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The Value Of Money

2 days ago while walking back from the grocery store I dropped 1 penny. I momentarily hesitated to pick it up – but why? I’ve thought about it and came up with the following post regarding the value of money.

From 2008-2012 I could have dropped a dollar and wouldn’t have cared to pick it up if it wasn’t in immediate reach. I didn’t value money. I only thought in terms of $100’s, which was the denomination of my most sought-after possessions.

Starting late 2012 I started thinking in terms of pennies, specifically how they added up to help me achieve my goals. A few pennies together could make 5 cents or a dime and that could pay for part of my weekly coffee. I kept thinking about the value of money in terms of pennies up until late 2015.

From 2009-2015 my hourly income didn’t increase.
There was no major inflation and I didn’t gain an inheritance.
The only thing that decreased was my spending. The best things in my life cost damn near nothing and the pricey things brought me very little genuine pleasure.

August 2013 I decided to put this theory of lifestyle pleasure and spending to the test. I sold nearly everything I owned, set aside all my expensive hobbies, and completely cut out luxury spending (fancy dinners, drinks, theater).

I thought that by spending even less and becoming more frugal, I would be even stingier with my money. This, in fact, only lasted a few years. By early 2015 I had accumulated a very sizable investment account.

With my overhead low and my hourly income high, picking up that penny no longer makes a difference. The value of money has changed.


Your Personal Value Of Money

Society would likely consider me wasteful if I didn’t bend down to pick up change off the ground. However, logic tells me that it would be a wasteful to spend the time, thought, and effort to pick it up. I would have to pocket it, then unpocket it when I get home, store it, and then put it together with other coins to figure out a way to spend it.

Though this process might be ingrained in one person, it’s completely queer to me. Frugality is not in my nature as I’ve testified to before.

How much money could I lose without worrying?

January 2016 I wrote this post. It involved a $1,500 bill from a rental car agency for damages to my rental car. I remember it very well. I was stressed, distraught, and worried for nearly 2 days.

If I lost $1,500 today it would suck but I wouldn’t be distraught.
The magic number, however, is lower, around $500.
That’s about 1/15th of my net worth.
I could lose $500 without batting an eye.

  • $500 = 5 hours of working.
  • It’s 20% of my investments’ passive income.
  • It’s renting my apartment for a week.
  • It’s 30% of my core monthly spending.

The point isn’t to waste money but to genuinely understand the value of money.

How much money you would be willing to spend on a service to free up your time?
What’s your free time worth?

Imagine you need to take care of some complicated bureaucratic paperwork. There is a reliable company willing to do it for $x – what is that $x for you?


Why Is This Relevant?

By understanding it and legislating it, you will make easier and more  effective financial decisions. It allows you to put the value of your money and time into perspective.

“Money makes money.”

“Time is money.”

It’s valuable to graduate our financial mindset from worrying about every single penny to worrying about only a meaningful percentage.

That percentage is different for every person. Various factors influence that percentage:

  • your work ethic, your diligence
  • your net worth
  • your outstanding debt
  • your hourly remuneration rate
  • your age
  • your future income potential
  • the breadth of your skillset

If you are buying a $500,000 home and the deal comes down to negotiating $5,000, would you hesitate or pass on the deal?

Most healthcare professionals don’t worry all that much about 1 penny. That’s because they make multiple $1 decisions daily – groceries, cafes, dry cleaning, gasoline purchase, etc.

1 penny is 0.01% of $1.

If the same person was making a $100,000 purchase then they certainly would care about $1,000. Probably because they make very few $100,000 decisions.


Overvaluing Money

Ignoring your personal value of money can lead to overvaluing money, making it harder to make financial decisions. Worrying about every last penny or dollar or every $100 can be crippling.

“Should I spend $500 on the CPA?”

“Should I get a maid for $300/month?”

“Should I paint the room myself or pay $1,000 to have it done?”

When it comes to our jobs, we overvalue the paycheck and so we might get stuck in a bad job for too long. Unwilling to part with $10,000 extra a year, we choose the more lucrative job over the less-shitty job.


Undervaluing Money

Money can buy us staples of life, luxury goods, experiences, and the freedom of time. Each individual will have their own priorities as to what’s most important to them.

Letting $100 slip out of our hands for an expensive dinner or $150 for unnecessary car trips adds up to a lot of lost opportunities.

Failing to save $100/month from now until age 60 would mean having $50,000 less in my retirement account. That’s huge. I suspect that the average healthcare professional household lets 30% of their income slip through their hands – that’s a lot more than $50k in 20 years.


Investing In The Market

The last thing I want to say about the value of money is that it’s best realized by investing your cash.

The return that the market is willing to give you is dependent on your time, expertise, and your ability to take on risk.

It’s wrong to assume that your money should earn 10% or 15% or 20% just because you are willing to invest it. When you invest in passive index funds, you might on average have 5-6% annual returns. This is before factoring in fees, taxes, and inflation.

The reason real estate sometimes offers up better rates of return is because it also requires an expertise and time factor. While passive index funds are fairly hands-off, real estate is far more resource intensive.

By seeing how such different investments return different profits to you, the value of money becomes quite real.


What Should One Do With Such Info

I find it worthwhile to determine the value of money. This will change at different stages in your life. Hopefully every last penny will mean a lot in your wealth accumulation phase. In time, your time will become far more valuable.

As you gain more investing expertise, you learn to earn more without necessarily trading your free time.

So if you have the option to free up some of your personal time to do more meaningful things, it might be worthwhile to pay for services such as a maid, a personal trainer, a business coach, a financial adviser, or an accountant.

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