that North Korea is technically still at war with us?  An Armistice was signed, but no declarations of the end of the war.)

Given a long enough time as an isolationist country, a stagnation can be reached.  I don’t believe any of the above mentioned countries ever reached that stage.  But, at some point, a country that has no exports and no imports will find an equilibrium of sorts.  The capacity of the manufacturing industry will be reached as will the consumption limits of the people.  When that happens, the economy of those countries will stagnate as well.  The law of supply and demand notes that the supply (and price) of an item can be an important factor in the demand for an item.  The opposite is true as well.  But, if demand is level, there is no need for increased demand and prices are likely to drop.  As the stagnation continues, the country will be forced to open it’s borders to outside trade in order to stimulate the countries economy.

How does all of this relate to personal finance and Beating Broke?

Mo Money Mo ProblemsPeople can be isolationist as well.  We each have a personal economy.  And each of our economies is a bit different.  When we treat our economy with an isolationist view, we too can stagnate.  But, how do we do that?  The most extreme example is to take all of your money and put it in a coffee can and then bury it in the back yard.  Or to take all of your money and stuff it in between the mattress and the boxspring.  That money is isolated from the economies of other people.  And while it isn’t necessarily shrinking (as long as you aren’t buying things), it also isn’t growing at all.

A less extreme example would be that of the person who keeps all of their money in a savings account that pays little interest.  With no growth (interest), your personal economy will eventually reach an equilibrium.  That equilibrium will be signified by the 0 cash flow situation that will occur when you begin spending as much as you make and are unable to add any more to your little lumpy mattress stockpile.  Given enough time, it will actually swing the other way as you find yourself pulling a bill or two out to buy stuff.

But, all of this is fixable.  All you have to do is be open to ways to grow your personal economy.  You can be open to increased imports (interest + wages).  Growing your exports (value of your work) can help grow your imports.  Finding a good savings account to put your savings in will grow your imports (interest).

Don’t let your economy stagnate!  Take the little extra time that it will take to find a better rate for your savings.  Find a way to increase your work output without increasing your hours, or take on overtime or a second job to increase your income . Maybe you can increase your financial knowledge and education with a finance degree.  The basic idea here is that you have to be open to new ideas, new products, and to the value that your economy has to you.

The effect that isolationism can cause to a region/country. Without outside import/export, optimization occurs and stagnation ensues.

Image Credit: Mo Money Mo Problems by greggoconnell, on Flickr

Is Saving Money a Waste of Money

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Save! Be Frugal! A penny saved is a penny earned. There’s a plethora of maxims meant to encourage us all to save our money for a rainy day. To hoard our excess funds so that we can spend them at a later date and enjoy their usage. But, is saving our money a waste of our money?

The most obvious way that saving money could be a waste of money is in lost opportunity cost.  If your money is tied up in some CD or savings account that you don’t have ready access to, what opportunity are you going to miss out on that could make you even more money.  If you can’t take advantage of an opportunity to make money, your savings is wasting those potential profits.

But, that isn’t the real issue.  Potential profits don’t necessarily mean lost profits.  Maybe that opportunity doesn’t perform as expected and you earn less than you would have in the CD or savings accounts?  No, I don’t think that theory holds up.  Sure, you might miss out on a potential profit boon, but I wouldn’t encourage not saving for that purpose.  In fact, having a readily accessible savings could make it easier to take advantage of an opportunity like that.

But, let’s think for a moment about what we do to save money.  The easiest way to do that is to just have it taken directly from your paycheck and into a 401(k) or to set up an automatic transfer from your paycheck to a savings account.  Easy.  A little bit of set up involved, but very little effort thereafter.  That’s hardly a waste of money!  But, let’s look at the opposite side of the spectrum.  You’re pinching your pennies, saving as much as you possibly can and then some.  You don’t want to miss out on an opportunity, or you want to pay your debt off super fast!  You go so far as to start collecting pop cans.  (assuming you live in a state that has a deposit.)  You walk down the street and throw the cans you find into a bag.  Maybe you even hit the parks and poke through the trash cans there.  Every week, you spend several hours looking for cans.

How much is your time worth?  If you’re spending several hours a week for a few bucks worth of cans, are you making a good use of your time?  Isn’t your effort to save a few bucks a waste of potential money doing something else?  Heck, you could deliver pizzas for a few hours a week and make much more than that.  Not to mention the other ways to make extra money.  You can make money selling ebooks, or working some overtime, or consulting, or just about any second job, or make money on twitter, or even *ahem* blogging.  Sure, the cans are an extreme example.  But, one used to put a spotlight on my point.  What saving practices are you employing that are a waste of money?  Which of them are worth your time, effort, and resources?  And which aren’t?

If we are going to attempt to create a super financial situation, we have to make our saving machine as efficient as possible. It doesn’t hurt to question your tactics.  Find the ones that are causing you to waste your money and find a better use of your time.  Not only will it make your money saving efforts more efficient, but I think it will free up some time to do things that you want to do.  Like spend time with your kids, or walk through the park and not look for cans!