Ways to Spend Money

by Eric on June 4, 2010

Every time I spend money, I try to mentally place the expense in one of five categories. Those categories are:

Helping myself and my family
Helping other people
Needs and material comforts
Memory creation (experiences)
Waste

Some expenses don’t categorize neatly. It’s not an air tight system. It’s just a useful way for me to think about money.

I don’t spend much effort on this. I just kind of casually consider it whenever I spend. I really only have one goal in doing this, and that is keeping the ‘Waste’ category as small as possible.

Waste

Waste is any expense that doesn’t fall under one of the other categories. The way I think about it, if I spend money and the result is not something in one of my four good categories, then I’ve wasted that money.

The whole point of this mental classification is to minimize wasteful expenditures.

Helping Myself and My Family

Helping myself and my family encompasses expenses that meet two criteria. First, it must improve my family’s condition. Second, it must compound.

If I buy an asset intended to provide us with money, that investment falls under this category. Examples are shares of stock or CDs. (The money that investment provides will compound).

If I spend money to develop some useful skill that enriches our lives, that expense falls under this category. Skills that increase earning power, make us more efficient or effective, or help us create memories qualify. (I’ll explain memory creation in a minute). Examples are learning to cook, fix cars, program computers, dance, take pictures, pick stocks, etc. (The money, efficiency, or enjoyment the new skill provides will compound).

If I spend money on something that helps me get more money, that expense falls under this category. An example is gasoline to get me to work. (The money I earn will compound).

Helping Other People

This is charity. This can be giving to organizations that help people or directly to individuals. I prefer that this money compound, but I don’t insist. One thing that I do insist is that this money be used for genuine help and not for enabling destructive behavior.

Needs and Material Comforts

Needs are food, shelter, water, clothing, healthcare – things necessary for survival. Material comforts are things like air conditioning and transportation.

This category is tricky for two reasons. First, it can be tough to distinguish between an acceptable material comfort and a wasteful extravagance. There is no clear rule. I have to be careful with these.

Second, sometimes it’s tough to know whether something belongs in this category or in the ‘Helping Myself’ category. For example, fuel to get to work belongs to ‘Helping Myself.’ I also need food and clothes to work, but I put those in ‘Needs and Material Comforts’. So what’s the difference? I don’t dwell on it. Neither of them belongs to ‘Waste’, and that’s really all I care about.

Memory Creation

Memory creation just means doing something fun that I and my family will remember fondly. Taking a family trip, going to a rodeo, or going to a concert are all examples. It just has to be fun and memorable.

An ordinary outing to the movies doesn’t count. Neither does sitting around and watching television. It has to create memories that me and my family will cherish forever.

I used to think that spending on fun, memorable experiences was wasteful. As I’ve gotten older I’ve learned better.

Don’t misunderstand me: I’m not saying creating these memories requires spending money. The memories come from doing fun activities with the people you love. There are plenty of these activities that don’t require money. But I’ve learned that money can facilitate these activities, and when it does it is money well spent.

Incidentally, if you think (like I foolishly did) that these kinds of memories aren’t valuable, I have a couple of exercises for you. First, think of your fondest memory. It can be something from childhood, high school, wedding day, whatever. Now imagine that some scientist will pay you to allow him to erase that memory from your mind. It will be as if it never happened. How much would you charge him? I bet it’s a lot.

If that doesn’t make you appreciate fond memories, try this. Go talk to an old person whose health is declining. Notice her demeanor when she talks about ordinary stuff – the news, food, the weather, etc. Then notice her demeanor when she talks about fun times with her children. How much do you think she values those memories?

Conclusion

This is not a rigorous system, and it’s certainly not all that I do to scrutinize my expenses. It doesn’t say anything about the proportions among the categories. But it does give me a framework for identifying and eliminating wasteful expenditures. Of course, that leaves more money for spending on the four good categories, which is the whole point.

I hope this will be a useful framework for you to consider your expenses.

