How to Think About Money
Have enough to do what you really want to do in life
Recently I asked myself the question: “why do I care so much about how much money I have?”.
It was a hard question to answer. The root of the question itself feels ancient, why do people want more than they need?. I wasn’t running into money constraints when trying to live the life I had been living. I wasn’t saving up for anything in particular that motivated me to want more. So why was I stressed out about how much more money I could acquire? I didn’t feel like I was greedy, but I also didn’t feel like I was being rational, either.
So, I decided to take a hard systematic look at what money could really do for me on a quest to figure out the root of this insecurity. Here are some thoughts.
There are roughly eight things that anyone can buy with money, roughly ordered from ephemeral to permanent.
Experiences / excitement. Vacations, nights out, gambling.
Comfort. Netflix, DoorDash, nicotine/alcohol/other drugs.
Nice things. Clothes, cars, top electronics, watches, whiskey collections.
Self-improvement. Education, gym subscriptions, preventative healthcare, news subscriptions, books.
Stability. Rent, debt payments, insurance, groceries.
Building wealth. Investments.
Freedom. Working less (opportunity cost here), “find yourself” traveling.
Promoting your values. Volunteering (opportunity cost again), donating to charity, accepting a job that pays less but promotes your values (opportunity cost).
I don’t have any preachy opinions about which of these things will make you happiest. But on a quest to figure out what makes me happiest I spent a lot of time thinking about the marginal value of each dollar I spend in each of these categories, and I think the patterns I’ve found probably hold true for lots of people.
Spending with Decreasing Utility
The first four categories (Experiences/Excitement, Comfort, Nice Things, Self-Improvement) each have decreasing returns to me when I spend more and more in each category.
Experiences/excitement: Personally, I really like to spend money going out to events, especially social ones like bars, concerts, and vacations with friends or family. It would be hard for me to feel happy and fulfilled without having a budget to do this. But that said, there’s only so much time I have in my life for these kinds of experiences. I wouldn’t want to go out every night of the week or take a vacation once a month, for example. I’ve also found that expensive nights out aren’t generally that much better than more modest ones — of course it’s all about the people you’re out with. There’s a sharp decrease in marginal utility in this category.
Comfort: Comfort spending for me is pretty similar. I like being able to order food in when I’m too tired to cook or to be able to subscribe to streaming services when I feel like watching a movie. But having more money to spend in this category would not really make me much happier. What would I do — DoorDash every meal and subscribe to every streaming service available? I would feel very wasteful doing that and likely not find it that utility-enhancing.
Nice things: I spend less on this category than on any other. This is not because I’m trying to live eco-minimally or have a morality that shuns fancy things, but just because I feel like nice things don’t add much to my life. Because I’m disorganized and move between cities a lot, I feel like things (especially valuable things) just add complexity and stress to my life. More suitcases to pack up, more worry about what would happen if a fancy gadget broke or I got a scratch on a my new car or lost my fancy watch. This utility is why (for me at least) the marginal utility of “nice things” spending can actually get negative.
Self-improvement: Excluding higher education (an absolutely broken industry), the monetary costs of “self-improvement” are very very low especially compared to the time-costs of these activities. If the hard part of getting in shape was buying a gym membership (or a Peloton for that matter), there wouldn’t be so many fat rich people. I suppose I could consider that I could work less and spend more time learning or improving myself with the time — but for me I generally feel like I’d rather just have a job where I feel like self-improvement is baked in.
Spending with Flat Utility
The next two categories have roughly flat marginal utility to spending up to a certain point.
Spending towards basic stability (remember this is things like rent, food basics, hygiene, etc.) is the first tranche of my budget because it’s the stuff that I need to stay alive as a functioning human. I derive extremely high utility from each of the dollars that I spend making payments on rent, buying groceries and hygiene supplies. But the amount of money I can spend in this category is pretty fixed. If I wanted to spend more money on deluxe food or a luxury apartment, it wouldn’t really help me stay alive any better and would (for my accounting purposes) count towards a different category (perhaps “nice things” or “experiences”).
Spending money on investments is the last tranche of my spending, it’s pretty much where my extra money each month ends up. I don’t really have any system for investing money (no monthly goals or budgets) but I end up doing okay just relying on decent spending habits. Each dollar I save goes into my portfolio and starts generating returns alongside each other dollar I have invested. Although, yes, there’s an exponential relationship between dollar returns and time the dollars were deployed, the relationship between dollars I save and utility to me is still linear since each dollar I save just goes into the same machine that’s generating whatever the market will get me at the same rate all the other dollars in my portfolio are working.
