When starting a new job and moving to a new place money comes up a lot. How much money will I make at this new job? How much will I have to spend on a place to live? As I come off of the teet once and for all, I have been thinking a good deal about money. Today I would like to talk about what money is, how money is earned in the modern day, and how I choose to spend money.
What is money?
Money is described as a “store of value”. The value that money stores is human energy, or what we call work. In the same way, a battery is used to store electricity, money is used to store human energy that can then be spent at a future time. When we spend money we are really just trading our human energy for the product of someone else’s human energy.
I could exert my time and energy to paint my house, or I could pay someone else to use their time and energy to do it. I could also go to a restaurant and buy a meal, the product of someone else’s energy. If I pay someone else to paint my house, it will most likely be done better and in a shorter period of time. The meal I have at a restaurant is going to be better than the meal that I would have at home. The reason that money can be exchanged for a higher quality product or service than I can produce myself is because of specialization**.**
How is money earned in the modern day?
Today people earn money through specialization. Specialization allows individuals to become very good and very efficient at one specific service. They then exchange this service for money. However, because they have a high degree of skill in this specific area, they can produce more energy per unit of time than they could in other areas. I can make a lot more money in one year as a Software Engineer than I can as a lawyer. I am much more skilled as a Software Engineer so people are willing to pay more for each unit of my energy. As an economy becomes larger and more complex, specialization increases. Jobs in New York are a lot more specialized than in Red Deer. As a result of specialization, people in New York are paid a lot more than people in Red Deer.
In the modern day people have less varied jobs, but a more varied life. They help others in one single way and get paid enough for it that they can then go and do other things. Compare this to someone working on a homestead 150 years ago. This person had to be a farmer, a carpenter, and an accountant. They were more varied in their work, but they didn’t earn enough to have variety in other areas of their life.
How to spend money?
Well since money is simply a store of effort, you should spend money on anything that is worth the equivalent amount of effort.
If a sandwich is $10 and I make $30/hr I need to decide if that sandwich is worth 20 minutes of my time. Now making a sandwich requires very little specific knowledge, so one could argue they could make a sandwich in less than twenty minutes minus the cost of goods. However, for tasks that require more specialized knowledge, such as car maintenance, paying someone else to do it makes more sense. The amount of effort that I would need to expend to acquire the knowledge about car maintenance and then fix the car would be much greater than the money it would cost me to pay a mechanic.
However, there is a catch. There is one thing that makes these calculations a little less straightforward. Money can be used to earn more money**,** whether through investments or access to opportunities. This means that money now can be equivalent to more money in the future. This adds a time component to the above calculation**. Not only do I need to decide if the $10 sandwich is worth it, but I also need to decide whether I want a $10 sandwich today or a $20 steak next year.
How do I choose to spend money?
When we work and store energy, what we are really doing is sacrificing today for tomorrow. We are doing the hard part today so that the future is easier.
“What you want to get everyone to is retirement…Retirement is when you stop sacrificing today for some imaginary tomorrow. When today is complete, in and of itself, you’re retired.” - Naval Ravikant
I have always been on the frugal end of the spectrum and was wondering why this is. I have not had financial difficulties and haven’t ever felt limited by my financial situation. Why then am I frugal? I have decided it’s because of this notion of sacrificing today for tomorrow. I want to get to the point where I don’t have to sacrifice today for tomorrow. It’s not that I don’t want to work, but I want to choose to work on what I want and not feel pressured to put food on the table. Naval calls it retirement, others call it F U money.
This leads itself to frugality because I know that money can be used to create more money, and that time is one of the most variables in this equation. If I am money-wise now I know that this will pay dividends in the future. I will be able to capitalize on investment opportunities and I can build a nest egg to use if I ever want o start my own company.
Now by no means do I want to live a completely boring life right now. There is a balance between spending now and saving for the future. Especially when I am young there are many things I can do now that I won’t be able to do when I am older. Because of this, I focus on spending money on experiences rather than things. I don’t really care about brand-name clothes or fancy cars, but I do care about enjoying life and my youth. I simply try and be conscious about what I spend money on, and conscious of how I put my money to work.
Summary
To summarize, I can build my store of human energy by specializing in one thing, becoming really good at it, and then getting other people to pay me money for it. I can then put this money to work to earn more money for the future. My goal is to have enough energy stored that it gives me the freedom to do what I want to. However, I don’t want to completely sacrifice today for tomorrow and should focus on spending money on experiences rather than on physical goods.
– Mitch
** If the money is not used in a productive manner, it will be worth less in the future and the opposite is true
Quote of the Week
Rule No. 1 [of investing] is never lose money. Rule No. 2 [of investing] is never forget Rule No. 1. - Warren Buffet
Favorite Things of The Week
📔 The Courage to be Disliked - Ichiro Kishimi and Fumitake Koga
I was initially skeptical of this book but it has actually been quite interesting, many similarities to stoicism. The book does make some bold claims but if taken with a grain of salt has value.
📺 Better Call Saul - Netflix
Breaking Bad spin-off.