This morning I was going through a morning ritual – reading interesting Medium stories.
One was Ed Luo’s “I achieved FIRE at 31 — 5 factors to consider or you might get burned.” An interesting read in general, it included this one line that really resonated:
“Our world is materialistic and revolves around mass consumerism, more so than ever before… We compare our spending to our friends and neighbors and fall into the trap of the hedonic treadmill. This is a poor person’s mentality…"
My Reaction to Mr. Luo’s Writing
This reminded me of a well-known quote about poor money habits. According to the Quote Investigator, Syndicated humorist Robert Quillen defined (in a June 1928 column) “Americanism” as “Using money you haven’t earned to buy things you don’t need to impress people you don’t like.”
The most powerful part of Mr. Luo’s assertion is about how we compare our spending to that of others. Clearly, when we do that, the more you spend, the better you look. On the surface.
This led me to think about all the things we do with money, and how we should consider and rate each such action in several different ways to make truly money-smart choices.
Our Money Actions
Here’s a non-exhaustive list of 30 (legal) things we do around money.
Reading through the above, you’ll quickly notice some of these words are just different ways of saying the same thing, e.g., accumulate and amass, bequeath and leave, contribute and donate, earn and make, etc.
Interestingly, our emotional reaction to these synonyms isn’t always the same. For example, one frequent way of raising money for a venture is by borrowing it. If you’re honest with yourself, you’ll likely admit that “raising” money sounds better than “borrowing” it.
Rating Our Money Actions
The simplest (but less sophisticated) way to rate these actions is by how well (or poorly) they align with who we see ourselves to be – “I’m the kind of person who … money.” where you fill in the blank with the action you’re rating. Then, you can use a rating e.g. from -3 to +3 where -3 = worst, -2 = worse, -1 = bad, 0 = neutral, +1 = good, +2 = better, +3 = best.
For example, I’d obviously rate “I’m the kind of person who wastes money” at -3.
As obviously, I’d rate, “I’m the kind of person who bequeaths money” at +3, because making life easier and safer for my kids and their kids is important to me.
The problem is that money isn’t always so simple. For example, take the word “spend.” Obviously, none of us can avoid spending money, else we’d have nothing to eat (even if you grow your own food, you still need seeds, water, etc. which cost money), have our utilities cut, lose our homes, and so on. Thus, you’d have to rate “I’m the kind of person who spends money” as a +3.
However, not all spending is equal, so some instances of spending would rate a -3.
A More Thoughtful Approach to Rating Our Money Actions
To address the above problem more thoughtfully, I use two nuances – who’s affected how, and how well the action rated aligns with my priorities.
For the first, I look at impacts on:
- My present self
- My future self
- My family
- The planet
Impacts on different entities could run parallel, but they could also counter to each other. For example, saving or investing money takes it away from your present self – negative; and gives (more of) it to your future self, your family, and possibly to society (if you end up bequeathing money to charity) – positive.
So, how do you resolve the dilemma when the interest of one entity runs counter to that of another?
Two ways. First, consider how well the action aligns with your goals and priorities, which usually requires you to consider also the items to which your money goes or from which it comes. Second, find a path of moderation.
My Personal Rating of Important Money Actions
Here’s how I rate several important money actions.
This directly affects my future self and my family in a very positive manner, +3.
It’s neutral for my present self (except for the need to save and invest, which I address separately below).
The impact on society could be seen as negative, in that extreme cases of money accumulating in the hands of the ultra-wealthy often distorts the economy and politics. However, keeping money away from consumerism is a positive for the planet, and thus for society. It’s also good for society that my family would be less likely to become a burden on others. Thus, I’d rate it as an overall neutral for society and the planet.
In terms of alignment, since financial freedom is extremely important to me, this rates a +3.
One caveat here – it’s crucial to know when enough is enough, or you’ll never truly enjoy what you build.
By accumulating enough money to achieve financial freedom, we’ll be able to bequeath that wealth to our kids. Like the previous action, this has no direct impact on my present self.
It has a negative impact on my future self in the sense that to leave money for heirs requires that we spend less than our portfolio and other sources would otherwise allow. By amassing enough, we can enjoy a very comfortable retirement and still leave behind more than we have at the start of our retirement, but this requires us to work somewhat longer, so I’d rate this a -1.
It has a very positive impact on our kids and their kids, +3.
Its impact on society and the planet is like that of the previous action, so again, 0.
In terms of alignment, as I’ve written elsewhere, I see this as part of an unwritten and unspoken contract with my parents and my kids, so +3.
Emotionally, knowing I’ll be able to leave a bequest that will make life easier for my kids and their kids gives me great comfort in the present.
This one is trickier.
Borrowing (or raising money) to gain skills (education, training, etc.), buy leveraged assets (e.g., using a mortgage to finance the purchase of a home or an investment property), or take advantage of low interest rates to finance a purchase we could cover without borrowing are far different than using a credit card to pay for a vacation we’d later struggle to repay. Thus, we need to distinguish between bad debt and good debt.
Borrowing for things we want but don’t need, and where we have to pay a high interest rate may be seen as positive for my present self, because it lets me buy things I couldn’t otherwise afford, so +1.
For my future self, who’ll struggle to repay it, -3.
