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Getting Personal Thumbnail

Getting Personal

Numbers lie…a lot.  I’m not really sure when I realized this but, now that I have, I feel like a whole new world has opened up to me.

Oh wait, I do remember…it was when I read this article on CNBC. Namely, this part:

“Do I pay $2.50 for a coffee? Never, never, never do I do that,” O’Leary tells CNBC Make It. “That is such a waste of money for something that costs 20 cents. I never buy a frape-latte-blah-blah-blah-woof-woof-woof for $2.50.”

Instead, he makes it at home.

“I drink coffee, one cup every morning,” he explains. “It costs about 18 cents to make it, and I invest the rest.” 

This is a very common way of looking at personal finance that involves a rather obstinate view of expected utility theory. “Expected utility theory” is the fancy economics way of saying that you can rank someone’s preferences for things based on the satisfaction that those things provide him or her; it’s pretty finite and assumes people are rational in all of their decision-making.

Said more directly, if I skip my coffee and invest the difference in cost of $2.32, the satisfaction provided from the additional savings will exceed the temporary satisfaction I will receive from drinking the coffee. Pretty simple…if I save a bunch of money then I can buy more stuff and more stuff will make me happier. This is an extreme example of how all of us have been taught to think about money.

While the above may work for Kevin O’Leary, I think it is quite possibly the worst advice for the average person when it comes to personal finance.

Initially, let me prove to you why the above example doesn’t actually make sense from a numbers perspective. Second, let me explain a more nuanced takeaway from this.

First, the numbers perspective:

Let’s say that he saves his $2.32 every day, 365 days per year. That would amount to $846.80. Now, let’s say that he compounds that money at 7% annually, adding an additional $846.80 each year along the way (I’m intentionally ignoring the effects of inflation for simplicity purposes). Kevin O’Leary is 65 years old, which gives him a life expectancy of another 12 years. So, assuming these numbers are correct, Kevin O’Leary will net himself a cool $17,055.10 at the end of his lifetime in exchange for never walking into another Starbucks again.

Now, Kevin O’Leary is reportedly worth around $400 million. The $17k of savings is around 0.004% of his total net worth and utterly meaningless from a monetary perspective. More importantly, consider the fact that his making of the coffee will take time. I make my own coffee each morning (not because I want to save $2.32 but because I have small children who wake up before Starbucks is open…I don’t understand why they can’t just slee… oh, nevermind) and I know that it takes around one minute to make the coffee. Hence, Mr. O’Leary is valuing his time at around $139/hour, certainly a paltry sum for a man of his stature. He could use that time to think of his next investment idea or to undo the brain damage of reading this blog post thus far (thanks for staying with me…it’s about to get better!).

Here’s the real reason why you shouldn’t strictly think of personal finance in these terms though…

Because personal finance is personal.

The whole point of saving and investing is to use it towards something productive and that productivity means different things to different people.  Maybe you do need that coffee to make you alert enough to make good decisions in the morning.  Maybe that vacation that you spend a little extra on is what keeps you motivated and working hard throughout the rest of the year.  Neither makes perfect sense from a dollars and cents perspective but both might make perfect sense from your perspective.

I can relate this to my own life through my aforementioned children that don’t sleep (seriously, I don’t understand why they can’t sleep when they’re always so tired). Having children is undoubtedly the worst financial decision I’ve ever made. Between diapers, school tuition, car seats, and little league fees, I am running a gigantic deficit every month on which I will never be made whole. For someone that prides himself on rational financial decision-making, having these three monsters certainly wasn’t my best choice…or was it?

We have the same routine with the boys every night. I come home right before they go to bed and the three of them immediately run towards the door, screaming with excitement and asking me to play garbage trucks with them (ok, fine, I admit the 12 year old doesn’t get that excited anymore but the other two seem to thoroughly enjoy it).  They give me a big hug, spend about 30 seconds talking about school, and we go about smashing their garbage trucks together until bedtime.  They are always smiling and they are always excited to see me.  This 30 minute routine each night is the greatest joy I will ever know and I want to savor these moments because I know they don’t last forever (see: 12 year old who doesn’t care about me coming home anymore).

So how should I value that joy? Should I discount the costs by some “enjoyment factor” to help me view them more rationally? Better yet…should I just never have had the kids at all since the utility function of their existence might be questioned by others who don’t receive the same enjoyment from them that I do? The answer is that in the end, personal finance is personal so I just take the whole thing for what it is…something that makes me impossibly happy.

In that way, I don't know that I'll ever be as wealthy as I feel today.