While driving to work this morning it occurred to me that I have only two choices in life. Stop and pay $5 for a latte or drive past the coffee shop and go directly to my broker. I would go in and hand the broker a $5 bill and ask them to invest this at a 7 percent return compounded and in 30 years come back a collect a stack of cash.
When you read a lot of personal financial advice articles, this is the common example given. They are trying to teach you that compound interest and time value of money are powerful financial tools. However, I think there is a different lesson hidden between the lines of these articles. It is the economic term “utility.” The economic definition of utility is a term used by economists to describe the measurement of “usefulness” that a consumer obtains from any good. I speak generally – the coffee brings you more joy then the $5 bill.
Finances have always been about asset allocation. Basically, you have limited resources (i.e. your pay check) and you have to decide how to use that fund for all your wants/needs.
There is a simple math equation to build wealth or save more money (which I think is a goal most people want to obtain). The equation is to spend less then you make. Shocking right? This equation has been true since the beginning of accounting practices. Most people will say “I don’t like math.” The real issue with most personal financial advice is that it assumes your life is a math maximization problem.
I think it is a better use of your energy to develop a good relationship with money. Like any relationship whether it is a spouse, a coworker or a friend, all relationships take work. Knowing that the $5 latte will not send your personal finances off a cliff is reassuring.
I asked a marathon runner once “How did you finish the race?” The reply was simple “I took the first step and another after that.” Rinse and repeat.
Start small, save a little bit every week (the amount could be as little as a $1). Develop your own system after all it is personal to you. Don’t beat yourself because you stopped for that $5 latte, set an obtainable goal and work towards it. The reward for reaching your goal quite possibly could be a $5 latte.
Born in Iowa and raised in several states, Brad Wysoske began working in banking 16 years ago and has been with TS Banking Group for the last three years. He has done several different jobs in banking and is currently a Senior Credit Analyst. Brad is a self-proclaimed economics and numbers nerd, and loves to add his analytical skills to the commercial credit team.
About TS Banking Group: The TS Banking Group is dedicated to the resurgence of community banking. By upholding a community bank management philosophy, TS Banking Group works to expand their organization with a client-focused operating efficiency that allows for the long-term prosperity of community banking. The current acquisition strategy aims to preserve the “local touch” at community banks by enabling the acquired bank to focus their efforts on serving their clients and communities. TS Banking Group is a joint venture between Treynor Bancshares, Inc., and the newly formed bank holding company, TS Contrarian Bancshares, Inc. Headquarters for both holding companies are in Treynor, Iowa. For more information visit tsbg.com. TS Banking Group represents $1 billion in assets.
