Stop Worrying About the Cost of Living and Money Advice. Worry About Living Well
The math for a more relaxed money life.
The only time I feel I have been able to manage my money was during my foreign exchange.
Most of the time this feeling arises because we feel the association between planning and travel is necessary. It is not our money knowledge that is at stake, but a necessity.
The idea of putting the backpack on our backs without taking a look at the numbers seems extremely dangerous to us.
Furthermore, a trip has some characteristics that make the planning process intuitive. It, in most scenarios, has a well-defined duration, which makes the allocation of resources easy.
If I have $1000 for day-to-day expenses, and I will be traveling for 20 days, it is quite obvious that I actually have $50 to spend every day.
The fear of running out of money on the road makes us look at the numbers more often and these small adjustments come effortlessly.
For example, if I know that I have $50 a day and that today I spent $60, I also know that tomorrow I will need to spend $40 to compensate.
If today I hitchhiked all day and ate at the stalls, I know that I will have a bigger budget for tomorrow and so on.
The trip also forces us to consider the probable unforeseen events, after all, we are in a place that we don’t know that well, so it seems obvious to us to count on a small reserve for all the factors and aspects that we are not able to predict.
The mathematics of the cost of living
Our perceptions of price and value are very subjective. In an attempt to save effort, our minds work with benchmarks. The strategy, however, is not so successful, we are easily manipulated.
This manipulation is called anchoring.
We get used to a certain value, and we use it as a basis to define what is expensive and what is cheap.
The problem is that we can move that anchor around. A $240 t-shirt is very expensive compared to the number of eggs you would buy for breakfast to be healthier, but it is very cheap compared to the price of rent in Los Angeles, USA.
Our income greatly affects our perception of the cost of living
For example, there is a car that today I cannot afford to buy.
But for everything it offers, and when compared to direct competitors, I don’t think it is expensive. This means that as soon as my income allows me, I will probably buy it. If I thought it was expensive, I wouldn’t buy it, even if I could.
But, the whole thing stops there.
Basically, our notion of expensive and cheap is, yes, dictated by our income.
This is not a rule, but our perception of “expensive and cheap” is almost always close to 10%.
For example, for a person whose net income is $10,000/month, $1,000 is within a comfortable zone for “higher” expenses, such as a car installment or a trip. And a $100 dinner is something that doesn’t cause any discomfort.
In the same way, for those who have an income of $1 million a month, buying something worth $100,000 may be trivial. But for those who need to live on $1,000, spending $100 on a pizza is too expensive, but maybe if you buy a used motorcycle for 8 monthly payments, it makes sense.
We can by no means say that this works for everyone. After all, once again, the whole issue is psychological.
I know people who have a lot of money and spend practically nothing. And there are other people who have much less and spend it without any resentment.
So we cannot judge people for their choices, after all, we have a very limited view of other people’s lives.
At the end of the day, everyone is different.
And with this in mind, the idea is to avoid unproductive discussions about something that, in the end, is extremely personal.
In the end, it is up to you to decide what is expensive or not and be happy with your decision, without it getting in the way of your life.