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woman doing a stop hand signThere are many mistakes to avoid in retirement planning. One of the most prominent is taking money out of your retirement fund. It is high on the “No-No” list together with not saving early for your retirement. There is just too much at stake if you decide to take money from your retirement plan – whether you intend to return it or not.

According to an infographic published on Principal.com, 27% of retirees are actually working while in retirement because they lack the funds to support themselves. The same statistic also revealed how 61% of those who retired early did so because of health problems. Imagine having to retire on a small retirement fund with health problems. How can you hope to support your basic needs much less the medical treatments that your health requires?

This is the reason why financial experts are strongly against consumers who plan to get from their retirement money.

3 conditions that make borrowing from a retirement plan okay

However, there are instances wherein your back is against the wall and you have no choice but to take money from your retirement fund. But before you really consider this as a solution, you must explore your options first. More than that, you need to make sure that these three conditions are met.

You have the stable income to pay it back.

First of all, you want to make sure that you have the income to pay back what you are getting from your retirement fund. Whether you loaned or withdrew the money, that should be put back someday. There should be no question about that. If you know that you cannot afford to put this back, then do not borrow from your retirement plan. That way, you will not be too much at a loss when you finally retire.

To have stable income means you should be currently employed with a regular salary coming in every month. Consider how stable your job is. Did you get a positive review the last time you spoke to you boss? And do not just concentrate on your own reviews. Take a look at the stability of the company. You may be very competent but the company may not be in good condition. You could still end up losing your means to pay back your the retirement money you borrowed.

And having the means to pay it back is not enough. Make sure that your repayment plan can be completed in 5 years. This is the allowable number of years that will keep you from being penalized by the IRS. If you loaned the amount from your retirement fund and you failed to pay in back, that will be considered as a taxable income.

You do not have a cheaper loan alternative.

Another condition that you have to meet is making sure that you have explored your options. If you need money, try to explore getting a peer to peer loan or a cash advance from your office. If other loans that you are trying to get is going to cost you more than borrowing from your retirement savings, then that usually means you have a credit score that is less than ideal. If this is the cheaper alternative, then go ahead and borrow from your retirement.

This is another reminder that bad credit scores negatively impact your life. In this case, it is forcing you to have no other option but to get funds from the money that should have been kept untouched until your retirement. Make sure that it will be a lesson that you will keep in mind. Fix your credit score problem so that you will not be put in the same position again. Your retirement plan may not fully recover if you make it a habit to borrow from it repeatedly. If anything, this should always be your last resort. Unless this is the cheapest loan alternative that you have, do not touch your retirement fund.

You will use it for something that will improve your personal net worth.

Lastly, the only acceptable time that you can touch your retirement money is when you plan to use it to grow your personal wealth. According to a study from Wells Fargo and Gallup, 64% of investors would prefer to have their retirement investments secure even if it will limit the profit that they will earn. The study published on WellsFargo.com also revealed that 33% admitted that they do not mind the high risk as long as there is a high growth potential. If you are part of the latter, then you can use your retirement money to grow your funds further. That is the only time you are allowed to use it. No ifs and buts about it.

This can also be applicable for those who want to use this as a downpayment of their home. A house can build up equity over time. This is a great way for you to increase your personal net worth. It sure beats having to rent all the time. Of course, this is a great option if you are still young and you have decades to go before you have to actually retire. In fact, the IRS allows $10,000 or less in withdrawals and will not penalize you for it. At least, if this is your first home purchase.

When these three conditions are met, that is the only time that borrowing from your retirement fund makes sense. If not, keep your hands off.

Should you ever use your retirement money to pay off debt?

There is a question of using your retirement money to pay for your debts. Some people who had it really bad when the recession happened had no choice but to use their retirement money to haul themselves out of debt. According to a Q&A article published on Oprah.com, financial adviser, Suze Orman warned consumers against borrowing from their retirement funds. She said that the better option is to keep their hands off the retirement money, get a part time job and them pay off the debt slowly but surely.

It is difficult to judge if you should use your retirement plan to pay off your debt. But in case you feel strongly about it, there are certain signs that will tell you if you are doing the right thing. It is still generally not okay but it will probably be acceptable if:

  • You will pay off a high interest debt. Compare the interest that your money will get if it stays in your retirement fund as opposed to the savings you will get if you eliminate the high interest debt. That can be a great way for you to compare if this is a good idea or not.

