We can all have our own perceptions and misconceptions of the value of money. For instance, in one pocket you have fifty pounds which you have worked all day for and in the other pocket you have fifty pounds which you won on a scratch card. Which one is more valuable to you? It sounds simple when you see it in black and white; the answer is that they are worth the same amount. But when we are presented with this question in real life scenarios, many people value the money they have worked for much more. On a larger scale, this scenario can cause problems when people come to invest money which they have inherited. They can have an easy come, easy go attitude, and think that they want to take risks which they aren’t really comfortable with, and come to regret in the future.
Another example of when we can struggle at looking at money of the same value in different ways, is when we come to choose a mortgage deal. Which is it worse to pay, a thousand pounds in fees or a thousand pounds in interest? This is a question which can split the vote; some people are more adverse to paying fees and others more towards paying interest. The real problem occurs here when people choose to pay thousands of pounds extra in interest in order to save a few hundred pounds in fees, or vice versa.
Now, to go against the first two examples try putting these three amounts in order of value: a hundred pounds today, a hundred pounds next year, and a hundred pounds last year. As long as inflation is above zero percent, the value of money is going down as time goes on.
Even here, given a choice many of us would make bad decisions given certain situations. We do however value money now, greater than we should. Although money now is worth more than money in the future, it is only by a few percent. However if you were to offer £100 now or £200 in a year’s time to a group of people, you would find that many of them would choose the £100 now because it is human nature. It is this human nature that organisations like payday loan providers are too often taking advantage of.
Again, to go against the trend, is £100 worth more to a rich person or a poor person? In the way of what it can buy, it is the same. However in the way of what it can do for that person it isn’t.
We have all been using money for most of our lives and some of these ideas should be simple and straightforward, but they are not. The real value of money changes depending on who, when and what.
You need to be careful not to be drawn in by adverts and advisors who use our misconceptions of the value of money to sell products. It is easy to sell a mortgage based on the interest rate alone, or it being fee free. Likewise payday loan providers take advantage of our desire for money now rather than later. Before making any financial decision, you need to weigh up all the costs and factors, not just one.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
4th August 2014
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