# Brave New Life: Understand The Marginal Utility of Money

## By Mr. Money Mustache

## Thu, 09 Feb 2012 13:02:45 +0000

Today I have the rare opportunity to share a guest posting from my Southern Colorado friend who runs the Brave New Life blog. Brave, as I like to refer to him, is a family man with two children. And he is about 477 days away from beginning his own early retirement. His blog offers wise perspectives on lifestyle and philosophy from a man who only recently made the switch to running an efficient and frugal life. He also has the unique trait of ridiculous dedication to mastering tasks, having gone through stages of extreme career dedication and ultramarathon running. Now he has turned his attention to early retirement with the twist of acquiring very advanced investment knowledge as a side hobby.

Core Principle #5: Understand The Marginal Utility of Money

This post is part 5 of an ongoing 8-part series. The series is presenting 8 fundamental principles of what I’ve been referring to as a Brave New Life. Each step builds upon and supports the other steps, so I would encourage you to start from the beginning, preferably before you continue with this post.

When Mr. Money Mustache asked me if I’d like to present one of my core principles on MMM, I have to admit that I was both excited and intimidated. It’s like Michael Jordan just asked me to sub for him, and I’ve got thousands of people watching me with very high expectations. So before I begin, let me warn you that I lack the fun, arrogant wit and charm of the great Mr. Money Mustache, but I’ll do my best to step it up. Also, I’ll probably fail to sprinkle in the swearing that you’ve all come to expect here…

The Marginal Utility Of Money

I’m here today to show you that money does not correlate linearly with happiness (not even close), and that recognizing this fact can be a powerful tool. In order to understand this, you simply need to consider the “marginal utility” of money. Understanding the concept of marginal utility is nothing complicated, but it’s something the average person refuses to consider. Luckily, you guys aren’t average people, you’re Mustacheans!

Marginal utility of money is the amount of value (happiness) gained from an increase amount of money available to you. This value changes depending on how much you already have stache’d away. Put another way, the value I get from saving an extra dollar means a lot more than to a billionaire.

Since the goal of the brave new life is peace of mind and joyfulness, let’s go ahead and look at the completely non-scientific correlation between money earned and saved and the joy it brings.

Everybody’s chart is different, but it will look something like this:

Point A is the point in which you have enough for the basic necessities of life: food, water, and shelter. Since you’re reading this post on a computer, I’ll assume you already have food, water, and shelter available to you. And since you already have these, you already have access to most of the joy that money can buy. That’s an important thing to understand – you already have most of the joy that money will ever buy for you.

Point B is the point at which you have enough for more of the luxuries we have in the modern world like a safe home of your own with heating and cooling, a car, higher education, and maybe a homemade bread maker. Once again, it’s up to you to define what you consider Point B.

Point C is financial independence. As you can see, it’s not that much higher than B on the happiness chart, and your overall joy will never rise significantly higher due to an increase in spending. And if your happiness won’t rise significantly higher by spending money, then why trade your valuable time to collect more of it?

OK, I get it. So now what?

Understanding the marginal utility of money is important for two reasons.

1. It forces you to realize that there’s a diminishing return in earning money.

Many people assume more money is always better, and they allow the potential for more money to be a carrot on a stick. They just keep pursuing it, never pausing to reflect on what they’re really after. It starts out with working a few hours of overtime, then 80 hours a week including weekend. Then they’re telling you how to dress. Next thing you know you’re 80 pounds overweight, divorced, and watching the news alone in the Marriot Suite’s at 6am on a Thursday, getting ready for a big sales pitch.

But once you recognize the marginal utility of money, and compare that to the marginal utility of your time, you can consciously decide to turn down money in order to gain more time – thereby regaining control of your life.

Picture the chart above, but replace “Money” with “Free Time.” The relationship between joy and free time exists, and the curve will look very similar.

I picture happiness as a cumulative thing, so in order to maximize overall happiness, you want to find the right balance between earning money and creating free time. This consideration, I suspect, is what drove MMM’s decision to retire at 30 and the reason I’ll be retiring soon at 35. Since I’m already on the flat area of the Money/Joy chart, I have very little to gain trading my time for money. Instead, I’ll achieve far more happiness by quitting my full-time job, freeing up time to spend playing with my kids and teaching them.

Here’s a real life example: I have a pretty good job, work with great people, and in general I don’t mind doing it for 20-30 hours per week (which is what I usually put in these days). But my company has this really rigid format for bonuses where they lay out specific tasks that you must do in order to get portions of your quarterly bonus. And one of the tasks this quarter is asinine. It has nothing to do with my job, and adds no value to me or the company. I despised the idea of doing it…

A basic time/money financial analysis shows that it’s about 10 hours of work for $800 worth of bonus. Not a bad return on time. But I’m past point C on the chart above, so now if I factor in my marginal utility of money, I recognize that $800 has a negligible effect on my overall happiness. I’d rather have those 10 hours to play outside with my kids, read a book, or throwing rocks at a tree. At least then I’ll be satisfied in knowing that I’m not selling my time for something I don’t support.

2. You can redefine your own marginal utility of money

The second benefit of understanding your own marginal utility of money allows you to redefine it. If you just avoid thinking about it, the evil marketing companies will be glad to define it for you. They prey on people that don’t deliberately define their value of money, but Mustacheans are too smart for that! Marketing firms would have you believe that Point A requires a car, a big mortgage, eating out at least twice per week, and obviously cable TV (so they can keep talking to you!). But now that you’ve been made aware of the real value of the money you’re earning and spending, you get to control how you define points A, B and C. Personally, I’ve been to some villages and slums in India, and there I saw what I define as point A and what I would consider below point A. These conditions don’t exist in the US and most other developed countries, which is a good thing.

Now that you realize that YOU get to define your points A, B and C – you can literally tweak your happiness. Seriously, it really works! Over the past 18 months, I’ve made serious changes to my life. I’ve downsized my house, sold my car, changed jobs (taking a lower income), moved across the country, and overall simplified my family’s life. And while I’m much happier now, I have to admit that the single biggest change to my happiness came when I redefined points B and C. I greatly reduced what I considered luxuries, and what it takes to be financially independent.

You guys are lucky, because by reading MMM you are already slowly having your definitions of points A, B and C reduced in needs and wants. But it’s not enough to sit back and let MMM and the rest of this community define these things for you, no more so than letting a marketing team define it for you. Everyone is different, and you have to deliberately define your own personal needs and wants along the Money/Happiness chart. Besides, it’s a fun exercise. And if you have a spouse or older kids, bring them into the discussion too.

Cliff’s Notes

Let’s revisit the basic concept of this post to wrap things up. Here are the key points.

- The value of each dollar you make depends on how much money you already have. If you already have “enough” then it’s not worth much at all when it comes to happiness
- You can define your personal value of an additional dollar
- Once you have “enough” you can free up your valuable time to do things you enjoy. This might be in the form of switching from full-time to part-time work, the ability to turn down crappy work for a few extra bucks, or an early retirement like MMM
- You will never have enough money to retire if you let TV commercials define your needs and wants

The Brave New Life Chart

Warning: If you didn’t go back and read the previous posts in this series, this chart may look a bit confusing and overly complicated. With each principle I present, I try to show how it fits visually into the brave new life.

As seen in the chart below, the idea of understanding and defining your marginal utility of money has two direct paths to happiness. First, it allows you to more quickly achieve financial independence by giving you the opportunity to define how much money you really need. Second, because you will be less likely to do work just for money, it frees up your time to do things you truly enjoy.

Click image for large version

Check out Brave’s full blog at http://www.bravenewlife.com