  • You will loan the money and not withdraw from it. Withdrawing would mean an early withdrawal tax penalty for you. If you loan it, it is technically still a debt but the interest will be placed in your retirement fund anyway.

  • You will make a plan to return the money. Actually, this should be something that you do before borrowing from your retirement money. Make sure that you can put it back.

  • You will address the real reason why you got yourself in debt. Lastly, you want to address the root cause of your financial problem. If you concentrate too much on paying off the debt without really thinking about staying out of it, then you might just be wasting your time and money. Ensure that you will solve the overspending or lack of emergency fund problem that led to your debt situation.

There are many retirement regrets that you should avoid at all cost and taking from your retirement savings is one of them. If you are not careful, you might find yourself struggling in the future just because you took money out of your retirement fund.

student holding envelopIf you think about the student loan crisis, you will realize that we have a long road ahead of us. We have yet to put a huge dent on solving it. In fact, if you look at the statistics, you will realize that it does not seem like we are doing anything to solve it. If we are doing anything to the student debt at all, it is obviously not working.

Based on an article published on NYTimes.com early this year, it is apparent that student loans continue to rise. In fact, to quote the article, it is revealed that “delinquencies continue to rise, and loans continue to be made without regard for the ability to repay.”

The article explained that student loans were initially created to help low income families have the chance to get a higher education. That is still happening but the whole system seems to be in error. Instead of helping, we find young adults struggling for the first ten years of their corporate life. It is creating a bigger problem for new graduates. Although they have the means to earn more compared to high school graduates, they still have the student debt to take care of.

Three reasons why the student loan situation in the US is scary

There are three important reasons why the student loan problem in the country is scary.

Student loans are advertised as a good debt that is necessary.

There is truth to this – that we cannot deny. Study reveals that graduates really earn more compensation. This is why college debt is often advertised as a good debt that is necessary for young adults to succeed in life. The explanation is this – it is a type of debt that has the ability to put money in your pocket. That is because it can open more opportunities for you to earn. But even if that is true, you should realize that the student debt is compromising the money that you should have been enjoying.

Student loans are given to confused and innocent borrowers.

In most cases, student loans are offered to borrowers who do not understand the real effects of debt in their life. Not only that, they are unaware of their actual capabilities to pay off this debt. At the time that the debt is made, there is no way for the borrower to know how they can hope to pay it back because they are still studying. If they have a hard time getting a job, that will not stop the student debt from being billed to them.

Student loan delinquencies continue to rise.

Another scary fact about this debt is that the delinquency rate is steadily rising. As mortgage and credit card delinquencies improve, the student loan is going the other way. It keeps on rising just as the amount of debt is also going up. We need to consider this fact because it clearly shows the inability of young adults to pay off this debt. To add to this scary fact, lenders are still issuing student loans despite the trend that borrowers are having a hard time paying it off!

These are the reasons why student loans make college education seem worthless. If we are not careful, this might result in another economic crash.

Recent study reveals that Americans still want to go to college

Surprisingly, despite all of these facts, Americans still believe that college education is a must. In a recent poll done and published on Gallup.com, 70% of Americans believe that it is very important for consumers to have a postsecondary degree. 24% believe that it is somewhat important. Only a mere 6% believe that this is not necessary at all.

The other findings from the poll are as follows:

  • 44% strongly agree that a certificate or a degree beyond high school is necessary to get a good job.

  • 40% strongly agree that a college degree can lead to a better life.

  • 89% believe that institutions providing higher education need to change so that the needs of students can be met.

  • Less that half of poll respondents believe that institutions are not doing anything to change and improve.

Gallup provided an explanation in this poll results that revealed how consumers know that student loans are destructive – but that they still believe that college education is necessary. It is safe to assume that when it comes down to it, they will opt to put themselves in debt if that means that they can get access to this higher education. That is because they believe it is a necessity towards a better standard of living.

How to go to college and minimize debt

It is true that student loans may be worth it because a college education can really open more doors to help you improve your life. But while a college education is a necessity, you have to remember that student loans are not. There are ways for you to get an education after high school and it does not always have to end up in debt.

Here are some things that you can do to keep student debt from being a problem after you graduate.

