Forgetting these 2 rules could cost you millions

When it comes to financial decisions, we often throw logic out the window and kick our common sense to the curb. This is a costly habit—one our legislators are particularly prone to make.

Here’s two foundational rules to remember when spending your own money and when it comes time to vote.

Nothing is free

Marketers are skilled at making stuff appear free, but all this advertising would be pointless if we were not willing accomplices. There is no such thing as a free lunch and that second burger isn’t free if you have to buy one to get it.

Often the government or a business will give you something that sure feels free, but someone has to bare the cost. In the case of government, taxpayers are footing the bill. And with businesses, they recoup their costs by charging more than they otherwise would for something else.

When someone tells you they can do something for free, be wary. They have to recoup their costs somewhere.

Freely entered agreements will enrich both parties

Of all the ignored and forgotten economic rules, this would probably be the most important and yet, the most overlooked. When two people agree to a trade, both people end up better off than they were before.

This equation remains true whether they’re trading sheep for tools, their time for money, or their money for a few gallons of gas. When two people come to an agreement on terms, they each have decided that they prefer having the tools, money, or gas more than what they gave up in trade.

This doesn’t mean you won’t have regrets. While every transaction should enrich us, some decisions do not make us financially better off.

You might be happy dining out multiple times a week or taking elaborate vacations around the globe. Culturally, you will be better off; you’ll be living a life rich in leisure, full of diverse experiences. The tradeoff, however, might be going into debt or working longer and harder.

How will this make me rich?

Understanding these rules might not make you rich, but you’ll certainly be much better off if you learn to consider tradeoffs. You’re always trading something: time, money, flexibility, or opportunities. Your best decisions will consider all of these factors.

In the same way, it pays to measure a politician’s economic competence before voting. Is the politician promising something for nothing? How will the promised programs be funded? How will the new taxes affect the public’s incentives to work, save, or invest?

Photo by Darren Hester