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A Penny Saved Is Not Just A Penny Earned - My Two Cents' Worth

I am not criticizing the wise old adage, "A Penny Saved is a Penny Earned."  What I want to point out is the way we look at the mathematics of it; the value...  A penny saved has two cents of value; excluding interest.  The lecture about opportunity costs comes to mind as I write this.  Opportunity cost is the value you gain or lose when investing in one thing over another;  for instance, the difference between the risk of a stock versus a guaranteed interest rate over a specified time.  If a penny is saved, it is not spent; ergo, you have two cents value.  If you invest that penny, you spent it (temporarily) and its value may increase by a percentage less than 100 percent.  You do not have two cents at this time.  Only when you sell the asset or convert it to something more valuable, this is when it comes back to you as more than one cent, and hopefully more than 2 cents if you invested wisely.  The trick to this example is to create value in everything.  When you purchase something it must bring you more value in terms of time or convenience than its initial cost; if it doesn't bring that value, don't spend it.

Making your money work for you is a fine art.  You must spend wisely by using the opportunity cost value method.  Carefully study the costs and the gains you will achieve when spending.  Once you analyze every expenditure, you will create more value through increasing productivity while saving valuable assets for more productive use.

Even applying this method to your personal life can create financial gains.  My household budget is carefully analyzed to give the greatest value at the least cost to maximize its value to me in terms of practicality and usefulness.  I do not buy anything impulsively; it must serve a purpose and increase my productivity in some novel way; if not, I do not purchase it, or I look for substitute products that will suffice.  I will buy a tool that can help me to fix something as long as it saves me in the total cost of the repair; if not, I will pay someone to do it for me because my time is also valuable, and I have to calculate my time in the opportunity cost.  You have to ask yourself, "What is my time worth?"  Some people spend hours searching for sales on minor purchases like clothing; what are those hours worth in terms of your time?  If you spend 2 hours saving $20 on clothing and enjoy shopping, then the time is well spent.  If you needed to get things done that are more valuable than the savings, then you lost value while shopping  because of opportunity cost.  If you drive many miles to shop, you have to calculate the driving costs into the equation as well.  My advice is to organize your time to do all of your shopping in an area to spread the cost of shopping over a larger group of purchases; managing your personal life like a business for efficiency.  Wandering a mall is actually a waste of time and your resources unless you are just simply out spending time with your loved ones.

The hard part of personal budget cost analysis is valuation of your time versus spending quality time with your loved ones.  How can you place a value on love and family?  Frankly, you cannot.  Family and love are priceless, so don't get caught up in over-analyzing your time; just keep all things in perspective and aim for value creation.

Value is interpreted differently by every individual, so make every attempt to create value in your life because it will increase the value for those around you.

Tuesday, January 5, 2016

By Bill Roberts