Spend 'Til the End (eBook)

Introduction:

The Three Commandments of Economics

This book may change your life. If you follow its simple prescriptions -- the surprising rules of true financial planning -- you'll live a more relaxed and happier life. You'll do so by achieving a higher and more stable living standard and a better lifestyle.

These are big claims for a small book. But we aren't offering the revolutionary solution of the moment. This isn't the miracle diet of the week or the sex trick of the month. It isn't even the six mutual funds guaranteed to fix your future. Instead we're providing something with a great pedigree: an economics-based, three-part prescription for personal financial health:

Maximize your spending power.

Smooth your living standard.

Price your love.

Economists have been developing and refining their approach to financial planning for over a century. But few people know about it, and for good reason: it's been impossible to implement this refined approach from a computational perspective. But times change, and today PCs can calculate in seconds what used to take mainframes weeks. With these new power tools, economists can finally move from describing financial problems to prescribing solutions. In particular, they can now help people improve both their financial and personal lives by finding them a higher, smoother, and more rewarding spending path.

'Higher, smoother, more rewarding spending' sounds good. So what's the catch?

There is no catch.

Maximizing your spending power doesn't require working yourself to the bone or even working an extra hour. It means making a host of decisions regarding education, career, job, location, housing, mortgage, retirement account, insurance, portfolio, tax, and Social Security, among others, that provide you more money -- potentially a lot more money -- to spend for the same effort.

Take the decision of whether to collect a smaller Social Security retirement benefit starting at age sixty-two or a larger one starting at a later age. Making the right choice doesn't take any more time or effort than making the wrong one, but the consequences for your living standard can be spectacular. The same holds for choosing between jobs, mortgages, retirement accounts, and so on.

Smoothing your living standard means spreading your spending power evenly over time, so you never need worry about running out. It doesn't mean starving now to gorge later or vice versa. Economists call this spreading of your spending power over time consumption smoothing. It is based on the law of diminishing returns -- the well known proposition that you can have too much of a good thing. Six-year-olds have this down. Put them in front of a plate of cupcakes. They'll inhale the first, gulp down the second, struggle through thethird, and then save the rest for tomorrow. In making this spending/saving decision, six-year-olds are smoothing their consumption. They are trying to even out their pleasure from consuming today, when times are good (Dad's been shopping), with their pleasure from consuming tomorrow, when times are bad (Mom's going shopping).

Smoothing your consumption also means protecting your living standard -- making sure it stays relatively steady in good and bad times. For six-year-olds, living-standard protection means hiding the remaining cupcakes from Mom. For us grown-ups, it means inoculating our living standard against adverse changes in income, healthcare costs, taxes, government benefits, and inflation, and making sure that risky investments are truly worth the gamble.

Pricing love doesn't mean selling your firstborn for ready cash. It means knowing what it...