The Dow rose 154 points yesterday. Nothing to worry about there.
So let us continue our series on ‘How to Get Rich’ with a warning: It may not be such a good idea.
This is why we’ve titled this first part ‘Homage to Poverty’. In it, we try to show you that: (1) you will find it hard to get rich at all if you are afraid of poverty, and (2) poverty isn’t really so bad, after all.
The simple explanation for why you may prefer poverty to wealth is that it allows you to appreciate money!
Yes, dear reader, if there is one thing for which the principle of declining marginal utility seems to have been invented, it is for money. Like shots of Irish whiskey, each additional dollar you get is worth less than the dollar that preceded it.
If you are down to your last nickel, finding a $5 bill on the street is a godsend. You pick it up immediately and head for the liquor store. But if you have $1 million in the bank, you might graciously leave the fiver for someone who needs it more than you.
This explains why rich people so often and so readily give away money. It just isn’t worth very much to them.
If you have $10 million in the bank, another million is just an accounting detail. It doesn’t change your life one bit. If you have no money in the bank, on the other hand, $50,000 could make you feel rich. Your first million could change everything.
In short, money is especially important when you don’t have any. When you have gotten rich, money doesn’t mean much to you.
And as we pointed out yesterday, this could leave you feeling empty. After all, if money doesn’t mean anything…what does?
Accumulations of time
Philosophers and poets have puzzled out this issue for centuries.
Money represents wealth. And wealth is a form of condensed life. It measures the time and resources that have been invested, fructified and accumulated…and now may be exchanged for other accumulations of time, imagination and resources.
A person may work all his life to build up some savings. Those savings are an expression of his life…at least its net economic value.
Each unit is a distillation of his hard work, self-discipline and forbearance. When he has so much money that an extra unit no longer has any meaning or value to him, he begins to feel the ground go soft under his feet. He loses his footing…and his bearings.
‘The best things in life are free’, is the popular expression. As far as we can tell, it is true. A kiss…a smile…the love of family and friends…who can put a dollar figure on them?
Doesn’t the autumn sun fall as warmly on the face of the pauper as on the hedge fund manager? And we have yet to meet the child who checked his grandfather’s portfolio before giving him a hug.
And yet, even on the best things money casts its shadow. After you have enough money for food, clothing and shelter…what is the point of the rest?
Isn’t it to win approval…to make you worthy of love and respect? Isn’t that why a young man buys a fancy car, even when he can’t afford it? To get the girl?
But that is also where the deception and disappointment begin. A woman – attracted to the successful, moneyed man – soon discovers that money isn’t everything. And the man realizes that what he really wanted was a woman who wanted him for more than just his money!
And pity the poor man who works his entire life trying to earn enough money to win his father’s approval. He is likely to discover that: (a) he never will, or (b) he had it all along!
The rich mark
The principle of declining marginal utility comes into play here too.
A little financial success may bring love and approval. But more success doesn’t necessarily bring more love and respect. And too much financial success may backfire.
The financially successful man may find himself the object of envy, resentment and opportunism. His spouse is only his as long as the money holds out. His ‘friends’ see him as a rich mark. And his mother looks down on him; he has become ‘obsessed with money’, she says!
The declining marginal utility of money also works in reverse.
A dollar lost brings more pain than the pleasure of another one gained. A guy with a million dollars will welcome another million. But it probably won’t have much effect on his life or his well-being.
Imagine instead that he loses his million-dollar net worth! Now, we have material for a tragedy.
He has to give up his house. He becomes depressed and impossible to live with; he wife leaves him. His car is repossessed. And he ends up sleeping in a homeless shelter.
With these thoughts in mind, let us take up the second major decision you must make in life.
We’ve already seen how gaining wealth may make it harder for you to do what you want. Now we look at how more wealth can keep you from living where you really want to be.
The trap of ‘trading up’
We’re going to begin at the end: We do not want to sleep under a bridge or in a homeless shelter. So we want to be sure we have a ‘Plan B’ that works for us in case we go broke.
We’ve already explained that one of our main joys in life has been building things in our spare time. Houses, barns, pigsties, the aforementioned gypsy wagon, stonewalls — you name it.
In particular, we enjoyed building the houses in which the family lived. This was a pastime with a rich reward…especially, early in life, when we had no choice.
Later in life, when we had the money to hire real professionals, we had to share our building projects with architects, contractors, plumbers, electricians…and even decorators.
This proved to be a major disappointment; in the worst case, we paid architects and builders to remodel a house we had built ourselves.
We now live in a house we did not design. We did not build it. We went along with the professionals. And now it is THEIR house, not our own.
One of the hazards of wealth that is rarely discussed is the pernicious way it draws you away from the things you really like.
It’s like in the 1960s TV series The Beverly Hillbillies….
‘Well the first thing you know ol’ Jed’s a millionaire,
Kinfolk said Jed move away from there
Said Californy is the place you ought to be
So they loaded up the truck and moved to Beverly.
Hills, that is’
When you come into money, you are tempted to ‘trade up’. Out of the old neighbourhood and into a new one. But the new one is a lot more expensive.
Everything costs more. Not just the house but also the insurance…the upkeep…the furniture…the heating…the cooling…
The big house — which you saw as the trophy for your financial success — turns out to be the booby prize.
More ‘Homage to Poverty’ next time…
For The Daily Reckoning Australia