Compare purchases to put them in context

We think of money differently depending on the context. For example, we may fight for a three hundred dollar discount when buying a new car. But, the same discount when buying a house would feel ridiculous. It is still the same three hundred dollars, isn’t it?

The downside of this approach is that we may be biased toward making certain kinds of investments over others. And, one tool I’ve begun to find helpful is to compare purchases to put them in context.

Let’s imagine you want to spend $100 on a hobby. It is tempting to think you’re rationally evaluating the cost/benefit of the $100. But, we’re not rationally evaluating anything – instead, we have a certain dollar amount threshold tagged to hobbies. So, I begin asking myself – what are other areas where I’m spending $100 or more? Let’s say I’ve got a vacation coming that’s got a budget of $1000. How would I think about adding $100 to the vacation with a new, cool add on? How much does that compare with the added benefit from the hobby?

Or, what about that gadget you’re considering buying?

After two or three such comparisons, it becomes obvious as to how much you value the expense you’re considering. In my case, for example, I found myself biased against making a couple of expenses that had some short term hassle and longer term benefit. I also realized I had a bias against annual subscriptions over one time payments.

My goal with expenses is to do so consciously. And, comparing purchases helps with that.

I hope it helps you too.

Inflows and Outflows

Finance, both in business and our personal lives, can both be complex. Debt, equity, valuations, EBITDA, are just a small sample of the kinds of terms involved. However, things become much simpler when we think of finance in inflows and outflows.

In personal finance, if our earning (inflows) is greater than our spending (outflows), all is well. The bigger the difference between inflows and outflows, the better things are. The same applies with revenues and costs in business.

This extends to other contexts as well. For example, businesses succeed when customers acquisition is greater than customer churn. And, sports like soccer have goals scored (inflows) and goals conceded (outflows). However, soccer coaches can spend all their time optimizing for average distance run and average number of passes. Managing by complexity and proxy metrics is an easy trap to fall into.

So, every once a while, it is worth taking a few minutes to look at the big picture. For our finances, it could just be a few minutes every week to understand how we’re spending relative to how much we earn. As long as that difference is positive, things are good. Of course, we should then ask ourselves about how we can save and invest more.

But, the main thing in business and life is to keep focus on inflows and outflows. And, our job is to keep the main thing the main thing.

The Personal Finance Learnographic

First up, the news – We, the Learnographics team, are back with a new learnographic. A learnographic, as you might have guessed, is a synthesis of learnings from a book (or a couple of books ona  topic). In the spirit of starting with “why,” I’d like to share our thesis on learnographics –

We believe that our progress as a species occurs when we find, build and share great ideas. We also believe in the power of learning, reflecting, and sharing ideas in living happy lives. Books are a big source of learning and ideas and we’ve embarked on a mission to spread ideas from our favourite books.

After our first learnographic on willpower last year, we took a bit of a break as we thought about how we wanted to make this process sustainable. Our promise for this year is release 4 learnographics by the end of the year – 2 in the first half and 2 in the second. Producing these is a real labor of love – it involves us reading a bunch of books, synthesizing them, picking a book or two that we think would make for an interesting topic, illustrating them so they are easy to follow, and then sharing them with you.

We picked personal finance as it is a topic that we believe ought to get all the attention it can get. In this case, the learnographic is a synthesis of 6 books, 3 interviews, and 1 blog post.

We really hope you find it useful. Please click on the image below to see the full learnographic.


And, if you like it, please do share and spread the love. :)