Money brain dump (1)
This is simply a brain dump about money in an unorganized fashion.
- Why is there so little information about money?
- Life in the 21st century
- Hierarchy of needs
No plans to continue this further… stay tuned for possibly more.
Why is there so little information about money?
Simply put, money is taboo in America. Since the Internet is highly US-centric, and much of the world has adopted the same cultural norms, it may seem as though money is taboo everywhere you go. Specifically, the idea of class is taboo. There is an implicit understanding that people can be divided into classes, and people do actively discriminate, but no one openly talks about it.
Piketty’s Capital in the Twenty-First Century is a good book to read about this whole subject. One point in the book is that in places such as 19th century England and France, people talked very openly about money. This was evident in novels of the time by people like Austen and Balzac, which mentioned concrete monetary amounts, such as an annual income of 2,000 pounds.
Then why not today? Mostly because today’s financial system is utterly corrupt. Every person born into the world is automatically enrolled in a lottery which gives grossly unfair amounts to some while keeping billions of souls in poverty. Money has so little bearing on the intrinsic value of a human being so that even one’s shoe size is more meaningful.
And so, today you are left with vague truisms like “save money for retirement” and “invest in index funds” and “pay off debts”. In short supply are not only solid facts, but strong moral judgements.
Life in the 21st century
I will now play Austen and Balzac, and give examples of real people’s lives in the 21st century. I’ll try to make them realistic and plausible. I’ll assume that the impact of taxes is minimal in all cases (the less fortunate are eligible for certain benefits).
George is a 23-year-old living in a mid-size city. His father was educated in a state university, and now makes $75,000 a year in an IT job. His mother was a secretary but quit to raise the children. The family lives comfortably in a single-family home. Because of their, they save very little in addition to home equity. George couldn’t find a job yet, but he can probably look forward to an entry salary of $50,000 within 6 months, and a maximum of $110,000 later in his career. There is some opportunity for upward mobility, such as completing an MBA, but this may require a complete change in direction or be a complete waste. George belongs solidly in the middle class.
Amy is 20 years old and the elder of two children. Though her parents both have college degrees, her father suffered a serious injury which crippled their finances. He s taking unemployment benefits and looking for a job which will pay up to $40,000. Her mother works odd jobs for insignificant amounts of money. The family lives in an apartment in a mid-size city, saving money at the cost of living quality. Amy works as a retail clerk earning $25,000 a year. Her main expense is her car, as well as helping parents pay off expenses. She saves $200 a month through strict budgeting. This will bring her net worth to a mere $25,000 by the age of 30, assuming she does not change direction. Her prospects for advancements are slim, and her degree in political science is not likely to help. She will likely marry upwards or pursue a different degree to improve her career prospects – all of this at great risk. Such is life in the lower-middle class.
Christina is a software engineer at one of the large Silicon Valley firms. At 22 years old, she is paid a total of $160,000 a year straight out of college. Her living costs make up the majority of her expenses, but luckily her company provides free food during weekdays. She maxes out her 401k at $18,000 a year, with $6,000 a year company match. She plans to finish paying off student debt in less than three years. After taxes and all expenses, such as travel, she saves $50,000 a year, plus the aforementioned $24,000 in the 401k. At this rate she could have a net worth of $500,000 by the age of 30. (Note that net worth should always include things such as home equity and 401k.) This is the enviable situation typical of someone in the upper-middle class, and yet…
Henry is a doctor in a small town. (Doctors in small towns tend to make more money due to being shorter in supply.) He finished paying off his student debt, earned his residency, and then opened his own practice at the age of 32. He will be paid $250,000 to $400,000 a year in a career spanning 30 years or more. This means he will become a millionaire by the age of 35, and have a net worth of around $5 million at the age of 50, assuming he invests his money properly. Most costs become trivial or insignificant to him. For example, he can afford annual vacations to Hawaii without breaking a sweat (assuming he finds someone to replace his shifts). Henry is comfortably upper-middle class.
Yet even more obscenely…
Lillian is a 32-year-old partner at a private equity firm. After stints at Morgan Stanley and Deloitte, and completing an MBA at Harvard, she lands a job paying $500,000 a year plus discretionary bonuses. By working a hectic schedule for the first few years she was able to earn a total of $1 million in bonuses and win the favor of her superiors. She is projected to have a net worth of $2 million by the age of 35, $5 million by 40, and $15 million by 50. Opportunities for upward mobility are virtually unlimited – she could become the vice president or CEO of a Silicon Valley tech firm in the middle of her career, and be paid $50 million in stock options all at once. Expenses are so insignificant that she simply allocates a small percentage of her savings as a very comfortable personal allowance, and paying capable money managers to take care of the rest. Lillian’s life is but a glimpse of what is possible in the upper class.
Hierarchy of needs
In psychology, Maslow proposed a hierarchy of needs for a healthy human psyche. This is depicted in the shape of a pyramid, with the most essential needs at the base and the most unattainable at the apex. From the base to the apex, the needs are categorized: physiological, safety, love and belonging, esteem, self-actualization.
A similar hierarchy can be developed to describe the purposes served by money. Starting from the most essential:
- Living: basic living expenses such as rent, mortgage, food, sanitation.
- Recreational: entertainment, travel, food beyond the purpose of feeding oneself.
- Saving: the act of growing money, or making money from money itself. For example, putting money in a bank, various means of investing.
- Self-development: mostly refers to continuing education, but also includes networking and expenses related to self-study. For example, learning plumbing to get a job as a plumber, or learning a martial art for self-defense.
- Influence: dealing in significant, real-world influence. For example, setting up charities, political donations.
Some items fall under multiple categories. For example, a car would fall under the first if it were absolutely necessary for going to work, and fall under the second if it were used to travel.
The purpose of the hierarchy is to show the order in which people prioritize their spending. Living expenses are the most essential need, so people will focus on this before others. Depending on their living conditions, people will place different items in different categories.
Here is an example to illustrate. Suppose I am a lower-class individual who starves on a regular basis. There is a McDonald’s near my home. I know that regularly eating Big Macs is damaging to long-term health, but it keeps me fed in the short term. When I am starving, I don’t really care that eating Big Macs is unhealthy, because the alternative may be to buy expensive groceries from Whole Foods. In my mind, feeding myself is the most immediate need, and so I have placed Whole Foods under “entertainment”, “saving”, or even “self-development”. On the other hand, someone who has no trouble feeding himself may look at me and criticize me for eating unhealthy food, because he has plenty of money left over even if he buys groceries from Whole Foods.
One of the shortcomings of Maslow’s hierarchy was that it was too narrow. The order in which the needs appear can not be universally applied to all humans, but is most suited to those living in the Western world. Similarly for the hierarchy of money. The ordering should be taken as a general guideline and not a golden rule.
(Updated with hierarchy of needs)