Personal finance boils down to recognizing, and acting on, good deals in their proper context. What’s a wise finance decision for one person could easily be a foolish decision for another.
In deciding whether something is a good deal, it’s often useful to quantify its cost in terms of something familiar. While raw amounts like “$500″ do indeed quantify the cost, $500 could mean wildly different things to different people:
- $500 to the average laborer in Indonesia is nearly a year’s salary.
- $500 is a bit over two weeks’ pay to someone at the federal poverty level.
- $500 to a middle-class worker is a few days’ pay.
- $500 to a CEO at a mid-sized company is pocket change.
- $500 to someone with Bill Gates’ wealth is hardly worth picking up if he dropped it, as it would cost him more than that in time to pick up!
It’s the analogies that put the amount of money into context, because everyone’s financial situation is different.
Here are a few useful ways to describe the cost of something in terms other than raw dollar amounts:
- Pocket change. This is an amount of money that can be spent without a whole lot of thought. In context, it will hardly be missed. People can budget for this category of spending, and there needn’t be a whole lot of planning as to how it gets spent.
- A pizza. I find myself using this one quite a bit, for some reason. We don’t eat a whole lot of pizza, but if we give up one here or there in exchange for something else, we cook pasta or grilled cheese that evening instead.
- A nice dinner. A slight upgrade from “a pizza.” We do this less often than pizza. Not something that breaks the bank, but also not something we do every night, either.
- A day’s pay. Now the numbers get a bit bigger — perhaps a few hundred dollars. The cost of a purchase begins to hit home when we realize that I’ll work for a full day to pay for this.
- A mortgage payment. This could also be described as “car payment” or “rent check.” A full month’s worth of either transportation (if you owe) or housing. Certainly not something to be taken lightly, and probably something to give a lot of thought to.
- A paycheck. As we were looking for a larger TV last November, I described the cost of some of the newer models as “more than a paycheck.” These are expenses that almost certainly need to be saved for.
- Two months’ salary. This is the self-serving guideline that the diamond industry puts out for guys to shell out for their fiancee’s engagement ring. We didn’t come anywhere close to that amount.
- A car. Five figures. Something you might buy only a few times in a lifetime.
What other money analogies do you use?