How Economics Connects To Personal Financial Planning

People know about the connection, but they don’t often think about what it means. It’s not just about money.

The fundamentals of economics and planning 

The connection is how you decide to distribute your time and money. Three factors inform how people make that decision

Scarcity. There are more things to spend money or time on than there is money or time to spend. That means there must be a way to allocate them to get a desirable mix of outcomes. You can modify scarcity by increasing your resources or tapering your wants. A credit card appears to reduce money scarcity, but really just transfers the scarcity to the future. Be cautious.

Tradeoffs are how you allocate resources against desirable outcomes. In simplest terms people list their wishes, in order from most desirable to least desirable, and the commitment to fulfill them. (Time and money) Then you start at the top of the list and act until you run out of resource. That’s where scarcity comes in.

Another aspect of priorities is urgency. Sometimes a lower valued wish is more urgent, and even though not most desirable becomes higher in the to-do list.

Incentives and disincentives.  People respond to to things they want and to things they want to avoid. Sometimes it helps people understand their wants if they notice the incentives and disincentives that are present in their priority decisions. When you understand what you get if you achieve the want, you can assess it better. Sometimes the incentive show the want to be not too valuable and you can reallocate your resources.

One enemy to sound allocation is impulse.

People cannot avoid impulse completely, but they can decide to accept it only to a certain level. An impulse purchase of a chocolate bar is not  a big deal and should be allowed. As with most things in life, you are more likely to succeed when you have a little slack. No one is disciplined enough to do exactly everything in an organized way. The impulse purchase of a Mercedes may not be as acceptable.

Self discipline is a very taxing cognitive exercise. Do not count on it. Think instead of incentivizing or disincentivizing things that are part of your strategic vision and its risks or costs. For example if you eat too little quality food, a solution could be to avoid bringing home less nutritious foods. If you do need Kraft Dinner, know consciously why you must have it instead of some other quick lunch for the children. Maybe making something more wholesome in quantity and freezing it would work. You’ll need more freezer space resource though. Always a tradeoff and a resource allocation.

A simple summary of how it works

Years ago, I worked in Oshawa. There was a business near our office that I used for some printing needs. There was a sign behind the counter that explained how the world of incentives and resource allocation works.

Good – Fast – Cheap

Pick Any Two.

My choice on a given day could favour good and fast but not cheap. On another day it might be good and cheap but not fast. We make this sort of decision almost effortlessly. We should assess how we do it and decide to continue. It is easy to fall into the cheap trap, or the fashion trap, or the right now trap. Pay attention and balance decisions against your needs. Know why you are making certain tradeoffs.

The bit to take away

Once you fully understand the idea of resource scarcity, tradeoffs, and incentives, planning becomes easier and more successful.

Don’t rely on self-discipline to save you. It’s too hard. Build structures that involve incentives and disincentives.

Be sure all the people involved share the goals and priorities. A mutually supporting pair is vastly stronger than two individuals. Ask the military.

You cannot be good at everything, so to find methods that help you may need outside help. More experienced people, advisors, and professionals, are most common.

Help me please. If you have found this useful, please subscribe and forward it to others.

I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email to

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: