“Enjoy life. There’s plenty of time to be dead.”
― Hans Christian Andersen
The traditional definition of an investment is one which you put money into something and you get more money out of it than you put into it. That money can be in the form of income – a stream of payments – or it can be appreciation – you can sell that something for more than you bought it for. In some cases (small businesses, rental properties, dividend paying stocks), you might get both.
However, it’s time that we expand out the meaning of the term investment. Every time we spend money, we’re investing it. It might not be an investment in the traditional sense in that, if you go to McDonald’s and hand the cashier over a buck oh five (because freedom isn’t free), you’re not going to get $1.10 in return at some time in the future. Instead, we should be thinking about how much true value in our lives we’re getting out of the money that we’re voluntarily spending.
Yes, there are a few expenses which you have no control over. Actually, there’s one. It’s taxes. Unless you enjoy having IRS agents paying you a visit and taking you away to spend time at the feet of Bernie Madoff, you must pay your taxes. Everything else is optional. Sure, you think that you have to buy food, clothing, and shelter, but you don’t. You have a choice. It’s not a particularly delectable one. The contrast is stark: you could buy food or you could dumpster dive. You could pay for lodging or you could live under a bridge. You get the point. Every time you spend money, you’re making a choice.
When you spend that money, though, are you actually thinking about just how much joy you’re going to get out of that spending, and, furthermore, are you maximizing the joy per dollar spent?
Let me propose a metric that, while you shouldn’t obsess over in every single spending decision, is one that you should keep in the back of your mind. Perhaps you could post it in a yellow sticky note on the front of Monkey Brain’s cage, right next to the DO NOT FEED THE ANIMALS sign.
Return on money spent = Utility / $
What is utility? you ask. Daniel Bernoulli was the first to discuss the utility of spending back in 1738. Utility is, in its simplest form, the satisfaction that you get from using a good or a service. If you really enjoy watching movies but really hate mowing the grass, then the utility of watching a movie will be significantly higher than the utility of mowing grass.
While tenured academics earn their paychecks in their ivory towers trying to come up with formulae for utility involving mu and beta and square roots, the reality is that, for all of us in the real world, we’re never going to spend time trying to calculate the utility of everything that we spend money on. Can you imagine how difficult it would be to come up with a rank order of how much you value chicken cooked at home with no spices versus fried chicken at a restaurant versus watching a movie versus watching the World Cup live versus on and on and on?
Neither does Monkey Brain. He doesn’t want to go through all of that math. In Monkey Brain’s world, math stinks. There’s only one number he knows: not enough. If it’s something that he wants, then you don’t have enough of it to satisfy him. He’s going to tell you that he needs whatever it is that is grabbing his attention at the current moment. If you’re not on top of your game, you’re going to give in to his petulant banana peel throwing and buy whatever it is that he wants just to shut him up.
Those of you who are reading who have children know this exact feeling.
I’m not about to propose that you come up with the definitive list of everything in the world that you could possibly spend money on and determine a utility score for each item. You’d die trying. I’m not even asking you to come up with a formula that you could use to determine a utility score on the fly. After all, how many variables would go into figuring out a formula for putting some number on your enjoyment? By the time that you actually went through the process of calculating that number, you’d be so disgusted that you wouldn’t derive any real pleasure from whatever it was that you were purchasing.
Instead, what I want you to consider is the relative merits of what you’re about to purchase compared to an alternative.
This is best described with an example.
My wife and I really enjoy wine. However, we’re nowhere near the sophisticated palettes that oenophiles are. I can’t discern a hint of saffron mixed with a frisky bouquet of dandelion on the nose combined with a scintillating rush of chili powder on the back of the tongue when I taste a wine.
For me, it’s almost binary. I either like a wine or I don’t. Yes, there are wines that I like more than others, and a few wines that I really enjoy. Beyond that, I don’t have a strong opinion one way or the other.
Therefore, when I’m buying a wine, I do a very quick calculation in my head. Let’s say that there are two wines which I’ll enjoy. One is $10 and one is $20. Will I enjoy the $20 wine twice as much as the $10 wine? Probably not. Thus, I purchase the $10 wine. Even though I would probably enjoy the $20 wine more than the $10 wine, I don’t get twice the utility, and it’s not like I’m buying the grape version of old vinegar when I’m buying the $10 wine. I’ll enjoy the $10 wine well enough, and that’s how I justify the purchase.
Let’s not confuse the issue of buying something I wouldn’t enjoy just because it’s cheaper. If it’s a choice between a $10 bottle of wine that tastes like a mix of quinine and arsenic versus a $20 bottle of wine that tastes good, I’m buying the $20 wine, no questions asked.
There’s pressure to get bigger and better everywhere we turn, and sometimes the cost isn’t even linear. If you look at a 60” flat screen TV versus a 27” flat screen TV, it usually costs more per square inch for the bigger TV than for the smaller TV. Undoubtedly, some of it is due to more bells and whistles that the bigger TV will have that the smaller TV doesn’t, but if you reduce television watching down to its basic premise, it’s watching a show or a game or news or whatever. The 60” TV may be a little clearer, but, before you buy the enormous television, you have to ask yourself.
Will I get that much more enjoyment out of a 60” TV than a 27” TV to justify the increased cost?
If you will, then go for it! Buy the big TV. Invite me over. I’ll bring the $10 wine!
I’m not advocating always going for the cheaper option. Far from it. I’m advocating going for the option which gives you the highest utility for your dollar spent. That’s going to be the best deal for you in the long run, and you’ll find that you are spending more money on things which are more important to you if you think about your purchases this way.
I also don’t mean your everyday, day-to-day expenses. I mean every expense. It’s particularly important that you apply this thinking for your biggest expenses. You’d hate to find yourself thinking to yourself one day “is this mortgage payment really worth what I’m paying for?”
Have you ever gone bigger and found out it wasn’t better? Skimped on something and regretted being so cheap? Tell us about your experiences in the comments below!
Around a year ago, I interviewed small business attorney Patrick Asplin to determine when you really need to engage a lawyer in your entrepreneurial affairs. If you haven’t seen the interview, go check it out!
This article appeared in the Control Your Cash Carnival of Wealth. Go read them. Click on the articles that they say are good. Expand your mind (and add to your reading list). Then come back.
This article also appeared in the Don’t Quit Your Day Job Weekender. If you like charts and answers to hard questions, go check them out. Don’t forget to come back here afterwards.