  • Work on the side. One of the most effective ways for you to break free of the student loan statistics is to just work your way through college. People have done it so you cannot say that it is impossible. They had to work during their spare time and it paid off in the end. They are able to enjoy their salaries entirely because it does not have to be split with student debt payments. There are so many things that you can do to earn on the side. You can babysit or provide tutoring services. Or you can have yourself employed by the college you go to so they can waive off your tuition. That means you only have to worry about your daily expenses and your books.

  • Be frugal. Another way that you can keep yourself from too much student debt is when you live a frugal life while in college. This is possible for you to do if you concentrate on the expenses that are necessary. New clothes, for instance, should not be high on your list if you still have clothes to wear. You need to prioritize food and your school expenses before you think about your wardrobe.

  • Keep an eye on your credit card spending. One of the things that make student debt a burden is the fact that it is often combined with credit card debt. The high interest of credit cards can be quite a financial obligation that can cripple the finances of the young adult. It can be too much to bear if this is accumulated on top of the college debt. That means you have to make sure that you keep any credit card spending in moderation. If you can manage it, just spend in cash only. That way, if you cannot afford it, you will be forced not to spend on it.

  • Understand your student loan. Lastly, if you really have to borrow money, make sure that you understand student loans. This is one of the regrets of a lot of young adults who have graduated with student debt. They said that they wished they know how hard it will be to pay off this type of loan. If they did, they mentioned that they would have done more to keep their debts low. That may be better financial management skills or a more frugal lifestyle. If you understand how student loans work, you can make better decisions about this debt.

mom teaching a childConsidering the way we react to our finances, it should be safe to say that we find money concepts quite confusing. Either that or we just do not have the discipline to put what we know into practice. But while financial education is not enough to keep consumers from money problems, you need to understand that it will give you the tools and knowledge to keep it from happening. While the key is really to implement what you have learned from your financial literacy lessons, you still have to acknowledge that you need to have the education first.

We often hear a lot of people say that they made a lot of financial mistakes because of ignorance. They were unaware of the real consequences of their decisions until it was too late. If you can relate to this because of a personal experience, then you should know that boosting your financial education can help improve your case. And while you are at it, you should start educating your kids about it as well.

Truth be told, if you find money concepts confusing, then you can expect that your kids will feel the same way. Not only that, since they are mostly dependent on you financially, you can expect that implementation will be tough for them as well. But while it can be a challenge for parents, that does not mean it is not possible to teach your kids the lessons that they need to learn.

According to a study published on FinancialEducatorsCouncil.org, there are three areas that will impact the way a person handles their finances. One of them is the recognition of the first step. The other two is the motivation to learn and the knowledge of the subject.

Of the three, the recognition of the first step is the most intriguing. You would not think that the first step is important. But if you think about it, if you do not know the first step to take towards making a financial decision, how can you hope to make the right one?

This makes early financial literacy all the more important.

5 money lessons that young children can understand

As a parent, you are expected to give them their first lesson. According to the same study mentioned above, 65% of their respondents believe that the people responsible for the first education of a child is the parents.

There are many money lessons your kid should know after high school but that does not mean you need to wait that long for them to learn. Even at a young age, you can start educating them about money concepts. Good news is, there are certain concepts that you can teach them that they are capable of understanding.

  1. Spend less than what you can afford. The first of the lessons that you can teach your kids involve spending only what they can afford. Just like you should be limited by your income, you should also tell them that their spending is limited by their allowance. If they only get $5 a day, they should only spend $5 or less. Encourage them to spend less so that they have money to put aside in their savings account. If they cannot afford something, they should just say no to the purchase.

  2. Save up for something that you cannot afford. In case your child wants something that their budget cannot afford, teach them that they can always save up for it. Do not buy it for them. We want to give them what they want but in the end, that will not teach them the right money concepts that will make them better financial managers. Encourage them to put aside $1 or something so that they can save up for it. Teach them to put aside a percentage of their allowance – e.g. 10%.

  3. Earn more money if you want to increase your savings. To help them save up for the purchase they want to make, offer to pay them for chores that they usually do not do. For instance, if washing dishes is not part of their chores, ask them to do it for a week and pay them a dollar or something for it. That should give them the value of a hard earned money.

