A simple and useful piece of personal finance reminder I received recently was to move saved cash from an ordinary savings account to a high yield savings account. Where I am, that instantly changes the interest rate from ~0% interest to ~1.9%.
Of course, a “high yield savings account” is just a fancy name for an account that ensures your money keeps up with inflation. But, if you maintain an emergency fund in your savings account, for example, it is worth finding a savings account that at least ensures you don’t lose money to inflation every year.
Over time, that is worth a lot – literally. :-)
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.