Money by itself doesn’t have any value these days. In pre-modern history, coins were partially made of silver or gold. Today, money is just a piece of paper, gold-less coins, or even less-a few digits on a virtual bank account. Money represents value the value of the things we plan to buy with money.
Today, we don’t even realize how much easier our life is, thanks to money. We don’t have to decide how many strawberries we need to give in exchange for a sheep. Heaven forbid the neighbor doesn’t want to exchange his sheep for strawberries, because that’s the only good you can offer for it.
Modern money has four crucially important characteristics that make it so easy to use, and thus popular.
a) It is general. We can exchange money for strawberries and sheep, and everything else, really.
b) It is divisible. You can break money down to the smallest cent to pay for your product.
c) It is fungible. It doesn’t matter which country you’re in; you can exchange your currency and get the same value of the foreign currency in return. You can go with your $10 to Istanbul and get 47 Turkish liras for it. Same value.
d) It is storable. You don’t need to store a warehouse worth of strawberries for the goat. You can keep your money in a small space, or these days in no place at all, just your computer. Money doesn’t spoil in three days like strawberries do. It will be ready to use even in 100 years (let’s assume we’d still use the same papers and there is no inflation).
Basically, money can be used anytime, anywhere to buy anything. We tend to take this fact for granted today. “Okay, I get it. Money is awesome and all, but why do we have so many problems because of it?” you may ask.
Money has its blessings and curses. On one hand, it is unquestionable that thanks to money, our lives have become much more colorful. We can become doctors, lawyers, and singers thanks to money. We can eat salmon, Indian samosa, or Peruvian chicken. We can do bungee jumping, sleep in a five-star hotel, or get our cat a cat house. The question is-and this is the curse part-which one should we choose?
Even if we had unlimited money and we could buy whatever we wanted, we still have limited time. We have one stomach to fill and one career path to truly master in a lifetime. Each choice we make costs us a hundred other things we choose not to do. This is called the opportunity cost. Just because money can be spent on anything doesn’t mean that we will be able to spend it on everything we want. We need to choose, and thus sacrifice other things. Every choice we make costs us something-another meal, activity, or cat we couldn’t get.
Each time we open our wallet and use our money, we also pay an opportunity cost. Choosing to buy something means also choosing not to buy something, or choosing not to do something (often, not even in the future).
Not many people think about opportunity costs when they spend their money. We don’t weigh that the new phone we don’t need may cost us 10-15 nights out with our friends, a week-long trip somewhere nice, three sheep, or 200lbs of strawberries.
Considering opportunity costs is a crucial part of establishing good spending habits so that we buy the things we value and care about most. We should consider alternatives, especially before making a big purchase. This lack of consideration is the foundation of the bad financial decisions house we are living in.
Neglecting opportunity costs regularly reveals the errors in our thinking. We don’t look at spending money in terms of what one buys today may stop them from being able to buy or do something in the future. This is not a natural way of thinking; it is difficult to take opportunity costs into consideration, and therefore, we don’t do it. This messes up our relationship with money.
Today, our situation is even worse than before because we have much more financial instruments at hand-like loans and credit cards which further cloud our judgment on what future financial effect our current spending will have.
This article aims to help you see the long-term effects of your daily spending clearly, establish better spending habits, and ultimately become happier with what you choose to spend your money on.