  4. Credit should not be the first option to pay for something. Teach your kids that credit, while can sometimes help, should not be the first option to pay for a purchase that they cannot afford. If they can save up for it, they should just wait before buying the product. In case they see you use your credit card for purchases, you have to explain to them how you pay it off.

  5. Know the needs from the wants. The last of the money concepts that you should teach your kids is the difference between the needs and wants. Have them make a list of what they wish to have. Then, you can identify together what is a want and what is a need. Let them know that buying  a toy does not have to be expensive if there is an economical version. Also, teach them that just because a playmate has something, they have to get it too. Tell them that skipping lunch in school is not healthy if that is their way to buy a toy. Instead, teach them how they can spend less but not to skip lunch entirely. Or teach them that they can earn extra money.

These are the money concepts that you can teach your kids. By relating them to things and purchases that they want to have, your kids will be more interested in learning the lessons you are trying to impart to them.

2 reasons why our country’s future will benefit from financially literate kids

While you may think that your efforts to make your kids more financially literate is not important, you need to think again. Just like the value and morals you are imparting to them can affect the future society in general, the same is true for the money concepts you will teach them.

If you think about, most of the deadly financial mistakes are really caused by our ignorance. When you raise your kids to be aware of the consequences of their financial decisions, it will not only benefit their own personal finances, it will also benefit the country’s future.

There are two reasons why the lack of financial literacy of your kids will help everyone in the long run.

Debt will not be as destructive.

According to an article published on TIME.com, the people who do not have a high level of financial literacy is more prone to make the wrong decisions. They borrow more money and they end up accumulating less wealth. But those who are financially literate will be more likely to plan for their retirement and acquire more wealth in the process.

When people become smart about their debts, not only will their personal finance be safe, they will also help the government. You see, people who want to have a low interest loan are usually backed by the government. When they default on the payments, the government will have to shoulder some form of insurance on that loan to keep the lender from losing too much money. If the consumer is financially literate in the first place, the government backed loans will not have to take up too much money in the federal budget. The government will not be wasting time to bail consumers out of a credit pit that is actually a personal mistake.

Financial opportunities will be recognized and grabbed.

Another benefit of learning the vital money concepts in a nationwide level is that people will start to recognize the good financial opportunities that come their way. And since they are knowledgeable about it, they will be more courageous to take a risk. This empowerment will help consumers rise up the income ladder and make something for themselves. They will have the knowledge that will help them pursue their dreams. Again, it will abstain the government from having to support low income households. At the very least, the people they will have to support will be lessened.

Some of the concepts may seem farfetched but it really is hard to see the finish line if you are still at the beginning of the race. You have to just trust that learning the right money concepts is the first step towards a successful financial future.

worried womanIt seems that Americans will never run out of financial worries. There will always be something to worry about: the bills, your job security, the minimum wage, the rising healthcare costs and now, insufficient savings funds.

According to PovertyUSA.org there are more than 46 million Americans who are currently living in poverty in the country. The website explains that this number of people, and more, are having trouble meeting even the basic necessities of food, healthcare and childcare.

Getting them out of that financial situation will be tough but you have to realize that it all boils down to one thing – we need to do something about the insufficient funds in every household.

This is where financial literacy will come into play. Although financial education is not enough to keep you from money problems, it will give you the insight and tools that will have to be implemented to improve your situation. The only way that you can keep yourself from financial worries is when you understand what exactly you need to do to keep yourself from falling into another crisis.

Survey reveals why Americans should still worry about money

The 2014 Consumer Financial Literacy Survey done by Harris Poll for the National Foundation for Credit Counseling (NFCC) gives us some foundation on what we should do exactly. According to this study, 1 out of 5 Americans are currently worried about their finances because of two things: insufficient emergency and retirement funds. Although we have gone through a lot of difficulties in the past, we still have to yet to prioritize saving up for the funds that will keep us sustained when another crisis comes around.

It is tough to survive a crisis without an emergency fund and it is tougher to live out your retirement without money either. You know that you need to come up with a plan to solve your problems with insufficient funds. That will help keep your financial worries from ruining your everyday life.

Thankfully, the Financial Literacy Survey published on NFCC.org revealed some statistics that points out the reason why 16% of Americans are most worried about insufficient funds. Here are the key findings in the report.

Only 39% of Americans use a budget to track their spending.

Budgeting is the key to save money despite your limited resources. If you use a budget, you can see the expenses that can be cut back on to make way for more savings. That will help you set aside the money to grow your funds.

