How to Perceive the Real Value of Money

Posted by André Nosalsky :: July 16, 2007 @ 2:06 pm

We spend money on things we don’t need ($5 for a Latte). We buy the most premium option when the normal will do. We think that the bank overdraft and other fees are not that much ($25 for an overdraft fee or a late fee).

To top it off, we pay the minimum payment on our credit cards every month, yet we don’t know the actual loss we are taking when we earn .25% in our savings accounts. We don’t know the real value of money.

How did we lose the real value of money?

There are two things that really changed our perception of money: moneyless society and credit cards. Some time ago, people would take all of their earnings in the form of cash and pay for everything in cash. When they paid for all of their bills and purchases, they knew exactly where their money was going and there was no way for people to get confused about what they could buy with cash in their pockets.

When people stopped using cash and other hard currency, however, they lost their understanding of the value of money. Today, everything is electronic: bill payments, credit cards, debit cards, PayPal are but a few examples.

The other thing that changed people’s perception of money was the credit card. Credit cards in today’s world are sent to just about anyone. A good majority of cardholders do not understand what the credit card is or the value it brings to their lives.

How can you get a true sense of the real value of money?

1. Pay everything in cash for a month. This one will really open your eyes to how much you spend on the small things and on those items that you automatically pay for without thinking.

Pay for everything in cash -- coffee, gasoline, bills and food. You can also take the cash and separate it into different piles to represent how much you’re paying toward each credit card and every other bill. You might also want to purchase money orders to make your bill payments.

The bottom line is to take a break from using electronic payment methods to get a true understanding of where your money is going. Not only will this help you understand the value of a dollar, it will also help you in creating your financial plan.

2. Calculate the real value of your investments. For example, deposit $1,000 in a bank savings account and lend $1,000 through Lending Club at 7%.

After the month is up, compare the interest earned in both accounts. You should have earned 20 cents (assuming .25% return) in your bank account. Assuming the 7% rate in this example, your Lending Club account would have earned $5.82 ($1,000 x 7% / 12 month). It’s easy to see which alternative leaves you in a better position.

3. Convert the money into time. For example, maybe you want to buy the new iPhone. If you are making $20 per hour ($40,000 per year), subtract taxes (assuming 30% tax bracket, it’s now $13.33 per hour), and divide your hourly wage into the cost of the iPhone ($600/$13.33 = approx. 45 hours). Would you give up 45 hours of your life to get an iPhone?

Apply this same method for anything that you want to buy. This technique will not only help you understand the real value of money, but it will also help you control your spending.