I have talked a lot, on the side, about money on this blog. I have not made it clear, in actuality, how I manage my money to get where I am. This will be a condensed post on 3 topics which will be expanded upon in future posts. Here is how I manage it:
- Determine what things provide value
- Buy them at the best possible price I can
- Invest all the rest of the money
At its core, this is relatively straightforward. However, most people go wrong at all 3 steps. Let’s break down what I mean by those steps, using the gym is an example:
- Determine what things provide value
This is a relatively difficult concept to master. Some things that seem to provide little value provide enormous amounts in reality, and some things that seem to provide a lot of value also provide none. All of this is also context dependent. I own an extensive home gym setup consisting of a smith machine, a half rack, 2 cables, adjustable dumbbells, well over 300lbs of weight, and a bench. This all cost me approximately $2400. I could have just continued going to the gym, where I maintain my membership anyways at a cost of $40/month. However, both the gym membership and the home gym setup provide value.
The gym membership provides value in the sense that my girlfriend and I get a lot of enjoyment from it and it comes with other things, such as pool access, track access, ect. We enjoy going to the public gym sometimes, and I still go with friends.
The home gym provides a ton of value in addition to this as it removes any semblance of excuses, does not suffer from breakdowns considering if it does I can repair it immediately (the smith machine at the public gym we go to has been down for weeks), and will stay with me effectively for the rest of my life considering fundamentally they are uncomplicated, easy to repair machines. Seeing as I will likely use the gym equipment for the next 50 years, as will my girlfriend and very possibly my teenage/adult children, the actual cost per use is miniscule, and working out is in my opinion almost the highest value thing anyone could do, ranking well above getting a university education.
An example of a poor value purchase would be an apartment larger than I need. There are some quite nice apartments nearby, but they would cost $400/month more than my current arrangement. But they simply add no value outside of a “nice” factor, and the hedonic treadmill would quickly adapt to them. This would be a terrible choice, despite seeming to provide “more”. Or, at this stage in life, a house – I would pay more in property taxes, repairs, utilities I do not have to pay, ect. in a mortgage than I do in rent currently considering my very cheap price, let alone the interest on the mortgage.
Fundamentally, evaluate how much you get out of the object/service after the hedonic treadmill has worn off. More on this in a later post. Purchase nothing that provides negative value, such as video games (outside of a few which function as an art piece much in the same way a book does, I think these are a waste of time).
- Buy at the best possible price
Convivence pricing is a trap. I can buy chicken for $12/kg cheapest at my local store of $9/kg at a business supply store near me. Grains are even worse, I can purchase quinoa at a third of the price from said business store. If an item that provides 80-90% of the value of an item is available at half the cost, and the item is not critical, get that instead. This is not a hard concept, yet it is very often violated. You almost never need to buy something right now.
- Invest the rest
Do not spend the rest on things that provide less value – it is much better value invested. This is simple, yet most people don’t. Diversified global all cap ETFs existed and would be a hell of a lot better than what most people do with their money (This is not financial advice and I am not a financial advisor. You know that). Despite this, very very few people invest on their own. It is not hard, and learning is not hard. Future you will thank you for this.
If you operate in this manner, you will not need a budget, it will be an irrelevant concept.