5 Economic Concepts You Can Apply To Your Daily Life To create Better Personal Finance Decisions

Most people might comprehend the field of Economics as revolving around study regarding the financial markets and also the economy of the nation or even the world. While that’s true, the fact is, most of the fundamental concepts in Economics also are also relevant and applicable on a personal level.

Just such as the economy, we have limited resources and limitless wants – and learning how to decide around scarcity forms the essential concept of economics. Applying concepts from Economics, which study how people and markets decide concerning how to allocate resources efficiently, can be instructive in assisting us improve outcomes in our personal finances.

#1 Opportunity Cost

Opportunity cost is the utility you’re missing out by selecting a certain plan of action. Every life decision we make comes with opportunity costs. For example, deciding to further college after graduation would mean forgoing a few years of employment income and also the possible career progression from starting work earlier.

Being aware of opportunity costs can help you make smarter financial decisions instead of just following standard advice. For example, most people will think that purchasing a house is a good financial decision. However, sometimes, renting is a better choice. Being conscious of the opportunity cost is important because you know the potential downsides of creating that choice.

Even a decision to not decide comes with an opportunity cost. If you put off investing since you either have no time for you to achieve this or cannot decide between the different investment strategies, investment products and/or the brokerages to use, you are also paying an expense: your money aren't being invested and taking the advantage of compound interest over time.

#2 Sunk Cost Fallacy

Sometimes we keep things and even ideas that no more serves us because we've already put in a lot into them. This really is sunk cost fallacy.

This is important specifically for investments because when your lifetime circumstances change, you have to re-evaluate your investment strategies and perhaps invest more or divest certain investments. For example, almost everyone has difficulty in surrendering or terminating insurance plans that no longer fit their life circumstances because of the insurance premiums that they have already paid.

#3 Law Of Diminishing Returns

In life, we have a tendency to expect results when we put in effort. However, the law of diminishing returns reminds us that there's the point where investing in more effort does not provide us with the same results as it did earlier.

For example, in the initial stages of investing, investing more capital and knowledge will quickly gain you an edge over your peers. However, once you have mastered the basic principles and also have good financial habits and systems in position, spending double the effort and amount of time in investing might not enable you to get double the investment returns.

In fact, spending a lot of time looking at your investments may be counter-productive if you become obsessively worried.

#4 Marginal Price of Production

Conversely, the marginal cost of production states that past a threshold, it actually is cheaper to create something. This ties in with what the law states of diminishing returns. The brink for the investment knowledge to be productive happens when you've mastered the basic principles and also have set up good financial habits and systems. Past this time, it costs you less when it comes to incremental effort to produce exactly the same results.

While it may be very difficult to begin a side hustle for example a web-based store or freelance work, after you have established yourself, the following sale or contract isn't as difficult to achieve as having your first customer or client. This is actually the marginal cost of production at the office.

#5 Externalities

Externality is the cost or benefit that affects a third party who didn't decide to incur that cost or benefit. In life, it might not be simple to define who's a 3rd party in almost any interaction, but some decisions might have unintended effects.

For example, having good financial habits and systems could have a positive externality of the better relationship with your spouse because you are no longer stressed about finances.