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Elements:
1. Discover your comparative advantage.
2. Cultivate skills, attitudes, and entrepreneurship that increase productivity and make
your services more valuable to others.
3. Use budgeting to help you spend your money effectively and save regularly.
4. Don’t finance anything for longer than its useful life.
5. Two ways to get more out of your money: Avoid credit card debt and consider
PART 4
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purchasing used items.
6. Begin paying into an emergency or “rainy day” savings account
(?)
every month.
7. Put the power of compound interest to work for you.
8. Diversify—don’t put all your eggs in one basket.
9. Indexed equity mutual funds
(?)
or indexed exchange traded funds (ETFs) can help
you beat the experts without taking excessive risk.
10. Invest in stocks for long-run objectives, but as the need for money approaches, increase
the proportion of bonds or cash.
11. Take steps that will reduce risk when making housing, education, and other investment
decisions.
12. Use insurance to help manage risk.
Introduction
Compared to post-communist countries, the countries of the European Union have much
higher income levels. Still, many people in Western European countries (and even more in
poorer countries) are under financial stress. How can this be? The answer is that financial
insecurity is mainly the result of the choices we make, not the incomes we earn.
If you do not take charge of your finances, they will take charge of you. As Yogi Berra,
the great American philosopher (and baseball star) said, “You’ve got to be very careful if you
don’t know where you are going, because you might not get there.
(90)
” In other words, each of
us needs a plan. If we don’t have one, we may end up where we do not want to be. The twelve
elements in Part 4 form the core of a practical plan. They focus on practical suggestions—
things that you can do immediately—that will help you make better financial decisions
whatever your current age, income level, or background.
Often, personal finance and investment decisions seem totally divorced from the world
of economics. But they are not. As illustrated in Element 1, the principle of comparative
advantage, which explains why countries benefit from specializing in the activities they do
best, also explains why you as an individual can benefit from specialization in things you do
well that are valued highly by others. Similarly, when it comes to building wealth over time,
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entrepreneurship, financial accountability, career planning, and investment in capital
(especially human capital) are as valuable for individuals as they are for countries.
The principles, guidelines, and tools presented here could be divided into four
categories: Elements 1 and 2 focus on how you can earn more; Elements 3 through 6 on how to
get more value from your income; Elements 7 through 10 on earning more from your
investments; and Elements 11 and 12 on management of risk.
The advice outlined here is basic, practical, and understandable. It will not make you a
financial wizard or an instant millionaire, but it will help you avoid major financial errors.
More sophisticated plans are available. However, the search for perfection is often the enemy
of positive action. Individuals who think they don’t have the time or the expertise to develop a
sound financial plan may fail even to apply simple guidelines that will help them avoid major
financial troubles. This section will provide such guidelines.
Life is about choices. Our goal is to enhance your ability to choose options that will
lead to a more successful life. John Morton, one of the United States’ leading economic
educators, states:
I always told my students that life is not a lottery and life is not a zero-sum
game
(?)
. Your success will not take away from anyone else’s success. Your
success depends on your choices, and choices have consequences.
Before examining how you can make better financial choices and get more from the
resources available to you, we want to share a couple of thoughts about the importance of
money and wealth. There is more to a good life than making money. When it comes to
happiness, non-financial assets
(?)
such as a good marriage, family, friends, fulfilling work,
religious convictions, and enjoyable hobbies are far more important than money.
(91)
Thus the
single-minded pursuit of money and wealth makes no sense.
At the same time, however, there is nothing unseemly about the desire for more wealth.
This desire is not limited to those who are only interested in their personal welfare, narrowly
defined. For example, Mother Teresa would have liked more wealth so that she could have
done more to help the poor. Many people would like more wealth so they can donate more to
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religious, cultural, and charitable organizations, or do more to help elderly parents. No matter
what our objectives in life, they are easier to achieve if we have less debt and more wealth.
Thus, all of us have an incentive to improve our financial decision-making.
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