Life Changing Economic Theories, Reinterpreted for Personal Finance

The writers of The Woke Salaryman previously wrote an article about economics and personal finance, and decided to return with another article on it.

They’ve added a disclaimer that they have no formal training in economics.

So while anyone who is professionally educated in the field of economics might not fully agree to everything that is stated here, this article might still serve as a good reminder to anyone who is reading this.

This article is based on the writer’s view on how economics and personal finance interlink.

Survivorship Bias 

Simply put: 

If you concentrate on success or survival stories, you’re not getting a full grasp on reality.

For example, if you concentrate solely on your friends who make lots of money overnight through day-trading, you’re ignoring the thousands of people who fail miserably at it.

What it means for you: 

A lot of people will say ‘pursue passion first’, and then point to inspirational stories like J.K Rowling and Dwayne Johnson who’re examples of classic rags to riches stories.

These are great stories, and we believe that hard work and the right attitude will serve you.

That said, what we often forget is that for every ‘rags to riches’ story that happened because the person took extraordinary risk, there are thousands, if not millions of ‘rags to rags’ story.

What we ask you to do, is to apply for some healthy realism to your worldview.

Your decisions should not be 100% based on practicality and money, but you should not let your passion cloud your judgment, either. 

Parkinson’s Law 

Simply put: 

If you tell someone they have three weeks to complete a task, chances are they will stretch out their productivity to complete it within three weeks.

Even if it can be done in one or two weeks. 

What it means for you:

The most natural analogy would be procrastination before your exams, but I’d like to offer another perspective.

I think most of us grew up modelling our lives after our parents, who started planning for their retirement in their 40s or 50s.

The implication is this: Because of the relative lateness our parents planned their retirement, we have been lulled into a fall sense of security of thinking we’ve more time than we actually have. 

What if the time we think we have for retirement is not the time we actually have?

Like we’ve said many times before, we live in the age of A.I and cost-competitive labour from more affordable countries.

This is a time of exponential change.

Given these facts, do you still want to take your time to plan for retirement?

The Risk vs Reward Trade-Off

Simply put: 

Low risk usually means low rewards.

People are rewarded with taking on more risk. 

Want something super liquid and safe with guaranteed returns?

Look no further than the Singapore Savings bonds.

Which has a measly rate of 10-year-return at 1.05% as of May 2020.

On the other end of the spectrum, there are super high risk, high return investments such as Forex and CFD trading.

You can make a ton of money overnight, but you may also lose more than you initially invested.

What it means for you: 

We all know high risk means high reward.

But for Singaporeans (and other cultures that are more conservative) I think a lot of us settle for low-risk, low reward.

Or worse – no risk, no reward. 

Is it a risk to ask for a salary bump?

Yes.

Should we do it?

Absolutely.

How else are you going to get that pay raise?

Is it a risk to go overseas to work in a place where it isn’t as developed?

Yes.

Should we still do it?

Yes.

Overseas exposure is important and Singapore is built on globalisation.

Is it a risk to start a business?

Absolutely.

Should we still do it?

Ideally, yes.

If all the best Singaporeans join MNCs, when will we ever have homegrown innovation?

That said, a trend I’ve witnessed here is that many of us tend to be crab people.

We mock people who have tried to pursue their dreams and failed.

Or even more hilariously, we mock successful entrepreneurs and hope they fail.

This doesn’t help foster a culture of risk-taking, which is crucial to success today.

Because just as how those Singapore Saving Bonds WILL fail to beat inflation, you have to understand one very important thing:

Being too safe is a risk in itself – we all need to understand the risks, then take them. 

Sunk Cost Fallacy

Simply put: 

There’s a tendency for people to invest more time, energy, or money into something, just because they’ve done so in the past.

Even if the decision might not be in their best interest. 

What it means for you:

This affects all of us to some degree.

There are many ways that this can be applicable:

If you bought shares of a particular company that’s clearly doomed, the sunk cost fallacy manifests in the denial when you’re unwilling to cut losses.

If you’ve put $1,000 into an Investment-Linked Policy that’s not appropriate for you, the thought of surrendering the policy and losing that initial $1,000 will overpower the fact you will continue to lose subsequently $1,000s if you keep going.

If you are in an abusive relationship and refuse to break up because you’ve been with your partner for 10 years, that crippling fear you feel from possibly being alone is the fear of sunk cost.

Ultimately, what you should take away is that we must always be ready to reexamine our past decisions, and if necessary, admit our mistakes.

Get an objective third party in, weigh the facts, and then rip off the band-aid, if it’s needed.

After all, there’s no shame in making mistakes, but there’s shame in letting your ego hurt you.

Stay woke, salaryman.

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This article first appeared on The Woke Salaryman and is part of a content syndication agreement between The Woke Salaryman and Seedly.

For this series of comics that are related to all things personal finance, the Seedly team worked closely with The Woke Salaryman to bring you useful sh*t which you can apply to your everyday life.

The Woke Salaryman is the brainchild of a Singapore-based duo that aims to help people reach financial independence early. It is the quintessential page for people living in Singapore who earn the median salary and didn’t inherit their fortunes from their parents.

If you have any questions with regard to personal finance and retiring early, feel free to discuss them with the friendly SeedlyCommunity!