I don’t currently have a TV, and I am spending a few minutes of these TV-less days thinking about whether I want to have one again. However, I’m thinking back to when I still had a TV, and a conspicuous ad caught my ear. Yes, my ear. I was cooking, not really watching the screen, cutting veggies, and listening to Captain Picard bark out commands when I heard (paraphrasing), “I just got a new car … and I know I can afford it because it fits my monthly budget.”

Ahhhhhhh! I had to look up from my work, nearly causing an unfortunate carrot-knife-finger-slicing incident.

The ad in question was from a certain car company with a cute animal mascot and is just one in an endless line of examples showing the American marketing machine at work, making (excess) spending so easy—too easy.

We are conditioned from a young age to see costs based on monthly payments. Paying for things monthly has a place in our society and is not always a bad thing. It makes sense for mortgages, utilities, and other expenses that are incurred monthly. However, thinking we can afford something because it fits a monthly budget is at least a contributor to long-term financial stress and at most an absolute drain on our ability to build wealth and maintain financial stability.

Oh, I’ve Been There, Spent That

I have “owned” new cars; I loved them. Got my first one when I was 20, financed by my 30-hour/week grocery store job and my parents’ (co)signatures. It was a four-year loan on a Plymouth, but after just three years I saw a sporty Dodge Shadow and just had to have it. Of course, thanks to my low down payment and depreciation, I was upside down on the Plymouth—owing more than the value of the car.

“We can work with that,” the sales rep told me as he leaned on the soon-to-be mine Shadow and adjusted my sunroof. “What kind of monthly payment can you afford?”

Ah, there it is. They “rolled” my unresolved debt from Car #1 right into the loan for Car #2, added another year to the term at a slightly lower interest rate, and … it fit my monthly budget. The reality was, however, that it was a financial mistake. I couldn’t afford the car—the total cost of the car. Yet I did the same thing not three years later with new Car #3, which was a little more expensive and the loan included a little more debt “rolled” in from the last car.

I found my financial footing a full decade after Car #3, and a big part of getting things together was facing and understanding the cost of those car loan decisions. How bad? Let’s just say it was thousands in interest and depreciation. The worst part was learning that I had paid interest on the debt from Car #1 rolled into my payments on Car #2, and so on. The other worst part was when I came to understand the opportunity cost; the 5-digit actual costs in dollars could have been invested or used for education or saved to buy a future car—IN CASH!

Would a basic personal finance course in high school have helped me avoid this misstep? Who knows for sure, but I know I would have liked the chance to find out.

The Inevitable One-Hand/Other-Hand Analysis

The car payment is likely the biggest-ticket depreciating asset that we tend to cram into our monthly budget rather than looking at whether we can afford the total cost. But there are others like furniture, appliances, electronics, etc.

On one hand: Buying things based on payments gives us the ability to have things now that we can’t afford now.

On the other hand: Buying things based on payments gives us the ability to have things now that we can’t afford now.

The American Monthly Payment Mindset (AMPM—can I trademark that?) extends to mobile phones, insurance, and streaming services, just to name a few. True affordability requires looking beyond the 30-day view.

Tips and Disclaimer(s)

  • Count smaller monthly items as annual expenses. For example, the average American has 4.3 streaming services at an average cost of $17 each. It’s far too easy to say, “Oh, I can sign up for QuickFlix, it’s only $17/month.” Maybe the question should be, “Hmmm…I am spending about $800/year on streaming services. Can I afford that? Can I afford thousands of dollars over five years? What else could I do with part or all of that money?”
  • Analyze a car purchase based on the total cost of various options over a period of years, say seven, which is now the average term for car loans in the US. Compare new and used cars looking at that total number including expected repairs, interest, taxes, and insurance. Send me an email, please. I am happy to help with that process. I’ve crunched the numbers to dust, and I can say that buying a good used car and borrowing as little as possible always wins when it comes to the Best Financial Decision. For me, eliminating car payments from my life has been one of if not the biggest factor in turning my finances in the right direction.
  • Turn the monthly payment mindset into something good—use it for savings. Cut a streaming service and start putting $17/month into an IRA or into a 529 education savings account. Try this savings calculator, watch the money grow.
  • Determine what can be paid annually. My auto and home insurances are discounted by about $75 by paying in full for the year (or six months for auto). That is $75 to pay for something else or to save.
  • If you are a millionaire, buy any car you want, and while you are at it, buy one for a friend.
  • Business tries to make it easier for us to buy, putting the unaffordable within reach. That’s their job, maximizing stockholder wealth and all that. I get it. But our job is to spend less than we make today in order to have a better financial tomorrow.

I am not preaching; I have no right to. I’ve made the mistakes listed in this post—some more than once. I was fortunate to realize that the path I was on was draining my financial stability and my ability to build wealth. I was robbing my future self, the me of today, who has found solid ground but who has also become an expert in the “If I’d only known then…” phenomenon. I’d like to see a TV ad leave us with this thought, “I can afford this car because I sacrificed, saved my money, paid cash, and have no monthly payments.”

