Economic and financial issues impact us on a daily basis and while they can be somewhat snooze-worthy or sound like a whole stream of gobbledygook there are some concepts to understand that can help us manage our money and make smarter more informed financial and more importantly, life decisions.
These are 4 key concepts to learn:
The Law of supply and demand
The concept behind the Law of Demand and Supply is that there is a specific price point where consumers and producers match up. Basically there is a price the purchaser is willing to pay and at which the seller is willing to sell.
Supply and demand can be affected by global shortages, domestic and international political, social, economic and climate related issues which can impact both the supply and demand side of the equation and as a result the price.
Understanding this Law is critical as it is the foundation on which most other economic concepts rest. Being aware of its operation and the levers that can impact it, such as government policies, tariffs, taxes, droughts and political and social unrest, means we can effectively plan our finances to be resilient to what the economy may throw at us.
Similarly, if we don’t value ourselves and the unique skills we bring to the world, why should anyone value us and have demand for what we supply?
Understanding our place in filling that one unique shortage we were born to fill enables us to put a value on what we supply and generate the demand for it at the “price” we deserve.
The concept of scarcity
The concept of scarcity is closely tied to the Law of Demand and Supply. It refers to the fact there are limited resources to meet our unlimited demand.
It encompasses limited economic resources available to the world, for example commodities, raw materials, goods and services and to us personally such as our financial assets and money and our most precious non-renewable resources – our time, our energy and our attention.
While the economic resources are important in that we need money to feed, clothe and shelter ourselves. These are not the most critical to our life satisfaction. The non-renewable ones are those that truly impact how happy we will be.
Understanding scarcity helps us place a relative value on the resources we need. And given that our most scarce are our most valuable, optimizing them is critical.
Spend time on the things that matter most to you. The tasks that energise, challenge and stimulate you are those that will bring the most value for your time.
Spending your energy on positive pursuits, exercise, your loved ones and chasing your dream maximises its utility.
According to Srinivas Rao, the brains behind the Unmistakeable Creative podcast, our attention is the “currency of achievement”, so spend your attention wisely by focusing on pursuits that support your goals for yourself, your life and the world,
Every day we wake up with an empty tank to be filled by where we spend our attention. We can fill our tank with information, experiences and knowledge that fuels more tank capacity, curiosity and enjoyment of life or we can waste it by topping it up with gossip, inane social media scrolling, complaining and other attention vampires that rust our tanks.
Where do you want to spend your most valuable resources?
The Opportunity Cost Dilemma
“Money is all about opportunity cost. Evert time you spend on something, that’s something you can’t spend on something else.” Dan Ariely
It’s all about what you give up by choosing the alternative.
Understanding this concept helps us use all our resources efficiently and strategically to get the most value out of them.
Opportunity cost is not only about the choices we make its also those we don’t make. Choosing not to exercise regularly, keep on top of our financial admin. or seize an opportunity means we forego a benefit we may have had.
The power of compound Interest
Albert Einstein apparently said “Compound Interest is the 8th Wonder of the World. He who understands it, earns it. He who doesn’t, pays it.”
When it comes to our finances, compound interest is earned on our investments when we reinvest the interest we earn and earn more interest on that interest. However it is similarly paid on our debts were we don’t pay the full amount due and the unpaid interest is added to the amount owed and is as a result charged more interest.
From a personal perspective compound interest works for building our knowledge and our relationships.
If we aim to get 1% more knowledgeable or accomplished every day, according to James Clear, author of Atomic Habits we will be 37% more knowledgeable or accomplished by the end of the year.
And the time, attention, interest and effort we put into our relationships compounds to strengthen the trust, build the relationship and grow the love.
Understanding these 4 fundamental economic concepts supports us in getting the most out of all the resources available to us and thereby facilitates us living our best life !
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