How to make more money

by Eric on April 30, 2009

There are so many angles for getting/keeping money. Legitimate investments and arrangements like stocks, bonds, options, futures, derivatives, commodities, arbitrage; real estate, commercial real estate, REITs; savings accounts, IRAs, Roth IRAs, HSAs, 401Ks, 403Bs, 529s; I could fill up this page with various financial instruments intended for wealth maximization. And that’s not a bad thing. I’ve spent considerable time and effort learning about these instruments and employing them for my own ends. They have their place.

There are also schemes, cheats, and tricks. These mostly involve fooling customers, cheating on taxes, skipping out on debt, etc. These are for losers. You can’t prosper long term by cheating.

Over the long term, your economic reward will likely be dominated by one component: the value that you deliver to others. (There are exceptions – Gandhi, Mother Teresa, etc.) Don’t waste your energy looking for a shortcut. Stop trying to work the system. If you want more, earn more. Focus on maximizing the value you provide to others and the money will follow.

Why Goldman is golden

by Eric on March 19, 2009

I believe this week’s drama over the AIG bonuses is a diversion. It’s meant to distract from the unveiling of AIG’s counterparties. The media and some Washington demagogues got Americans all fired up over $165 million in executive bonuses. This sum is a little less than 1/1000th of the bailout money AIG has received so far. But it makes for good television.

Far more distressing is the question of how AIG has used the rest of the bailout money. I don’t feel like spending a lot of time on this. You can see the links below for elaboration. The short version is that Americans had to cough up to pay off AIG’s debts to foreign banks and Wall Street firms.

Exhibit A: AIG Counterparties

So why did Americans have to pay for this? Weren’t we told that the whole world economy would implode if we didn’t save AIG? Why couldn’t AIG just file for bankruptcy like any other insolvent firm?

I believe it’s because they owed the wrong folks – namely well-connected Goldman Sachs.

Exhibit B: http://abcnews.go.com/Blotter/Blotter/story?id=5891663

If AIG were allowed to go bankrupt, Goldman and others likely wouldn’t get all their money. By saving AIG, the government effectively made it a conduit to transfer hundreds of billions of dollars from taxpayers to foreign banks and Wall Street firms.

For more elaboration, see these:

http://www.slate.com/id/2213942/

http://www.slate.com/id/2214076/

One more thing: why was bankruptcy ok for Lehman brothers, but all the other big boys required rescue? The line you hear from the media and from Washington is that there was no political will to save Lehman. Everyone was bailout weary and someone had to be made an example. I’m not so sure that’s the real story.

Exhibit C: http://www.thedeal.com/dealscape/images/Lehman_show_case_doc-3776.pdf

This lists Lehman’s top 30 creditors. Goldman is nowhere to be found.

I’d like to see a study on price movement of stocks of the largest corporate contributors to winning Presidential campaigns. My hypothesis is that they outperform. Let’s watch GS stock for the next 5 years.

Someone please comment and explain why this is all nonsense conspiracy talk. Please point out what I’m overlooking.

Full disclosure: I own an AIG life insurance policy. Thanks for the bailout.

Update:

Looks like Paulson and Blankfein had a lot to talk about prior to AIG’s rescue. http://www.nytimes.com/2009/08/09/business/09paulson.html

Now is the time to build wealth

by Eric on December 18, 2008

I’m so excited. This is the cheapest US stocks have been in my investing lifetime. That’s not to say that they won’t go still lower – only that they are collectively on sale. I don’t know where the market will be next month, next year, or even in the next five years. But I am quite confident that 10 – 20 years from now we will remember this time as a ‘sale of the century’ on American equities.

Many people lack the guts to participate right now. That’s great news for the rest of us. As Ben Graham said, “In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.” And as Warren Buffett famously said, “You try to be greedy when others are fearful and you try to be very fearful when others are greedy.” And finally, from Peter Lynch: “Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.”

Check out my collection for more quotes on investing.

Disclaimer

Remember that you shouldn’t get your investing advice from the internet. Educate yourself and understand what you’re doing and why.

What is the world’s largest ponzi scheme?

by Eric on December 17, 2008

Why does everyone keep calling the Madoff hedge fund the world’s largest ponzi scheme? Have they never heard of social security?