Last time I outlined my experience learning and then learning to love economics. Now it’s time for detail and ideas for economics-related discussions in personal finance classes.

Maybe Starting by…

Refreshing yourself on or learning anew these core principals and passing them on to your students and community (another mention here of FAME’s YouTube channel and the webinar I did last fall on the economics-personal finance connection).

I offer each of these along with teaching nuggets and/or “Steveisms” in italics.

This also seems like a good time to mention that as part of my work at FAME, I visit classrooms and organizations (in-person and/or virtually), and I’d love to talk about visiting yours to talk economics and/or personal finance. Email me!

Trade-off and Opportunity Cost: A foundation of economic thought and really the cornerstone of personal finance. Every decision is a choice; every choice has a cost. Accept the cost or make a different decision. Opportunity costs are often not measurable in dollars but still have financial implications, the great example being the cost(s) of our time.

“Who bought something today? You made a trade-off. What was the opportunity cost? What were the non-financial opportunity costs? Who chose to come to school rather than sleep in? What are the costs of education? What are the opportunity costs of not having an education?”

Scarcity: It means that, simply put, there isn’t enough of anything, and that forces us into decisions or trade-offs. Welcome to the basic problem of economics.

A terrific exercise for the classroom is to challenge students to think about resources that they assume are unlimited, then work through situations that prove otherwise, get into what happens to prices, etc. Grains of sand are endless, right? There could never be a shortage, right? Look at this article.

TANSTAAFL: There Ain’t No Such Thing As A Free Lunch. The key is to challenge students to identify and understand costs associated with decisions and think about, “Is free always free? Is free always a deal?” This is a daily challenge for all of us, isn’t it? When a business offers a “FREE” TV with a purchase… Come on, is that TV really FREE? Did that restaurant really give me a “FREE MEAL” or did that coupon actually cost me $50?

I always advised my students to be wary of “FREE”, typically saying something like, “Hold onto your wallet, back away slowly, eye contact optional.” The more serious message being that, once again, everything has a cost. The key is to root out that cost and decide if it’s worth it.

The Circular Flow of the Economy: I admit, this one sounds BORING, but it’s actually very interesting and is perhaps the glue of our economic system. To summarize, everything is connected. The CF (with its lovely diagram for visual learners) shows the relationships between working, earning, and spending, between spending and business vitality, and between business vitality and working, earning, and spending. It matters because it shows us how our role as consumer conflicts with our role as financially responsible citizen/family member/cog in the economic wheel.

Core discussion: Is savings is a withdrawal or an injection? Is savings good or bad for the economy? Take a look for more on injections and withdrawals connected to the CF of the economy.

Inflation and Prices: I don’t like paying $50 to fill my gas tank.  However, economics (with some help from math) shows me that adjusted for inflation, a gallon of gas is hovering right around the cheapest it’s ever been. Economics, and the perspective it provides, reminds me that it’s not a politician or an evil oil company causing me pain when I fill my tank. I’ll use my energy to focus on expenses I can control, on larger environmental concerns, or on the costs (and opportunity costs) of converting to the next major source of energy.

Have some fun with the class and explore prices as they compare to the “Good Old Days” with this inflation calculator. For example, 40 years ago a gallon of gas cost $1.21.  Adjusted for standard inflation it should cost $3.65/gallon today. The average price/gallon in the US now according to AAA?  $3.60. Wow. The overwhelming political/message is that gas is outrageously expensive and it’s <insert name>’s fault. Gas prices are in line with inflation. What’s not? A pound of ground beef cost $1.30 in 1984. Adjusted for inflation it should cost around $3.92 today, but no, it does not. The average price/pound in the US is around $5.20.  Where’s the society-wide, media fueled and politically charged cry for change?!?

Politics and Economics: Economics is my filter. It helps me decide if a policy is good or bad for me or for my community. It can be hard to distinguish between economics and politics but remember this – economics doesn’t benefit from being elected; it is what it is, an honest and objective analytical tool.

Have the class look at almost any political ad from any era, ask the students to identify the economic concepts and discuss whether the message of the ad is rooted in economic truth or political persuasion.

Honorable Mentions:

  • The Federal Reserve, monetary policy, interest rates, and they affect consumers.
  • The Paradox of Thrift (I predict that there will be a post dedicated to this gem).
  • The theory of wage-price spiral and inflation in general.

Quick Quiz

Economics:

A) is a great tool for supporting our personal financial decisions.

B) is a great tool for understanding political conversations.

C) doesn’t have to be boring – you can make it sizzle.

Yep, all of the above.

In our economic system—let’s call it Mostly Capitalism—there is no escaping the incredible weight of decision making when it comes to managing our personal finances. We need every possible intellectual asset at our disposal.  I recommend using economics as a key tool for you and your students on your personal financial journey.

