How Much Is Enough?
We have the ability to recognize when something benefits us, but at what point does the benefit begin to decrease? Our brains have an amazing capacity to recognize value and encourage us to repeat those behaviors or actions that created that value. The Law of Diminishing Returns is always in effect, but we just may not notice it. The problem lies in the fact that we don’t have a shut-off for this reward seeking behavior. Our brains don’t naturally recognize abundance, and the same desire exists for more, more, more.
The Law Of Diminishing Returns
The Law Of Diminishing Returns is an economic principle that is the decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant. In simpler terms it essentially means too much of a good thing is not a good thing. A good example in terms of economics is a car factory. By adding a worker to the factory line, the production of the factory increases. At some point adding more workers will begin to increase production less and at some point the workers are all in each other’s way and production decreases.
We can apply this to our personal life by thinking about eating. Eating adds value by removing hunger, giving us energy, and comfort. Initially it may feel like eating more will increase these outputs, but at some point it begins to give us less satisfaction and will actually decrease satisfaction the more we increase our eating.
Applied to Personal Finance
How do we apply this principle to our personal finances? First, let’s think of ourselves like an operation or factory with the ultimate goal of producing a particular output. This output could be many different things: happiness, contentment, comfort, etc. Money should be considered a factor of production, helping us achieve a particular output, and not the output itself.
It can be difficult to find where the returns begin to diminish when we are looking at abstract feelings. Now, we can use the Law of Diminishing Returns to look at dozens of different factors of our personal finance and spending habits, but let’s just look at a few examples.
- Let’s say you have no car, and you buy one. This will dramatically increase your comfort, your productivity, contention, etc. Perhaps upgrading to a luxury vehicle will again increase a few of these outputs dramatically. However, upgrading again will provide less. So, now we can see the point of diminishing returns.
- Same goes for a house. If you haven’t owned a home, buying one will produce dramatic results. Again, upgrading will provide the same increase. However, at some point these returns will decrease and may even become negative as a larger property becomes more work to maintain.
- Having money allows you to pay for things that produce the output you desire. The thought is more money will make me EVEN happier, and it’s a natural thought because money gives us the things that add value. The reality is for almost everything there is a point of diminishing returns, hence the “Law”.
Instead of money as a factor, we can also use time as a factor. By spending more time working, I in turn earn more money, and in turn can purchase more of the things that bring me comfort, security, & contentment. I’m sure you get the idea, so we’ll spare more examples. You can do this experiment with any example you would like, and try to see if you can find the point of diminishing returns.
Overriding Desire
Embrace the law of diminishing returns with almost every purchase you make, especially the big ones. Your brain will keep telling you “MORE!”, but override it with logic. It will take discipline and practice and you will probably fall for “more” a few times. But, with time you will be successful, and you will begin to become more grateful for the things you already have.
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