Only 32% of are saving for retirement.

This is a direct statistic that answers the question why people are worried about their retirement fund. If you are worried about it, just save up for it. Use a budget as suggested previously.

34% still carry some credit card debt every month.

The initial fear of credit card debt is now gone. Apparently, people have begun to take on this type of debt once more. The high interest rate is robbing you of money that could have been going into your saving funds. More than 35 million consumers carry over $2,500 balance to the next month. If you have to use your card, make sure you can pay for it in full when the billing arrives. That will keep the interest rate from taking your money. When you carry over an amount each month, that can add to your monthly card payments.

These three statistics simply tells why Americans have financial worries about their funds. First is they lack a budget to help organize their finances. The second is they do not put savings high in their priority list. The third is they are letting their money go to waste because of interest fees that could have been avoided if they only learned how to manage their money properly.

Tips to grow your savings and thus avoid money concerns

The obvious solution to relieve your financial worries about insufficient funds is to just put aside some money to increase your savings. We don’t have to dwell on the reasons why you need both a emergency fund and a retirement fund. They are both important because they can protect you during times when you are most vulnerable. It will keep you from both debt and money stress.

Of course, that is easier said than done. There are sacrifices that you need to make along the way in order to implement the strategies to save money. Here are some of our suggestions.

  • Create a realistic budget and stick to it. When you have a budget, you are made aware of the money that comes in every month. A budget plan will also help you decide where your limited resources should go. If you put your savings high on your budget list, that will help you meet your target every month.

  • Change your spending habits. Obviously, if you want to save more money, you need to start implementing better spending habits. You need to stop making purchases that you cannot afford. Or even if you can afford them, if you do not need it, you may want to pass up on the purchase and put the money in your savings instead.

  • Opt of the economical version of expenses. It is ideal that you pay for the cheapest product that will give you the best value for your money. Take note that the most expensive is not always the best product to choose. Sometimes, you are merely paying for the name of the brand. Just be careful that you are not sacrificing the full quality of your products over the price. Find the balance at all times.

  • Set up an automatic savings transfer. One way to make sure that you will save money is by setting up an automatic transfer to your savings account. That way, the only money that you will see will be post savings. Just like your taxes, you may want to do this so that you will not feel the decrease in your net income. Well, at first you will feel it but eventually, you will get used to it.

  • Downsize your expenses. In some cases, it is tough to make ends meet simply because you are living a lifestyle that you cannot afford. Lower your standards a bit. Live in a smaller home, get rid of your second car and cancel some of your subscriptions. There are so many areas in your budget that you can cut back on to help you boost your savings.

  • Review your tax breaks. Sometimes, you do not know it but you are entitled to some tax breaks that can increase your monthly net income. You may want to check this out and anything that you find can be added to your saving funds.

You have to realize that your financial worries can be addressed when you have financial security. Once you feel secure, you will feel that the stress will mostly just go out the window. You do not have to think about the unexpected because of the security that you have set up around your money. Saving for the rainy day and your retirement is a clear solution only because of the financial cushion that it will provide. It is also because it can keep you from the need to acquire debt and thus wasting more money on interest payments.

Remember that in growing your savings, the amount of money that you can afford to put aside matters. However, do not be discouraged if you can only put side a small amount because you still have debt obligations. A small amount is better than nothing. Just be consistent in putting money in your savings. That way, you will not be left with nothing when you need it the most.

woman wearing a credit card and carrying shopping bagsIf you want to break bad spending habits, you need to understand what is causing you to act that way in the first place. That will allow you to really correct the habit that is causing you some form of financial difficulty.

Living in a consumerist society like in America, correcting bad spending habits is easier said than done. That is why you need to find out things like the philosophy behind your spending style. If it turns out that your style is defective by itself, then you know the root cause of your problem. You can choose to change the way you spend so you can develop better purchasing habits.

There is an interesting article on the HuffingtonPost.com that is written by an 18 year old teenager who grew up in Pakistan. According to the author, Shanzeh Khurram, The American Dream is “always a bit materialistic.” She said that she sees the nation buying a lot of unnecessary purchases. It started with a home and a car – which are necessities. Now, it has grown to include an iPhone, designer items and other expensive stuff that are extravagant.