We’ve been through a lot, econ and me, and although we are in a good place now, it hasn’t always been easy. The stages of my relationship with economics, starting with the most recent:

  • Love it, need it, teach it, preach it.
  • The “Ah ha-I get it now-this is fascinating” stage. A major turning point thanks to my experience in the Peace Corps and to a graduate refresher course.
  • In my 20s there was no econ or personal finance, just credit cards, car loans, and consumption.
  • Junior and senior years of college, one professor planted an idea or two.
  • Freshman and sophomore years in college… Read on.

Lecture Halls, Production Possibility Curves, and Yawns

Just a few years ago, (ha, ha, ha. Define “few”) I majored in economics at Southern Connecticut State University. I chose economics because it was the best way to get a business-related degree without taking a lot of math. Ah, the rationale of a 17-year-old. So, in the fall of that year, I fired up my old orange Subaru and headed off to class, but the start of my economics education was inauspicious at best.

You are probably familiar with this scene: a lecture hall with 150 students for Day One of Econ 101–Principles of Macroeconomics. Yuck. What followed was 100 weeks (ok, it was only about 12) of sleepy lectures filled with aggregate output curves and the impact of public goods.

The only thing worse than those classes was the textbook–4.5 pounds of graphs and chapter titles like, “Factors of Production and Aggregate Supply & Demand”. Absolutely no knock on SCSU or the teachers—it was a function of large classes, a tired yet established way of teaching economics, my age, and the absence of meaning in the abstract theories, numbers, and charts.

Econ 102 followed, which focused on microeconomics and rocked our intellect with production possibilities curves and the price elasticity of widgets. Then came the 200-level courses which were slightly deeper dives delivered in smaller classes.

Halfway through the degree, I was considering a switch to sociology.

But in my junior year I was able to take econ electives, and everything changed. Professor Crakes gets full credit for sparking what would become a foundational topic both in school and in my pursuit of personal financial righteousness.

A Few Years and a Few Credit Cards Later

In post #2 of this blog, I mentioned that during college I stumbled and fumbled with money. Credit cards were easy to get, with monthly minimum payments fooling me into thinking I could afford yet another thing that I didn’t need. It was a time when I wasn’t connected to my personal finances or to economics. Eventually, and fortunately, these two pillars of financial life came together and ever since I’ve included econ in my personal finance classes and in my personal financial life.

In fact, it was while I was teaching economics at a high school in Richmond, Virginia, that everything gelled thanks to a “Macroeconomics Refresher” course at the University of Richmond and another influential teacher. I enrolled to brush up on concepts that I never felt connected with back at the start of college. The instructor was Dr. Gerry Swanson from the University of Arizona.

You might not have heard of Dr. Swanson, but some of you will recognize this name, Ross Perot, the one-time independent presidential candidate (1992) and his 30-minute prime-time infomercials where he lectured American voters on economics. Remember the charts? He used a lot of them, and 16 million people tuned in for the first installment. Well, it turns out that Dr. Swanson was the guy who made those charts. Politics aside, it was fascinating to hear details from that campaign.

But not as fascinating as what he showed us about the economy and how it affected every one of us.

TANSTAAFL, Trade-off, and Opportunity Cost

Dr. Swanson came in one day wearing a t-shirt with TANSTAAFL printed across the front. We finally asked and he answered by turning around and showing us the full phrase on the back, “There Ain’t No Such Thing As A Free Lunch”. He then led us through an exercise in trade-off and opportunity cost, showing the costs associated with “free” things. The bottom line was that nothing is free, and at the core of every economic choice should be a consideration of opportunity cost (the cost of making a choice).

Around that time and in the years since I realized (and continue to remind myself almost every day) that the key to personal financial behavior lies in this core economics concept.

As we went on to study economic policy, The Federal Reserve Bank, and the national debt, it became clearer than ever that although our government (regardless of party) does not adhere to Econ 101, 102, 202, or 502, individuals should be using econ basics to inform our decisions about money. That pushed me to double down on my efforts to manage my personal economy regardless of the state of our national monetary or fiscal policy.

Sharing the Love

Understanding economics is integral to personal finance and, therefore, to personal finance education. It helps by holding up a mirror to our behavior and by helping us understand the economy, how it swirls around us and affects us, and how we affect it.

Yes, this is about economics. It’s also about the impact and power of good teaching.

We learn in our own ways, and I am sure that since the time of Adam Smith many have learned and enjoyed economics taught the old-fashioned way. However, for me, and maybe for entire generations, those heavy textbooks and even heavier graph-centric lectures did not do the topic justice.

Economics came alive when I was lucky enough to have teachers who made it relevant. They didn’t just explain the nuts and bolts of elasticity of demand, they illuminated the connections to everyday experiences, especially when it came to decision-making and money. Those teachers inspired me to do the same for my students.

To survive and thrive in our system takes more than just managing money and resources. It also takes an understanding of how everything is being managed around us. We might not always like what we see or hear, but being armed with the skills to interpret it is vital.

Next time, I’ll share my thoughts on what I think are some critical economics topics that fit perfectly with personal finance. In the meantime, you can check out this webinar on FAME’s YouTube channel  I recorded a few months ago. According to at least one friend it was, “a good listen while driving”.