Your Goal Is Not To Die With the Highest Net Worth Possible, It Is To Maximize The Utility of Your Family’s Money
In the past, we’ve talked about how money doesn’t actually exist, but it is instead a promise; a claim check on society that you can use to turn in for goods and services you desire or require. By its very definition, money is a form of debt because it is a claim check on the output of other people. Money can be represented by different things – seashells, gold, shark teeth, electronic points on a computer screen – but the most familiar form is a piece of paper with a picture of a long-dead United States President or founding father that we call fiat currency.
In the final analysis, money is only useful for what it can achieve – the utility it can add to your life in terms of comfort, convenience, efficiency, peace of mind, freedom, and opportunity. Failing to remember this can result in being a miser, which is a foolish way to behave because ultimately, the money will be spent – if not by you, then by your heirs or the government.
We’ve also talked about the different forms of capital – intellectual capital, financial capital, sexual capital, political capital, etc., which can be exchanged for each other. An attractive man or woman, for example, could use his or her sex appeal to find a wealthy spouse, thereby converting sexual capital into financial capital.
Likewise, someone with a lot of financial capital could convert it into political capital by funding special interest groups. A good education (knowledge capital and network capital) can be exchanged for a great job (financial capital). The list is practically endless; capital is just another word for something of value that people want. In many cases, it is fungible and can be exchanged for other forms of capital. We aren’t going to get into the various moral and ethical implications of such exchanges; for now, I’ll leave you to debate that among yourselves.
All day, I’ve found myself thinking about the utility of money. This is closely related to our past discussions of money and capital.
Every Penny You Spend Has Utility … And That Utility Is What Matters
Every penny you spend has the power to provide you utility (something useful to you). The utility of money can come in many forms, such as:
- Convenience (an ice maker, vacuum cleaner, or car),
- Reproductive signaling theory (a Louis Vuitton bag, which tells people you have money and are a desirable mating partner),
- Emotional fulfillment (taking your children to the zoo, spending a weekend with your spouse, or giving money to a charity that you believe makes the world a better place),
- Entertainment (tickets to a concert or play),
- Physical pleasure (a great dessert, a massage, illicit drugs, sex, heating or air conditioning, a cashmere sweater)
- Financial (spending your money on things that generate even more money)
Your job is to live your life in a way that you maximize the total utility of the money that flows through your hands. Many people make the horrible mistake of believing that the goal is to simply make your net worth the largest figure possible. It’s not. Your goal should be to live a life that maximizes your personal happiness and utility, while maintaining the lifestyle you desire.
To prove it: If I offered to double your net worth but in exchange, you had to give up heating, air conditioning, cars, television, and a washing machine, and were never permitted to enjoy the fruits of these inventions again, you would be an idiot to take the deal. The reason is simple: The additional money added to your net worth would have less utility in terms of standard-of-living than the convenience of having your clothes washed quickly, of being able to go more than 20 miles in distance a day without being beaten up in the back of a horse-drawn carriage, or being cool in the summer and warm in the winter.
Saving money is important. Investing money is important. But if you don’t cash in some chips at some point in your life, all of your efforts will have been wasted because those claim checks on society will be taken by the government, spent by your heirs, or redistributed through fees and expenses by professionals such as attorneys left to sort out the inevitable lawsuits that result in the fight over your fortune after you’re gone.
Reader Comments (3)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Malioil
May 16, 2012
I want to say I agree completely. I have always communicated an opinion similar to yours but people whom I have told this too have looked at me blankly, not understanding... I am so glad to find someone who shares a similar opinion, except you are far more informed on the matter.
I collect old currencies, and among them is a $100 trillion Zimbabwean dollar issued in 2008... it is money, more ''money'' than anyone can imagine. If I had went to Zimbabwe prior to the restructuring of their currency my bank statement would have had $100,000,000,000,000 printed on it. Which, according to the people who always think more=better, I should have a fulfilled life, after all I have far more than most in terms of sheer ''money''. Yet a $100 trillion ZWD can buy you about three eggs. It's utility, or yield, is next to nothing, making money worthless. The only thing that makes money worth anything is what you can do with it, how you utilize it. If I earn $1 billion, but live in the same house, eat the same food, wear the same clothes, and get nothing tangible, meaningful in my life through owning that money then it is as useless as the $100 trillion. The satisfaction the $100 trillion gave me is, as a collector of currencies, I had something rather strange in this day and age... that is what it bought me. And thats all it's worth.
Trev
March 22, 2013
Great article. However I disagree with the definition of money as "a form of debt because it is a claim check on the output of other people". Money is simply a medium of exchange. It only represents a claim on the output of others once an agreement to exchange is made. A great example is when a currency reaches hyperinflationary levels. If producers are no longer willing to accept the worthless paper in exchange for their goods or services, then it is no longer a claim on their output.
Joshua Kennon
March 22, 2013
Replying to Trev
Thanks =) Welcome to the site!
Your definition is absolutely true in basic, often agrarian societies, that use a tangible commodity as a primary source of exchange. It is not true in an advanced society that uses a fiat currency with a fractional reserve banking system so that the overall money supply can be managed through the increasing or decreasing of central reserve requirements because in such a system, there is no "there" there.
In other words, if you pay me in chickens, that has utility. No debt has been created. If, however, you pay me with a piece of paper that we agree I can redeem later, and everyone honors this commitment, between the time of the paper being handed to me and the moment I spend it, a debt has been created, backed by the aggregate output of the society that denominates the debt. I have a legitimate moral claim on the output of the civilization. If the paper is issued solely by you - a promise to let me get so many pounds of grain after the harvest - then you are, de facto, in debt to me because the time between redemption and creation of the value requires a non-documented loan to be created.
It's a bit more complicated than that but if you're curious to know the reasons, as well as the mechanics behind it, any decent college-level macroeconomic textbook should suffice; pick up a used copy on Amazon and read through it. It's not terribly complex once you understand the different money supplies (e.g., M1, M2, M3). Any freshman or sophomore economic major should also be able to sit you down for about ten minutes and walk you through the mathematics of how this counterintuitive position is a factual reality so if you know one, take him or her out to coffee because it would be worth it to understand.
Although it sounds ominous, the idea of money as debt isn't nearly as bad as some of the population thinks. A commodity backed currency, while having the superior position of possessing utility on its own and serving as a natural restraint against inflation, has no mechanism for stopping crippling deflation when an economic spiral begins. Deflation is far more painful, and has a much higher human cost, than its twin.