The acquisition of these things have become a need simply because Americans are trying to live up to a lifestyle that they cannot afford. It is a lifestyle that society itself have set. While buying things in a consumerist society is deemed normal, it is oftentimes destructive – especially when consumers start to borrow money just to buy these products.

Explaining the different styles of spending: things vs experiences

The spending style of consumers are categorized into two: materialism and experientialism. These two will define what influences you to spend your money. On one side, you are influenced by the product that you will pay for. On the other side, your spending is influenced by the experience that you will get from the product.

Let us try to define and explain further what both of them mean based on the Merriam-Webster.com definition.

Materialism

Based on the online dictionary, this is “a way of thinking that gives too much importance to material possessions.” The philosophy explains that consumers buy things just for the sake of owning them. This is actually what consumerism wants. Those who practice this type of spending style think that they need to get the most expensive and the most flashy of the products in the market. They get satisfaction from the more expensive items because they associate value with the price tag.

This is the mentality that will breed habits that will make you a financial failure. If you continue with this way of thinking, you will end up with a lot of possessions that cost a lot, but you will get tired of easily. Before long, what you thought was valuable just ends up as junk and clutter in your home.

Experientialism

According to the online dictionary definition, this is “a philosophical theory that experience is the source of all knowledge.” If materialism gives importance to the thing being bought, experientialism gives importance to the experience that goes along with it – rather than the product itself. Simply put, you buy things so you can enjoy it and derive a meaningful experience from it.

This is how people can break free from the grip of consumerism. Since you are concentrated on the experience that is associated with a product, the price and the brand will not matter to you. You will not be compelled to buy designer products and sometimes, the cheaper products will suffice for you to feel satisfied.

Comparing the two, you know that the latter, experientialism, is the better spending style simply because you can opt to spend less and still feel good about your purchase. Between a $200 and a $50 pair of jeans, you have no problems paying for the latter because you are after the use of the product and not the price. A materialistic person will choose the more expensive item because they will feel that it is the more valuable of the two. By choosing to value the experience more than the value you can make smarter spending choices that will keep you from overspending.

Between the two, what spending style can you identify yourself with?

What purchasing behavior will make you happier?

If you want to be a financial success, you may want to choose the right spending style that will lead you there. As much as you want to put your finances in order, you want to make sure that you will end up happy too. Restricting yourself from spending is not how you will find financial happiness. You need to understand how you can utilize your spending so it will give you the most satisfaction.

A lot studies have been done to compare what gives the consumer a higher happiness level – materialism or experientialism. In one study, authored by Leaf Van Boven for the University of Colorado and published on Colorado.edu, it is revealed that the latter make people happier because of three factors.

“Experiences are more open to positive reinterpretations.”

Material things are tangible and something that you can never alter. The more you look at it, the more it becomes ordinary to you. When you are basing your satisfaction on experiences, this is purely a mental recollection. In most cases, what we remember is intensified by the emotions associated with it. So when an experience makes you feel happy, your recollection of that will intensify and thus making the memory all the more satisfactory.

“Experiences are less prone to disadvantageous comparisons.”

Since your eyes are focused on the experience, you will hardly find that the lower price of a product will bring your satisfaction level down when it is compared to a higher priced item. Your experience, being secure in your mind, is protected from any comparison. In fact, given the first factor that we have discussed, you can assume that our mind is powerful enough to make our experience seem superior to any other comparison.

“Experiences are more likely to foster successful social relationships.”

In most cases, experiences are shared with other people. That is what boosts the happiness level of people when they prefer experientialism. Although material things can be shared, it is the experience that is brought about by that sharing that makes a huge difference. It is what makes the spending style all the more pleasant.

Think about it. When you buy stuff, you will get bored with it eventually. But when you store the experience associated with it, your memory of the product will only get better as you recall it again and again.

In the end, you know that it is a win-win situation if you choose to change your mindset to experientialism. It may be tough in the consumerist society that we live in but you know that it is the better choice. The key is to focus on the life experiences that you will get from every purchase.

Whenever you are faced with a spending decision, think about what experience this will give you and how you can share it with your peers. It allows you to go beyond the question of “what will this product bring to my life?” It can also make you ask the second question of “how can I achieve the same experience but for a lesser price?” Materialism will only focus on the first while experientialism will proceed to ask the next question.