How to Spend Your Money & Money is like Sex

April 18, 2014

money and sexThe theme of this week’s show is how money is like sex. Granted, there are differences between the two. It’s okay to find money in the street. It’s okay to have money on the kitchen counter. And so on. But for all their differences, their key similarity is this: everyone wants it, but nobody wants to talk about it. Well, I’m here to talk about it. I’m here to cover just as many awkward truths as your sex education teacher, only with fewer diagrams and awkward euphemisms.

Naturally everyone wants to start at the beginning. “Where does money come from?” Well, you see, when a Store of Value falls in love with a Medium of Exchange, they come together to make… No, I’m just kidding. In this sense, when we talk about ‘money’ we really mean ‘wealth.’ For modern economies, a nation’s wealth is represented by its Gross Domestic Product, which is the total of its government spending, consumer spending, business spending, and net exports.

At its core, wealth is a function of productivity; productivity is, in the classical and neoclassical models, how many units of output are made from one unit of input (labor and capital). The more units of output for a fixed level of inputs, the more productive an economy.

Consider this basic example: Two guys, Jay and Scott, subsist on pizza and beer. Each devotes half a day to making pizza and half to making beer. Jay can make 7 pizzas and 3 bottles of beer per day, while Scott can make 5 pizzas and 5 bottles of beer. Obviously, Jay has a competitive advantage making pizza and Scott has an advantage making beer. If they specialize, with Jay making only pizza and Scott making only beer, their combined output would be 24 units of pizza and beer (14 pizzas plus 10 beers), versus only 20 units (7+3+5+5) if they didn’t specialize. Thus productivity is higher.

Now expand this simple model across an entire economy. Millions of people with millions of individual advantages all producing millions of different products and services. Most people produce just one thing through their jobs, but consume hundreds of different products and services each month. Odds are, the people producing those products and services can do so more efficiently than the first individual by himself.

An individual’s wealth comes from finding what they do better than most and putting all their energy into it. I’m pretty darn good at hosting a radio show, networking, and inspiring teams. I’ve used these qualities—which is really just the same quality: charisma!—to create the Jay Garvens Show, start an Amway business, and start a mortgage company. I can do all these things better than most, so rather than devote energy to things I don’t do well, I let those who specialize in their own trades to offer their products and services to me, and I focus all my efforts to my sole area of specialty.

You will notice in the last paragraph that I have applied my talent to creating three separate streams of revenue. This is something all wealthy individuals do, and must do. They may have rental properties, they may have investments, they may have several self-operating businesses. However they achieve it, the fact remains they cannot hope to grow their wealth without multiple streams of revenue. This is why wealthy individuals, on average, have 15-19% of their net wealth in real estate outside their primary residences; real estate is a fantastic revenue stream and wealth builder.

To start creating wealth, you first have to identify your personal strengths and weaknesses. Then, you have to apply your strengths to endeavors that will create wealth. Then you need to do it again and again. This is another characteristic of wealthy individuals: they are constantly working to improving themselves, refine their talents, and apply these talents to life-improving efforts. It is a self-sustaining cycle.

But it’s not enough to create wealth; you must also know how to spend it. Truly, the best way to spend it is not to spend it. Save it. Always earn more than you spend. This means to skip on luxuries and frivolities, be constantly frugal, and learn the difference between price and value. For example, far too many people buy their cars brand new. Opting for a car that’s just a few years old with a few thousand miles can save thousands of dollars versus a new car, even though the value of both—they’re the same model and do the same thing—are similar. Even shopping for value at the store, saving 78 cents on this item and 23 cents on that item, will accrue over a lifetime into a substantial amount of money.

These are just two hints to help build wealth. But, ultimately, everyone will pass on to the next life, and you can’t take your wealth with you. This is the part people are most uncomfortable with: discussing their financial affairs in preparation for their impending demise. I have seen time and again when individuals in their 80s and 90s—including my own dad!—passed on without making any arrangements for their assets and finances. I cannot explain this phenomenon. Most of the cases I have seen involved substantial estates, so it wasn’t a matter of embarrassment. As I said, they were in their 90s, so it’s not as though they didn’t have the time! Maybe it’s their suppressed anxiety over their own mortality. I don’t know; I’m not a psychologist or existentialist. But something inhibits people from openly and candidly discussing their finances with their children, and it’s always to both their detriments.

Money may be most like sex in that everyone wants it but nobody knows quite how to get it. It’s not as simple as striking it rich. Wealth demands that you know how to make it, know how to spend it, and ultimately know how to part with it. None of these are topics you discuss in polite company. Luckily for most, their families are not polite company. It’s okay to talk about these things with them.

Listen to This Weeks Show Here

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