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Friday, April 30, 2010

Financial Relativity

As I progress further along my journey, I begin to understand the concept of financial relativity. In a nutshell, financial relativity is how much we think or feel is a large sum of money relative to our mindset. $10,000 to a billionaire is probably equal to about $100 to a millionaire, which is probably equal to $1 to a thousandaire.

So... how much is a large sum? Is $100 large? I remember feeling that it was a huge sum when I was serving the army with a monthly allowance of $500+. $100 could make a significant difference in my assets for months, or so I thought. But now, I would spend it on meals with my girlfriend quite frequently as it is no longer very large to me. It is fairly insignificant to my assets, and feels perfectly normal to me.

An analogy would be the amount of food we eat. I remember my friend who wanted to gain weight by training hard with weights and eating a lot. He told me he eats a lot, but he just cannot gain weight, and asked me how I can gain weight so easily (not really a good thing at times). On going through his diet with him, I realised that how his view of "a lot" is actually normal (on the low side) to me.


Such subjective view points of "a lot" is the main reason why we have the SI units created for usage in science. It is the reason we have the metre for measurement of length instead of far/near. It is the reason we have the second for measurement of time instead of long/short.

Similarly, money is a perception. This, is financial relativity to me.

Real Life Examples of Financial Relativity I have encountered:

The rich neighbour
My girlfriend's neighbour is someone who's extremely rich... or so I thought... There was once I overheard him and his business partner talking animatedly about the new High Definition 52" LCD TV he has bought. "It was only $6k! It's such a good bargain! Extremely cheap!" And his partner readily agreed.

At that point in time, when my girlfriend and I overheard this, we were wide-eyed. A normal 19" Akira LCD TV costs only about $200. $6k was a lot a lot of money in our opinion for a mere TV. Was he bragging to his business partner? Was he being elitist?

However, as our assets grow, we slowly realised that the $6k was paid for quality, and for that size, it was indeed a good bargain. Not that I would splurge on such a TV now if I have a new home, but while $6k is still a rather large sum of money to me, I don't feel that it's too much for a 52" LCD TV now.


My daily coffee
To keep myself alert during work, I drink coffee. When I first started out in this journey, a 3-in-1 coffee packet from Old Town that costs about 40c is sufficient for me. In fact, to spend $6 for 15 packets was quite an amount to me. I used to wonder why my colleagues have no 2nd thoughts to buy coffee from the coffee shop when they can have a cheaper 3-in-1 coffee. It was extravagant to me at that time.

Right now, as I progress further into this journey, my perceptions changed. I now enjoy a packet of coffee from the nearby coffee shop at a dollar a packet every morning. A dollar a day for my caffeine kick is very well within my means. It has become a normal purchase to me. My view of the dollar has changed.


Tuition Sideline
I used to think $30 per hour was a normal rate, and $40 per hour was a moderately high rate for A level students. But as I progress, I achieved higher and higher rates (at least twice), and $40 per hour suddenly seems much too low a rate for me. Do I have 2x the knowledge of what I had previously? No. But I became much much better at conveying and teaching knowledge to my students.

My current rates are still a low price to me because I know I'm a much better match for it. However, I don't feel good charging students too high, because I know some of my students are really struggling with their fees while they really need the help. My heart goes out to them, and I sincerely want them to score As for their final exams.

 

The point here is, financial relativity is a limitation of our mind. If we think it is out of reach, then it is. If we think it is normal, then it would eventually be. Different people have different comfort zones and levels. To many of us, having a HDB roof over our heads with three full meals a day is a luxury. To some others, living in a 6000 square feet bungalow would be normal or expected.

Just because we have been conditioned to think that a certain level is normal doesn't mean that the standard is absolute or meaningful. Being enthusiastic about achieving a certain level is ok, but if we get the feeling of amazement when we think about that level, chances are, we won't reach that level.

If financial freedom is to be achieved, we must get comfortable with changes that might currently feel uncomfortable.

4 comments:

  1. JW,

    You have moved up in life. :-)

    Hubert asked in his blog recently if we prefer a 20% chance of winning $5000 or an 80% chance of winning $1000 and I said I would take the former. However, if that 20% chance is to win $5m and the 80% chance is to win $1m, I would take the latter. Haha.. ;)

    ReplyDelete
  2. Hi JW,

    I echoed the same sentiments felt by you. Regarding tuition, I consistently charge lower to students who are needy (some are really poor thing with 1 working parent and 2 kids..) but charge a higher fee for those who can afford it. Have to practice price differentiation.

    I've a few suggestions:

    1. Get a class size of 12-15 students with lower fees, say $220 per mth. These are classes for drilling, not much questions asked.

    2. Get another class size of 3-5 students, charging say $280 per month. These are classes for in depth discussions.

    3. Get individual students, charging say $640 per mth. These are for those who want individual attention.

    4. Set up holiday classes for topical revision during non peak period. Like a workshop (more like a crash course) on eletricity, dynamics, static etc. Charge it as a course fee of maybe $260, maybe 3 hrs per session, total of 4 session.

    ReplyDelete
  3. Hi AK,

    I would prefer to take the 80% of winning $1m as well :)

    ReplyDelete
  4. Hi LP,

    I'm only charging $200 per mth for a class size of 3-5 students for in depth discussions.

    Thanks for your suggestions. I did think of changing my style and increasing the class size, but I would need a bigger space than what I have now :x

    Still thinking how to go about doing it.

    ReplyDelete

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