Personal Finance is About Value Tradeoffs

One of the most basic principles of economics is that people make trade-offs. We trade time for money, freedom for security, and often style for substance — or visa versa. Often, what we get out of life depends on what we’re willing to trade for. Below, we’ll look at a collection of trade-offs that are common considerations for most consumers.

Note that, of course, it’s often possible to achieve both of the values that are sometimes traded off for each other. They’re listed below only because they’re often pitted against each other — not because they always are done so.

• Debt vs. Freedom. Sometimes debt is necessary for us to achieve things that are good in the long run, but we can’t currently afford out of pocket. For example, a home, an advanced degree, or often even a car. The problem with debt is that it often chains us to certain possessions and assets.

• Security vs. Comfort. Money spent on security is money that could be spent on more immediate desires and luxuries. For example, spending a thousand dollars for a diesel generator is probably not going to be as comfortable as spending the money on a new TV. The same goes with insurance, an emergency fund, and monthly savings. Planning for the future requires sacrificing a little of the present.

• Education vs. “Coasting”. Out of all the trade-offs made in personal finance, this one is probably the most damaging and consistently poor trade off. Many consumers — if not most — choose to coast through their finances without trying to get a systematic financial education. It’s hard work learning how interest rates work, how mortgages work, what the right IRA might be, what live silver prices are, how to diversify a portfolio — but in the long run, learning these and similar topics is absolutely crucial to predictable financial success.

• Short-Term vs. Long-Term. Of all the trade offs made in personal finance, this is the big one — short term versus long term. Should you pay off your car quicker or save for retirement? Buy term or whole life insurance? Get a grad degree, or make do with your current income and education? These questions honestly have no single universal answer, and really depend on the financial values of the person in question.

In the end, understanding economics is essential to learning to master personal finance. The more you master, the more prepared you’ll be for whatever financial situation comes your way.