Your Goal Is Not To Die With the Highest Net Worth Possible, It Is To Maximize The Utility of Your Family’s Money

In the past, we’ve talked about how money doesn’t actually exist, but it is instead a promise; a claim check on society that you can use to turn in for goods and services you desire or require. By its very definition, money is a form of debt because it is a claim check on the output of other people. Money can be represented by different things – seashells, gold, shark teeth, electronic points on a computer screen – but the most familiar form is a piece of paper with a picture of a long-dead United States President or founding father that we call fiat currency.

We’ve also talked about the different forms of capital – intellectual capital, financial capital, sexual capital, political capital, etc., which can be exchanged for each other.  An attractive man or woman, for example, could use his or her sex appeal to find a wealthy spouse, thereby converting sexual capital into financial capital.

Likewise, someone with a lot of financial capital could convert it into political capital by funding special interest groups.  A good education (knowledge capital and network capital) can be exchanged for a great job (financial capital).  The list is practically endless; capital is just another word for something of value that people want.  In many cases, it is fungible and can be exchanged for other forms of capital.  We aren’t going to get into the various moral and ethical implications of such exchanges; for now, I’ll leave you to debate that among yourselves.

All day, I’ve found myself thinking about the utility of money.  This is closely related to our past discussions of money and capital.

Every Penny You Spend Has Utility … And That Utility Is What Matters

Every penny you spend has the power to provide you utility (something useful to you).  The utility of money can come in many forms, such as:

• Convenience (an ice maker, vacuum cleaner, or car),
• Reproductive signaling theory (a Louis Vuitton bag, which tells people you have money and are a desirable mating partner),
• Emotional fulfillment (taking your children to the zoo, spending a weekend with your spouse, or giving money to a charity that you believe makes the world a better place),
• Entertainment (tickets to a concert or play),
• Physical pleasure (a great dessert, a massage, illicit drugs, sex, heating or air conditioning, a cashmere sweater)
• Financial (spending your money on things that generate even more money)

Your job is to live your life in a way that you maximize the total utility of the money that flows through your hands.  Many people make the horrible mistake of believing that the goal is to simply make your net worth the largest figure possible.  It’s not.  Your goal should be to live a life that maximizes your personal happiness and utility, while maintaining the lifestyle you desire.

To prove it: If I offered to double your net worth but in exchange, you had to give up heating, air conditioning, cars, television, and a washing machine, and were never permitted to enjoy the fruits of these inventions again, you would be an idiot to take the deal.  The reason is simple: The additional money added to your net worth would have less utility in terms of standard-of-living than the convenience of having your clothes washed quickly, of being able to go more than 20 miles in distance a day without being beaten up in the back of a horse-drawn carriage, or being cool in the summer and warm in the winter.

Saving money is important.  Investing money is important.  But if you don’t cash in some chips at some point in your life, all of your efforts will have been wasted because those claim checks on society will be taken by the government, spent by your heirs, or redistributed through fees and expenses by professionals such as attorneys left to sort out the inevitable lawsuits that result in the fight over your fortune after you’re gone.