Apr 102017
 

To get the most out of our spending we can take advantage of consumer surplus. A consumer surplus occurs when we, as consumers, are willing to pay more for something than the actual market price. For example, I pay about $50/month for parking at work. Since I drive to work everyday, being able to use the parking lot is fairly important to me. Given how essential this privilege is, I would be willing to pay up to $125/month for parking. 🙂

The difference between how much I value the parking space versus how much I actually pay is the consumer surplus, which is $75 in this case. If the cost of parking was over $125/month however, then I would take public transportation instead of driving to work.

In order to increase our perceived wealth and live a richer life, we should try to allocate more of our spending towards products and services that will bring us greater marginal benefit.

Here are a couple of ways to increase our consumer surplus:

  • Practice mindful spending.
    Lots of people buy clothes, exercise equipment, or magazine subscriptions often on impulse. But realize after awhile that they don’t actually use those things very much. We should minimize buying things that won’t give us a consumer surplus. We have to know ourselves and take some time to consider how much utility a product will give us not only at the moment of the purchase, but also in the future.
  • Earn more money.
    The more income we make the more affordable things will be for us, relative to other consumers. A taxi ride to the airport may seem expensive to someone making minimum wage. But the same fare would be pocket change for an engineer making $140,000 a year. My cell phone plan was $40/month 10 years ago. That seemed expensive to me as a student. Today, my cell phone plan is still $40/month. But I would be willing to pay $300/month for it. So my consumer surplus is $260, making it an excellent deal for me.

Consumer Surplus in Everyday Life

Some people complain we have expensive telecommunication services here compared to other countries. This is true, but measured from a consumer surplus perspective the cost of internet and phone services is not that bad. 🙂 Evaluating a product based on what other people are willing to pay for it is natural. But it puts us at risk of buying something not very useful or enjoyable to us. Here’s a joke to prove this point.

Husband: I just bought this bag of dog food for 90% off. I couldn’t pass up such a great deal!
Wife: But we don’t have a dog.

We all have different values and interests. So if we spend money with a higher priority on maximizing consumer surplus then we can enjoy more bargains in life. 🙂

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Random Useless Fact:

Jun 252015
 

Some people may think of me as frugal, but that’s actually not entirely true. For example, I spend a lot of money (over $2,000 every month) on interest payments. 😉 It’s fun to find out how much other people spend on their hobbies. But in the end it’s pointless to judge their behavior because money contains different meaning to different people. This is because our real wealth is time. Money is merely a means to maximize the enjoyment we get out of our time in this world.

This is why some people who make $30,000 a year can live a happier, more fulfilling life than others who make $300,000 a year. The income gap between the rich and poor gets a lot of attention, but from a broader perspective most people have roughly the same amount of real wealth in this world, which is measured in years, not dollars. The truly unfortunate are those who are so poor that all they have is money, lol. If all my financial assets disappeared overnight I’d be fairly upset. But if I knew I only had a few more months to live I’d be devastated. 😱 I don’t blame Walter White for what he did. Dire times call for extreme measures.

So if our goal is to enjoy life to its fullest using our limited financial resources then we simply have to allocate the right amount of money for each block of time we spend living. This means if we watch more than 10 hours of live sports a week then spending $3,000 on a new 60 inch 4K Ultra HD LED TV is totally justified. 😀 After seeing a football or soccer match in 3840 x 2160 resolution there is no going back. 😉 But on the other hand if we use those 10 hours a week to play PC games then we should spend $3,000 on a new kick-ass gaming computer instead. 🙂 The point is to choose what our interests, passions, and values are in life, and spend our money with the purpose to maximize our happiness in mind. This way, we’re less likely to second guess ourselves and regret our purchases.

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Dec 052014
 

Americans VS Canadians on Household Debt

Consumers love to spend money. And around this time of the year big spenders tend to have a whole lot of purse-onality. 😀 A report from the newyorkfed.org shows that Americans have a total of $11.7 trillion of household debt. Roughly 74% of that is mortgage debt. That’s aboot $37,000 of total debt for every man, woman, and child in the U.S.

Meanwhile, a recent report from the Equifax credit bureau reveals that Canadians now carry a total of $1.5 trillion of debt. This is 7.4% more than a year ago. And it works out to be roughly $43,200 per capita. But not to worry because if we remove the mortgage portion, then the total amount of debt has only increased 2.7% from 2013. This is actually quite sustainable, because if the inflation rate is around 2.7% and our debt increases by the same amount then the real value of our debt wouldn’t have gone up at all. 😉

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It looks like Canadians are 17% more indebted than Americans. Sorry 😐 But stable growth of household debt isn’t necessarily a bad thing. In fact, it’s what’s keeping the Canadian economy competitive. Canadians have to stimulate the economy by consumer borrowing and spending. Low interest rates have encouraged people to do just that. Auto loans showed the most significant increase, at 6.8% year-over-year. This is great news for everyone! Drivers can own new cars with affordable financing. Dealers are making more money from selling more cars. The manufacturing sector is firing on all cylinders. And total economic activity increases across the country. 😉 I don’t see any problems with this picture.

A devil’s advocate may suggest that borrowing money to buy expensive cars and speculate in the hot real estate market may not be such a smart idea. But let’s not forget that personal finance is relative. Despite the increase in debt, the delinquency rate — (bills more than 90 days past due) — remains on a downward trend and now stands at just 1.1% of all loans in Canada, Equifax said. In other words people are better off with their debts today than when they had less debt in previous years. That’s because the cost of debt is what determine’s our ability to pay it back. For example I would much rather owe a bank $100 with a 2% interest rate, than owe $80 with a 10% interest rate. Assuming these loans are amortized over many years, the latter loan, despite being a lesser amount, will end up costing me more money. 😕

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