The fallacy that a lot of super-savers have, and the reason my graph above splits into three trajectories towards the higher end of the savings amounts is that investment returns are only as valuable as the value you eventually derive from them. If you save up a few million dollars working hard for thirty years in a professional services job you hate whilst pinching pennies only to have a midlife crisis where you burn through that money quickly on sports cars, golf vacations, and antique art you don’t actually care about (for example) then I would say the utility of all the saving that enabled that spending was extremely low utility on the life-time scale.
But, if your diligent savings early in life let you spend the next few decades working a lower-paying job that allowed you with flexibility and time to spend with your family while still affording to own a home — then power to you. Those savings had huge utility.
If you’re saving (and you probably should be saving!) you should have a notion of what you’re saving up for, or you might realize later in life that you wish you could go back in time and live a fuller life with a less constrained budget.
Spending with Increasing Utility
There are two categories that I think have increasing returns to spending. The way you “spend” in these categories though is usually by foregoing higher earnings opportunities. The cost that you incur here is opportunity cost.
I wish more budgeting blogs talked about spending “budget” on these categories. I think a lot of young people, especially those with lots of high-paying opportunities available to them, don’t realize that these categories even exist.
Besides not realizing that opportunity cost is budget available to spend, I think a lot of people underinvest in these categories because small amounts of time or resources put towards exploring passions / volunteering / charity oftentimes lead to negative outcomes (guilt for not donating more, disillusionment at how little impact your work might be making, etc).
Freedom: There are nearly limitless possibilities of what a person could do with their time if they weren’t working a traditional job. I think a lot of people, especially those burned out from years of traditional work, would initially spend this time doing soul-searching travel or learning. But with enough time off, driven people would devote this time to working on fun, fulfilling, and exciting projects. At least I would.
Freedom, though, can be terrifying. There are a lucky few people who know what they would want to do with their time, but for most people the first few months would be really hard and full of doubt. Everyone knows Americans don’t take much time off of work, even when their workplace offers generous vacation. Why? I think it’s usually because work-entrenched Americans don’t know how to spend it.
Promoting values: American culture tells people they can and should want to change the world. For many people, I actually think this might be a bad mindset — I think most people by nature (and not because they’re simple or selfish or incapable) could live fulfilling and morally righteous lives without feeling like they had to leave an impressive legacy. I am not one of those people. I want to change the world, and maybe I even need to change the world to feel fulfilled (perhaps this attitude is the selfish/egotistic one to have, I’m not to say).
But it’s hard to change the world. I don’t want to disparage the everyday stuff (most importantly being decent to others) but to have a shot at creating perpetual long-lasting change in the world you need to be strategic and accept that the process takes a lot of upfront time and resources to get started.
Making an impact on the world is like any other job where it can take months of full-time effort to get “onboarded” and start adding value to your organization. This is hard to do well without full-time effort. Just as hardly any companies would hire an employee who was only willing to work one day a week (even if pay was hourly) because that employee would be hard to keep up-to-date on stuff and would take so much time to get onboarded, you can’t expect to have a high-impact volunteer role at any impactful organization with only a day-commitment/week. If you want to make a difference I think you either have to have impact built into your everyday job (perhaps you work for a non-profit you care about or a company that you believe has a good impact on the world) or you have to save up enough money to go full-time with an un-paid position.
The same that is true for time investment is true for monetary investment. With a $100 donation to a cause you care about you can extend the reach of that organization in proportion to what it’s already doing (say provide X meals for the homeless). But with a $1,000,000 donation you could still provide the same proportion of benefit the organization is already outputting (100,000X meals now) while also having a shot at asserting control of the organization and improving its operations (perhaps with a board seat or by imposing conditions for your money). With $100, you’d have no shot at starting a charity for a cause that needs one but with $1,000,000 you’d now have the capital to realistically do that. The marginal value of donated money increases the more you give.
Conclusion
The conclusion that I’ve come to after all this reflecting is that for me to live a happier and more fulfilling life I have to eventually start spending more of my money on freedom and value-promotion related expenses. I should think of my investments and savings as being for this purpose, instead of just naked money accumulation.