It’s only money
In the pissing contest about wealth, there is always the question of money, how much or how little one has of it. Do you simply issue a check from your bank account when you buy a car? Or do you need to sell the house you live in to meet extreme medical costs? How much money do you really have?
Macroeconomics classifies different levels of money supply into M1, M2, and M3. This depends on the maturity of the cash, with M3 including long term placements of bonds. Thus, the new trend in central bank accounting of money supply is simplified to MZM (Money with Zero Maturity). Anyway, when money supply rises, there’s no use looking at your savings account to check how much of it you got.
Even for one’s personal money supply, there are also various classifications of cash.
There is future money which we spend in the present using bank loans against future incomes not yet received including gratuities from kindly benefactors in exchange for services like the tending of mushrooms. Even farther out in terms of availability are such monies ( yes, it has a plural form) as expected shares in inheritances, not always a sure amount, sale of a proprietary share or condo, or a windfall from some deal where one is only an arranger or intermediary and maybe future whistle-blower.
In terms of time and availability, one can see that money varies in amount and dependability. The only sure money which personal finance consultants want you to spend is present money, which is not the same as the present value of money — an economic concept which is also hypothetical and can’t buy you a signature bag here and now. The present value of money is a construct where future revenue streams from different investment options are brought to the present using a nominal interest rate so that revenue streams of varying schedules and time frames can be compared, apples to apples. See, I told you it was an abstraction.
Present money then is cash in the pocket, bank accounts (not set aside for amortizations for cars or houses), and maybe mutual funds, and stocks that are liquid and traded daily, even when they’re plunging in value. Stocks fluctuate in market value and become cash only when sold, but not always at a profit.
The conservative consumer resisting the urge towards impulse buying will only treat as money what is in her wallet or ATM deposit. Of course, that amount also includes the plastic cards that take a dip of future money but limits this to what is expected in the next 60 days. Even with the credit card’s seduction for you to spend more by stretching out the payment into “minimum amounts” (4% of the charges) to be paid every billing period, the spending of future money needs to be reined in. What then is real disposable income? This is broadly defined as personal revenue after tax. A narrower sub-set is set aside for discretionary spending. This much smaller amount has removed cash obligations like rent, loan amortizations, utilities, groceries, and tuition fees. Discretionary cash should be limited to the amount after all these obligations are netted out. And if that number is zero or negative, it’s time to look at a change in lifestyle and to remove “fun money” from your vocabulary. It’s not a phrase you should even think about.
How much money you have then is a complicated subject.
Behavioral economists have a term called “mental accounting” which segregates discretionary spending into categories like travel, eating out, concerts, shopping, and creature comforts which cover a broad range from mani/pedi and foot massage and other afternoon delights (a Turkish dessert). There is then this compartmentalization of spending money. Once the amount is exhausted, the consumer needs to wait for her next revenue cycle. There is no transferring of mental accounts. Eating out money cannot be applied to concerts even if these two categories may be jointly enjoyed.
Money and spending can be complicated. Still, there is only one simple rule to follow which yacht salesmen already know — if you have to ask how much a yacht costs to maintain, you just can’t afford it.
If you have to ask how much a yacht costs to maintain, you just can’t afford it.