Sunday, October 27, 2019

Thinking at the margins.

Image result for burger and lobster roll

One reason I would like Economics to be introduced to O level students despite only starting to study it serious at my Masters is its immense usefulness in daily life (as compared to that abomination English Literature). 

One really nifty concept in economics is marginal value, which is contrasted with average value. Marginal value is the value we give to one extra unit of an item. i.e. I'm going to eat lobster rolls with a friend next week and I bet we're both looking forward to it. This is a special event because neither of us eat lobster rolls on a regular basis. If my friend has already eaten three lobster rolls that morning, he probably would not be too excited to each his fourth lobster roll  with me that afternoon. 

Ergo, the marginal value of the fourth lobster roll is very small compared to the first. 

The crucial problem in education is the ability to translate a theoretical idea into everyday living. 

How can we think at the margins the same way economists are trained to do ?

Not all dividend dollars are equal. 

As we starting to get payouts from our investments, the dividends would not be worth very much. You might see a $50 payout in your bank account once every three months, hardly enough to pay for anything else. This can cause a lot of Millenials to give up on the dividends chase. 

The marginal value of a dividend payout happens when one quarter of dividends payments start to exceed three months of particular bill. Then you can at least say to yourself that in that payment category, the item will be free henceforth. If you spend $40 (or $120 per quarter) on a sim-only plan, the marginal value of the $121 dividends dollar that quarter will be very high because your data will be free moving forward.

The success of a dividends strategy, thus, relies on chaining your dopamine rush by being aware of your regular expenses. It's great to know the size of your smallest bill every month so that you will know the point that expense becomes free. In my opinion, a data plan is always the best place to start. 

For rookies, you might want to ask yourself at which stage of your portfolio development does your data plan becomes fully subsidized by dividends payouts ? 

I'm rapidly reaching a stage in my life whereby an added dollar of dividends in a quarter is not particularly valuable to me. My biggest expense every month is my mortgage and I have a leveraged account producing close to about 120% of my quarterly mortgage payments every three months.

At this stage, the magic of Economics 101 can be further applied when you have a steady flow of dividends coming into your bank account.

Capitalism ensures that there are millions of products that are designed and engineered to have a high marginal value to you. I got the latest Kindle Paperwhite with 8Gb and free data after stacking a round of discounts on Shopback and 

I also tried to do more shopping at Cold Storage to try out a better brand of butter. The marginal value of better butter is a little overrated, sadly. 

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