Lending Club

Keeping Relapses Short

Mike Smith — Fri, 05 Sep 2008 16:11:02 +0000

When trying to break any bad habit, relapses are likely to come into play. Poor financial habits are no exception. Keeping those relapses short will minimize their impact and keep you on track towards your financial goals.

The truth is that good habits are usually more difficult to keep up than bad ones. One of the side effects of this notion is that an occasional good habit isn’t likely to break a bad one, but an occasional bad habit can easily break a good one. Giving yourself a taste of an “easier” way may be all that it takes to make you want that all the time. As anyone addicted to a bad habit can tell you, even though the habit seems easier at the onset, it usually makes life more difficult in the long run.

By keeping relapses as short as possible, you don’t allow yourself to get used to your old way of doing things. With comfort comes eventual acceptance, which means you might get stuck living with your bad habit. Allowing for small relapses may inspire you to reach your goal, as long as they are kept short. All of your hard work should be rewarded. Ideally you would reward yourself with something other than the habit you’re trying to break. Those trying to get out of credit card debt might try rewarding themselves by investing the money they saved. While not as exciting as a small shopping trip, it shows that joy can be found in other ways. If a shopping trip is the only way for you to feel rewarded, keep it small and try to pay cash.

It’s important to remember that relapses will likely be a part of your transition from a bad habit to a good one. Rather than feeling guilty about it, try to understand that it’s part of the improvement process. Knowing in advance that relapses are to be expected, you can be ready if they do occur and in a strong position to keep them as short as possible.

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Economies of Scale

Mike Smith — Thu, 04 Sep 2008 19:10:43 +0000

Economies of scale occur when inputs get less expensive as you generate more output. More than just within the realm of big business, there are many ways we can use this principle in our own daily lives. Getting more for less is clearly beneficial to your personal finances.

One economy of scale we encounter all the time is the United States Postal Service. For all the criticism the USPS receives, it’s truly an amazing feat that it can transport a letter anywhere within the continental US for a mere 42 cents. Imagine what it would cost you to transport that same letter yourself. More than just transportation costs, all of the overhead – building and vehicle acquisition and maintenance, employee payroll, etc. – must also be paid for. In the case of the postal service, each letter can be transported so inexpensively precisely because of the tremendous volume of mail being delivered.

This phenomenon has likely entered your life in other ways, such as when you buy bulk items at a warehouse club. Larger quantities typically offer a substantially lower unit cost. As long as you use the entire amount of the product before it spoils or expires, you stand to save considerably when buying at a lower unit cost.

Economies of scale can be leveraged in simple ways too, such as by batching bills to reduce overhead. You can also imagine how the due diligence for researching and tracking your investments probably takes as long regardless of the amount in your portfolio. By building your positions, the hours of research and tracking per dollar gain from the investment is sure to go down.

One last point is that bigger isn’t always better. Paying careful attention to unit cost, efficiency of work, and required overhead can all help to illuminate cases where staying small is advantageous. But in many aspects of our lives, exploiting economies of scale can allow significant progress towards reaching our personal finance goals.

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How Important are Finances in Your Life?

Mike Smith — Wed, 03 Sep 2008 15:55:07 +0000

Obviously, there are many things more important in life than money. Spending time with family and friends, enjoying life, staying healthy, and finding fulfillment are a few that come to mind. Those are not the types of things I’m talking about when discussing the importance of finances in your life. In fact, focusing on money makes many such items more achievable. But in the bounds of this discussion I’m talking about the things that prevent us from reaching our full financial potential.

Every dollar we spend indicates a choice and the importance we place on the good or service being purchased. This is true even of our basic needs. Your bank account, investments, and overall net worth could grow more quickly if you didn’t eat, but obviously such a tradeoff would not be wise. It’s after our basic needs (and a few wants) are met that the importance of finances in our lives become clear.

I’m currently in the process of selling my home, so I’ve been looking at other homes in the area for comparison. One of the things I’ve noticed is that most homes are decorated much more lavishly than mine. It’s not that I live with bare walls and no furniture, it’s just that I don’t have every inch of space maxed out with coordinating knickknacks, designer fabrics, and expensive artwork. I was starting to feel bad about that until we began discussing the finances of our sale with my real estate agent. He couldn’t believe how little we owe on our house.

By not spending more money to over-decorate our home, we’ve been able to significantly pay down our mortgage. I’m not suggesting that’s the right course of action for everyone, just that it was more important to us than higher decorating costs. In my mind, overpaying your mortgage versus investing elsewhere is a discussion worthy of debate. Overpaying your mortgage versus spending money on home décor is a no-brainer.

Understanding the importance of finances in your life will help you to set reasonable goals. If you determine that other discretionary spending is more important, that’s okay but it will help you to understand that you won’t reach your financial goals as quickly. Making your finances a top priority will allow you to reach your goals faster, but at the cost of giving up some lower priorities. The importance you place on your finances and alternative uses of your money could make either choice the right one for you. Where do finances rank on your list of priorities?

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