Thursday, April 2, 2009

Economic Concepts in Personal Finance

Occasionally, I still get questions about whether it's more important to teach personal finance or economics. My answer is "You can do both. Either class is enhanced by your ability to connect the theory to the practical."

This can be well illustrated using this post on Marketwatch.com. The post addresses saving when money is tight. Now I believe we should be saving money all the time. But the author frames the issue as one of choices. And economics is about choices.

In fact, all of the five steps listed in the article (prioritize, build an emergency fund, be creative, pay yourself first and walk the talk) are about making choices - voluntary actions that we must choose to undertake. And in each case, the idea is to look at the costs/benefits (marginal thinking), or understand and accept the foregone options (opportunity cost) in pursuit of a larger goal.

I would not hesitate to use this brief piece in a personal finance course as a way to introduce the theories behind budgeting. Likewise, I think this would be a good piece to use in an economics class to illustrate how we use concepts of choice, opportunity cost and marginal thinking on a day-to-day basis. The choices we make determine what resources we have available to meet our goals. Making wise choices can impact our living standards, even in down times.

Please share your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
7. Economic thinking is marginal thinking.

and
8. Quantity and quality of available resources impact living standards.

2 comments:

lampkinsr said...

I believe that personal finance is pretty instrumental in learning about economics as a whole. It's important for people to know how to survive financially when the economy is in a downturn, and know how to avoid a Roaring 20's-like irresponsible spending spree when the economy is thriving. As Mr. Schilling said, personal economics is very much influenced by choice. A greater understanding of personal finance can help encourage a greater understanding of economics.
That being said, some theories of personal finance come in direct conflict with certain principles of economics (e.g. the idea of deficit spending) therefore, it is important to make certain distinctions.

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