What are you turning money into?

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Nick Foy, CFP®

In 2005, I bought my first house. It was a total starter home north of Charlotte. New construction, 1,500 sq feet, it became the place that my wife and I lived for five or so years after we married.

Toward the end of the construction process, I realized I was really just taking money and turning it into a house. In 2011, we moved closer to town and ended up building a home in which we still live. I had the same feeling the second time around.

Turning money into other things can be either good or bad, depending on what’s on the other side of the exchange.

I thought I’d compile an admittedly incomplete list of things that you can turn money into. Some of them are worthwhile; they’ll either bring great satisfaction, or will make someone else’s life better. Others are less effective at actually increasing in value over time, either in reality or in our mind.

Things worth exchanging for money (in order of effectiveness in bringing satisfaction)

  • Food for hungry kids (giving)
  • Good investments, ideally index or passive funds and ETFs (saving/investing)
  • Vacations (memories)
  • Free time
    • With family
    • With friends
    • To serve others
  • Health care
  • Housing
    • Power
    • Water
    • HVAC
  • Education
  • Delicious/nutritious food
    • Coffee
  • Clothing (high quality, reasonably priced)
  • A method of transportation (high quality, reasonably priced)
  • Netflix

Things not worth exchanging for money (because they’ll likely bring regret and not much satisfaction)

  • Bad debt (consumer)
  • Status symbols
    • Overpriced cars (even a car guy like me has come to terms with this. I’d rather watch Jeremy Clarkson drive an Alfa Romeo around Wales or looking for driving heaven in mainland Europe instead of actually owning one myself what with all the potholes and stop signs in my neighborhood)
      • Bonus (negative) points for leasing
    • Overpriced clothing
    • Overpriced housing
  • Overpriced coffee
  • Overpriced, underutilized gym memberships
  • Cable TV
  • Bad investments (high cost, tax-inefficient, evidence-ignoring)

Behavioral economists tell us that there are some things that are more valuable than money, and some things that are less. Deciphering the difference and focusing on turning money into things that are more valuable, or will probably become more valuable over time, is a skill practiced by too few.

Said another way, there are five things you can spend money on:

  • Taxes
  • Living
  • Debt
  • Saving
  • Giving

That also happens to be the spending order for the average person. People tend to live until they can’t afford to live anymore, then go into debt trying to spend more on living, then save and give out of what’s leftover.

Placed in their proper order, excluding taxes (which are largely unavoidable, though we can be smart about the way we approach them), and debt, people who are the most satisfied with their finances (largely regardless of income) order their spending like this:

  • Giving (a specific % annually)
  • Saving (a specific % based on future needs/goals)
  • Living (with what’s leftover)

So, for every dollar you spend, think about what you’re exchanging for the money, and determine if what’s on the other side of the trade is something that will add or deduct value. Work hard to only turn money into things that will grow in value over time.

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