For my family, who’ll be impacted by those financial struggles, -3.
For society, in the short term, consumer spending is positive, so +1.
For the planet, excessive consumerism isn’t sustainable, so -3.
As far as alignment, such borrowing runs counter to eventual financial freedom, so -3.
Overall, I’d rate this as -2 at best.
It’s also important to note that beyond its financial costs, high-interest debt is a huge emotional trap.
Borrowing to gain skills or to increase net income through (low-enough-risk) leveraged investing is a positive for my present self, as it lets me achieve things I couldn’t otherwise do, so +3.
My future self will also benefit from these, so +3.
My family will similarly benefit, so again +3.
Society benefits from increased economic activity, so at least +2.
Sustainability is less of an issue here, so I’d rate it neutral, 0.
In terms of alignment, this is very aligned with my goals and priorities, or I wouldn’t do it, +3.
Overall, I’d rate this at least +2.
Here too, things are tricky.
Bad Spending (a.k.a. wasting)
Buying things that don’t make us happy is exactly what Quillen was lampooning as “Americanism.” It’s how I distinguish between spending and wasting money.
Going out to eat as one way of getting together with friends and family in a relaxed setting can be good, but overdoing it to the point that it prevents you from taking care of higher priorities crosses the line.
I can’t think of any redeeming feature to wasting, so -3.
Does having the water flow when you turn the faucet or the lights (or A/C) come on when you flick the switch make you happy? Or conversely, would it make you unhappy if the water and/or power was cut off?
That makes paying your utilities good spending. However, overdoing by e.g. keeping lights on where they’re not needed, leaving the A/C on high when you’re on travel, not fixing water leaks, etc. crosses the line.
Does it make you happy to be able to buy a treat for your spouse or kids?
Does it make you happy to go to a concert (once Covid isn’t a risk)?
Spending on things that let you enjoy your life is good for your current self, +3.
Spending reduces your saving from its theoretical maximum rate. However, in moderation it makes saving/investing emotionally sustainable – so I’d rate it a +2 here.
Your family likely enjoys good spending, +3.
Economic activity is good for society, so in moderation I’d rate it a +2.
Sustainability is an issue, because modern life isn’t fully carbon neutral, so at best -2.
In terms of alignment, good spending is aligned with my goals and priorities, so +3 (if it wasn’t aligned, I’d classify it as bad spending).
Overall, +2 seems fair.
Contribute/donate/give/share (the last two are not identical, but rating is similar)
Any amount of money you contribute, donate, give, or share means that money is not available for your present self, your future self, or your family. So seen through those 3 lenses, (overdoing) it would be rated -3.
However, giving to those less fortunate than us is a major societal good, as scripture tells us: “Cast thy bread upon the waters, for thou shalt find it in due time.” – Ecclesiastes 11:1, “He that is gracious unto the poor lendeth unto G-d; and his good deed will He repay unto him.” Proverbs 19:11, etc. +3
Here too, the path of moderation lets us chart a sustainable course. Whether you tithe to your church, or regularly donate to another worthy cause, so long as you don’t impoverish yourself to the point that you and your family become a burden on others, this aligns with my personal priorities. +3.
If you’re like most people, giving to others also makes you feel good about yourself.
Making money is crucial to almost all of us (except for those who were born “1-percenters”).
If you don’t make money (and didn’t receive it as a gift, inheritance, or in vastly different situations as charity), you can’t pay for necessities such as food and shelter, let alone anything more.
You can make money actively, through work, or passively. Some call passive income a myth. I strongly disagree, as I wrote elsewhere.
Regardless of how you (legally) make your money, this is a rock-solid +3 in my eyes.
Being able to cover your expenses without working until your last day ultimately requires passive income. This is only possible through investing.
Here, I include savings accounts, certificates of deposit (CDs), and similar vehicles as investments. They just have far lower risk and offer far lower return than e.g. investing in stock mutual funds (my preferred investment vehicle). When choosing investments, you have to allocate between different risk, return, and liquidity levels as appropriate for each intended goal.
While investing requires you to reduce your spending, which makes it negative for your current self, it’s positive in all other regards. I rate it a solid +3.
Further, having invested reserves offers safety from financial shocks, which is an emotional positive for your present self.
I see repaying debts is a legal and moral obligation that should only be declined in extreme cases (e.g., bankruptcy). Thankfully, I’ve never been driven to such extremes (though I know others who have, and it’s not pretty).
For obvious reasons, doing a good job repaying what you owe, and doing so in a timely manner, rewards you through a higher credit score that makes future interest rates lower.
For me this is a straightforward +3.
Some would understand this as placing money in a savings account or some such.
For me, saving is the necessary first step before investing – setting money aside rather than spending it. However, by itself saving isn’t sufficient to create wealth and achieve financial freedom. Thus, I’d rate it lower, at +1.
The Bottom Line
Borrowing from scripture again, it isn’t money that’s the root of all evil, as some misquote, but rather the love of money – “For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.” 1 Timothy 6:10
And to quote my own grandmother’s pithy thoughts on money, “Money is the least important thing in the world, so long as you have enough.”
The important thing is to have a healthy relationship with money. I hope the above will help achieve that.
This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a relevant professional before making any major decisions.