What is the Social Cost of Investing?

by NerdWallet | September 28, 2013 10:00 am

What is the Social Cost of Investing?

Investing is like a coin flip game: it’s a two-faced gamble. You can either gain tremendously or lose a fortune. That is why some people who do not want risks do not want to venture off into investing. Some more would say that investments lead to income that only equal the costs so why bother investing in a no-profit transaction. And even some more who don’t believe that investments lead to income at all. But for those who really want to secure future finances find investing as the best way to do so and all one has to do is to learn how to properly invest and to invest in the proper company at that. And that these risk-takers find their investments to be really rewarding.

A Present Dilemma

Seeing New York Times’ article[1] on Generation’s X and Y on investing, it is without a doubt, a dilemma that young would-be investors are facing. Fidelity’s Millionaire Outlook found that Gen X and Gen Y were deeply engaged in managing their money, though that engagement was not necessarily paired with a deep knowledge of investing. Technical knowledge on investing can be covered by seminars and tangible references; however, the mindset of our young investors is something we need to change.

Aside from the knowledge of investing and the luck that comes along in every case, what spells the difference between a successful and failure in investing is the social cost that one would either luxuriously expend for, or would thriftily ignore.

Social costs are those you incur in order to fit in and be with the crowd – the in crowd, so to speak. The relationship of this in investment is that you give up or at least control your social spending in order to bring out the best to reach your financial goals. Think about it, you would not be able to save anything if you keep on spending what you can add to your money stash. Even if you invest a million dollars in a stable company that can give you 10% or $100,000 annually but spend $99,000 then would it not have been better to have invested to that which can yield $1000 a year?

The Social Aspect of Investing

Investing is a science. You would be able to see signs for ups and downs in the financial charts if you try to learn about it. You could withdraw your funds when you expect the company to fail or increase them when you expect a boom. But your knowledge would do you no good if you have no control over your social spending. Social spending embodies those unnecessary wants that we just need to be cool and trendy. Such needless money-burning will really determine whether or not you would have success in your journey to investing.

Take this as an example, Felix and Christopher are both working in New York, with the same profession.  The two equally receive $7000 a month as salaries. Felix buys $1000 worth of stocks every month, each yielding 10% or $10 annually. Christopher, on the other hand, does not save at all. Christopher goes for a shopping spree every salary day and he makes sure that he has the latest gadget there is. His expenses are almost equal to his wage, but other people think of him as very rich because he can afford these luxuries.

One summer, the two decided to go mountaineering. They geared up and were set to go on their little adventure. But while they’re at it, they had an accident and suffered injuries. Both were rushed to the hospital. Who do you think can afford the bills? It’s sure that both can pay their bills but Felix won’t be as tight in the pocket as Christopher would be. What more if the place they’re working on disallow them to work for a few months? Christopher would be in quite a trouble but Felix wouldn’t be. Depending on the terms with the financial institution he’d invested in, Felix could recover his money, enabling him to survive until he can work again.

But poor Christopher, since he spent so much on social costs, he will be forced to depend on his family for some time. This is how our social costs hamper our aim to be financially free. We are blinded by our wants instead of focusing on what we need. We tend to buy too much of anything because it’s a way of flaunting one’s riches. Spending sprees are short term gains only. If we learn how to properly allocate our budget and continue to expand our earning opportunities, then we can see ourselves retiring early, or even just retiring free from worries of financial problems.

Weighing the Reasons Behind Spending

It doesn’t matter if you socially spend a bit. It’s not bad at all to have some gadgets that could help you out in your activities and for a little entertainment. But don’t overspend just to show off because this will cost you what should have been your savings to be used on unexpected needs like hospitalization or house and car repairs. Learn to spend wisely and save while you’re at it! Because if you think you can always find money lying on the ground, then buddy, I think you’re stuck in a video game!

Story by Guest Contributor Jason Boden of Action Binary[2]

 

Endnotes:
  1. article: http://www.nytimes.com/2013/09/21/your-money/younger-investors-approach-to-investing.html?pagewanted=all&_r=0
  2. Action Binary: http://www.actionbinary.com

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