Spending and allocating money responsibly, for you.

I used to want to buy a lot of stuff. In grade school, I even made a list of things I wanted to buy in the future when I could afford them. But now that I can afford most of the things on that list, I have a compelling urge not to spend my money on them. And it’s not because I’ve lost interest in that stuff, rather I have developed a very simple philosophy: spend money where the result yields the highest anticipated ROI. If the ROI of spending money on x is higher than the inertia of cash and current alternatives, then spend it on x.

This spending philosophy developed during my first year of financial independence (I wish I had learned this sooner). Prior to this, I didn’t realize how expensive life is. We’ve got bills to pay, food to eat, and we need shelter, transportation, and clothing. Even recreational goods are expensive. We tend to only consider the sticker price as the main cost, but stuff comes with a lot of underlying expenses, both monetary and non-monetary which can and will quickly drain your time and capital if you’re not careful.

When you buy a car, you obviously should budget for insurance, gas, and maintenance. But when you buy a new videogame console, for example, we don’t always take into account the games, accessories, in-game purchases, and most importantly, the time we will spend on it. ROI in the context of spending money is not limited to financial return. There are other variables such as happiness, health, and psychological needs that should be a part of the equation. This is where things get a little tricky.

First of all, time spent on a purchased thing should be the most important factor because time is non-fungible. It’s the only resource we know we can’t make more of and we’ll never be able to recover the time we’ve lost. The word “time” is the most commonly used noun in the English language for a reason.

But this isn’t to say that every waking hour should be spent grinding, hustling, or even working. Rather, your time just shouldn’t be wasted. What defines wasted time is a little subjective, but can be broadly defined for everyone. Time wasted is time not used enjoyably or for growth. Some situations where we objectively waste time are when we are looking for something we lost, waiting in lines, or being sick (if what you got was avoidable).

Aristotle once said, “Leisure of itself gives pleasure and happiness and enjoyment of life, which are experienced, not by the busy man, but by those who have leisure.” He also recognized that we must work in order to afford necessities to earn leisure “We give up leisure in order that we may have leisure, just as we go to war in order that we may have peace.”

No one should abstain from spending money on leisure—no matter how prudent one may be. The argument for valuing leisure can be summarized in a single quote from George Bernard Shaw “Leisure, though the propertied classes give its name to their own idleness, is not idleness. It is not even a luxury; it is a necessity, and a necessity of the first importance. Some of the most valuable work done in the world has been done at leisure, and never paid for in cash or kind. Leisure may be described as free activity, labor as compulsory activity. Leisure does what it likes; labor does what it must, the compulsion being that of Nature, which in these latitudes leaves men no choice between labor and starvation.”

To live a life where you can do whatever you want, whenever you want, requires financial freedom which can be achieved by either downgrading your lifestyle or building wealth (given that you don’t inherit a large windfall). True wealth is started but not established by wages. Wages can make someone comfortable or rich, but true wealth comes from ownership of assets^[1]. Every single person on the Forbes 100 list is there as a result of ownership. Moreover, poverty and wealth inequality stems from ownership or lack thereof.

So before you decide to spend all your money on leisure, let’s consider building wealth on the ROI judgment to conserve your leisurely indulgences. I’m willing to bet that the majority of people reading this have a significant portion of their net worth in cash.

Right off the bat, there are financial products that are superior. Cash, no matter what currency you hold, is prey to inflation. On the flip side, cash is convenient because any business that sells goods or services will accept your cash in return for their offering. So cash is handy for buying things, but you only need an amount which you plan to spend in the near future. For the rest of your cash, it may be smart to spend it on investments that will build or at least preserve your wealth.

Investments don’t need to be illiquid or pricey like a property or a private company. Buying lower-yield, low-risk liquid financial assets give you the ability to quickly transfer them into cash in case of an emergency, while still earning you a return on your money while it’s not in use. Some examples of liquid income-generating assets include but are not limited to stocks, bonds, and money market assets.

Choosing whether to stay in cash, buy assets, or spend on leisure makes the initial philosophy of spending money on what has the highest anticipated ROI convoluted. There are too many factors and possible outcomes at play to spend with absolute certainty of the best possible ROI. But with this philosophy, we can at least make more astute spending decisions based on our personal goals and aspirations.

The next time you spend money, especially on a large purchase, consider these factors not only in the short term but also in the long term. What is the ROI in a five or ten-year time frame compared to alternatives? Buying a new iPhone may be justifiable for some, while others would gain a lot more by otherwise donating, investing, holding cash, or buying something else.

In conclusion, my philosophy for spending money is to spend unrestrictedly on things that produce the best ROI compared to alternatives. On one end of the spectrum, people tell you to save as much money as you can. And on the other end of the spectrum, they buy a ton of stuff as if they have an infinite amount of money—even spending money they don’t have through debt. Both of those types of people are right, but what they spend or don’t spend their money on is not a conclusively good decision for everyone, and may not even be a good decision for themself. The ROI of a particular expenditure varies from person to person according to their personal needs, goals, and ambitions.

Cash is good for transacting and transferring goods, but it’s not the best store of value and it provides no utility (I can’t eat it, can’t use it as a tool, it can’t heal me, etc.) So it’s better to transfer most of that cash into a wealth-building instrument, or into something that returns other types of bonafide value to you^[2].

[1] Wages are tied to your output and your time. If you die or stop producing the same output, then your wage stops or decreases. Ownership, however, can be passed down through generations. It works even when you’re not working. Wages are linear while ownership is exponential.

[2] The notorious legal strategy that mostly wealthy people use is known as buy, borrow, die. It allows you to avoid taxes while leveraging more of your wealth in compounding assets. It essentially works by keeping the majority of your wealth in appreciating assets, and when you need cash for spending, then you borrow against your portfolio. This allows you to avoid taxes because your assets remain “unrealized” while continuing to grow your wealth long-term in assets.

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