The Basics: How the Economy Works and What is Your Part

This is probably the best summary I have seen on understanding the economy. Knowing how the economy works on the macro will help you make better decisions on the micro by knowing how you fit into the bigger picture. If you haven’t seen the video before check it out and then read on to see how these rules can help you excel in times of economic boom and bust.

Ray Dalio’s 3 Rules of Thumb from How the Economic Machine Works and How you can apply them in your life

Rule One: Don’t Have Debt Rise Faster Than Income

Spending and Debt are the same thing. Spending means what was once your money is now someone else’s money, it’s gone forever. And when you spend the money you do not have, that is future income that is gone forever. Seeing how this can spiral out of control is not difficult. To keep up you will have to increase your income in the future and there is no guarantee that will happen.

Sit down and sketch out a plan determining how hard you want to work today and how much harder you want to work tomorrow to make up for the lost productivity of today and think of debt as lost productivity. To me it makes more sense to work harder today so I can enjoy tomorrow. Achieving that goal comes down to spending.

Prioritize what you spend your money on with three simple categories and be honest with yourself.

This is something I need. Whether you like it or not you have to pay the rent-gas-electric-water-whatever.

This is something I enjoy, a want in other words. If you don’t buy it you won’t die. Try it sometime.

This is unnecessary. It is the mindless, thoughtless, not-even-sure-why-I-bought-it things that we buy. Never spend your money on those things.

Take Away: Take control of your Spending.

Rule Two: Don’t Have Income Rise Faster Than Productivity

This one is more difficult to think about on the personal level, but here’s how I am applying it. Let’s say I land a high paying job, or finally get that promotion and my income suddenly becomes greater than my current standard of living. Assuming I am following rule one I won’t have a problem with lifestyle creep and increase my spending. However,what might happen is that I decide to rest on my laurels. Suddenly feeling like I have arrived might lead me to believe there is nowhere else to go. Hence, I acquire an attitude of thinking I know it all and miss the opportunity to learn new things increasing breadth of knowledge or depth of skills. Over confidence in myself leads me to believe that no one else can do what I do.

Opportunities are missed. I fail to adapt.

Someone hungrier than me comes along with new ideas. Better ideas. Innovation swoops in for the win and disruption happens again. Stay humble, my friend. Learn something new everyday.

Take Away: Don’t become Complacent

Rule Three: Do all that you can to increase your productivity

In economics the rule of productivity is that what you do not produce today cannot be made up tomorrow is difficult to recognize in our personal finances. Think of it this way: If I produce 100 units of something today when I could have produced 200, producing 300 units tomorrow does not make up for lost productivity. It means that I missed the opportunity to produce 500 units.

Inevitably, many of us learn how to increase our productivity because we failed at Rule One. Our productivity rises because we are playing catch-up! Now we have a mountain of debt we’re trying to get out from under. The thought of climbing to new heights does not even sound like an option anymore.

Getting spending under control and taking advantage of every opportunity to grow will put you at an advantage. Since many of us are starting at the cavern beneath the mountain rather than at the base it can seem like an impossible task.

I used to feel that way too and I can assure you it is not. Getting today done right will free up the ability to take advantage of tomorrow’s opportunities. And I mean literally today and tomorrow. Thinking about five, ten, and fifteen years from now will do nothing but discourage you in the beginning. That’s like thinking you can leap to the top of the mountain.

Put one foot in front of the other. Tackle one thing at a time. Every step is one step further from where you started and one step closer to where you want to be.

Take Away: Don’t put off until tomorrow what you can do today!

You might also like: Start Growing with Acorns

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Loving Husband. Humbled Father. Grateful Son. Live life knowing that every day is a gift.

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