Money should never be spent, only invested

November 7, 2015

by — Posted in Philosophy

/rant ahead. tread with caution

This is a fundamental paradigm shift in thinking, though in practice it may seem superficially similar to the normal person who spends money. The primary difference is to always think in terms of ROI, or return on investment. Money should only ever be spent in expectation of a better ROI than the money that was spent.

This is particularly important when we talk about superfluous material consumption or purchasing of luxury services/experiences, such as first class flights versus economy flights.

As things stand now, we seem to categorize the use of money in a few different ways. When we talk about investing in the traditional sense of investing – everyone understands this principle. You would never invest $1000 in the expectation of getting $900 back.

When it comes to other things – it’s not so clear. Some things are also classified as an investment – but very vaguely and abstractly, without any real concrete logic, math, or heavy thought of any kind behind the classification. An example of this is paying for college education. When faced with the skyrocketing price tag, many argue that college education is an ‘invaluable investment’, and well worth it at any price.

That much, definitely, it not true. There are few things, if anything, that are well worth it at any price, and for many out there, at least, it seems as if investing the money that would be paid towards college tuition in a traditional sense would definitely yield far more material benefits down the line (see:

Another nefarious category is the realm of spending money for ‘happiness’. E.g., buying a first-class ticket for say, $5000, instead of an economy ticket for $400. I was upgraded to first class once on a domestic flight, and happened to be sitting across the aisle from a rather talkative fellow passenger, who revealed he had paid $5000 for his seat. I had paid less than $300 (n.b. this was being reimbursed – otherwise I definitely would have paid $0 instead).

In that case, we ended up with the same experience, and so I definitely got the better end of the deal, but even had I been in economy and him in first – would that experience of being in first-class, and the associated comfort, happiness, or other metric of value being employed, be so great as to warrant a 15X+ increase in price? The only difference I felt being in first class was that there was a really nice flight attendant who kept refilling my tomato juice the instant I finished it. If my tolerance for tomato juice and the capacity of my stomach had been infinite, I might have gone through a couple thousand cans of tomato juice and theoretically recouped my value, but that not having been the case, I failed to really see how the experience was worth more than maybe an extra $10 to me – not an extra $4700.

That flight was maybe 4 or 5 hours. For that amount of money, I could have climbed Kilimanjaro two or three times over, gone on an expedition vessel to Antarctica, visited the Amazon rainforest, gone to North Korea, bought an island (true story, not an exaggeration), rowed around the world in a kayak, learned how to skydive and go skydiving at least 50 times, or any other number of infinitely more worthwhile experiences that would have personally brought me infinitely more happiness.

But for some reason – we don’t think about the value of our money in terms of ROI and opportunity cost when we’re in consumption mode. It’s only – will this make me happy-ish right now? And if the idea seems vaguely like a yes, we just go for it, without really thinking through the cost-benefit analysis.

There are absolutely experiences that are worth every cent you pay – particularly if you don’t give in to all the pointless frills that the world tries to upsell you on. In 5 hours, when we step off that plane, that guy who paid $5000 and I who paid $300, are going to be in exactly the same place, no better or worse off than the other. So many things in life are similar – we pay so much more than we need to on transient, ephemeral indulgences that really leave us no better off in the end.

That said – taking that economy flight halfway around the world to Tanzania, or taking an extremely discounted repositioning cruise across the Pacific Ocean, or jumping on a last minute ticket to Antarctica – those are all experiences I’d do again in a heartbeat, and I absolutely classify as good investments. I got the Thiel Fellowship in part because they were impressed by my having just left school and gone to Tanzania to climb Kilimanjaro (I think), I met my cofounder in Antarctica, and I strengthened extraordinarily valuable friendships and made new ones on the repositioning cruise.

And yes – they were all experiences I deeply enjoyed in of themselves, and I would do it again just for that. I would not, however, ever pay for a first class ticket to Tanzania, or a balcony suite on a cruise ship. Those are the kinds of consumptive upgrades that yield little to no true value over the heart of the experience itself, while exorbitantly increasing the price.

Put in other words, this might go something like this: Invest your money in the best experiences and lessons you can, and find the cheapest path to the heart of those experiences and lessons. Ruthlessly exfoliate and eject any extravagance that adds nothing to the fundamental value of the experience and significantly increases the cost. It is likely to tip your ROI from very positive to much less positive.

It’s hard to calculate ROI for a lot of things – but just keeping the concept in mind and being cognizant of the principle, I think, will go a long way in rectifying mistaken wrongs. Another way about it may be to visualize opportunity cost: “is this really the best use for 500 of my dollars? What else could I use this money for that might bring me even more happiness, learning, experience, wisdom, or any other metric of value to me?”

And if you can think of plenty of more valuable things to be using your money for – well, there you go.

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