Back in action

Sorry for the hiatus. Like a good little U.S. citizen I was out spending money to do my part for the US economy over the holiday season. My biggest purchase was probably a new blackberry storm which has been a very good phone with the exception of the "random reboot" feature which has yet to be solved. Here's to hoping the new OS release will fix it.

My motivation seems to be somewhat manic (but positively correlated with caffeine use) so this blog unfortunately will not be as regular as I would like but in an effort to continue to collect my ramblings I will be making an effort to publish as often as possible. Blame netflix watch instantly feature for my recent lack of motivation.

So on to where we left off last post. How do you value your dollar? This is a tough question for anyone. When a person is asked this question most people will take one of three approaches (or hopefully all three) to describe the value they place on money. To make this easier we should probably use $100 so we can talk about something that is a little easier to assign value to.

Approach one: Assign a value based on what the most enjoyable (maximize utility) item(s) they can purchase with $100; we talked about this in the last post. Someone who really likes Wendy's chicken nuggets might tell you $100 is worth 362.31 Wendy's chicken nuggets. Where as another person may tell you it is worth 92.30 yuengling beers enjoyed at home or 36.36 enjoyed on domestic beer night at their local bar. This approach is assigning the value of a dollar (or $100) in terms of the goods and services you can buy with it. When I was young I thought of money in terms of the toy(s) it could purchase. Wal-mart had a big grab pack of baseball cards they sold for $14.99 and I always thought of money in terms of the amount of baseball cards I could buy. At that point in my life baseball cards were the most enjoyable product I could get with my money. Since money is very scarce resource to a child they put a much greater value on a dollar than an adult that can easily obtain money. Hence the reason my parents could talk me into washing, vacuuming and detailing their entire car for a measly two dollars (or one pack of 1993 tops baseball cards). Now I would probably pay up to $20 for that service. Another popular pass time is using money to buy stock. If you wanted to take your $100 an buy a steak in one of America's largest corporations, $100 would get you a .0000000644% stake in GE as of closing Friday Jan. 9th. (Based on market cap of 9.69B and stock price $15.99). With that kind of power the Board of directors better watch out!

This leads us to approach two: Assigning a value based in terms of what you had to do to earn it. So for a working adult they may value a $100 in terms of time they had to give to an employer in return for getting paid that $100. A common answer you may get from many working people when you ask them how they value $100 will be in terms of the time it took them to earn the $100. Most basically a high school student may say that $100 is the same as 19.08 hours work standing next to a road waving at passing cars and renting inflatable inter tubes to tourists. Six years later that person may say it is worth ten hours of calling unsuspecting North Carolina residents during dinner and attempting to convince them to do surveys on back and neck pain or most recently that person may respond it is 5.88 hours talking to angry, verbally abusive, impoverished retirement plan participants that have over extended their credit cards and are underwater on $300,000 houses (now worth $200,000) with $25,000 salaries utilizing a 0% down option ARM. Valuing money in terms of time can be a tricky exercise which we will discuss in detail next time.

The final way to value money is by considering what your money can earn you in the future. For example a 65 year old retiree who resides in North Carolina could grantee himself $.72 a month until he died and another 10 years of payments to his wife should he expire first via an immediate income annuity with rights of survivorship purchased for $100. Perhaps that person would prefer to invest in the "ultra safe" treasuries and receive .08% interest on 3 months treasuries or the ever alluring 3.04% 30 year treasuries were earning on 1/10/08. In that case his money is worth $.02 of interest on 3-month t-bills or $3.04 a year on 30 year treasury bond.


These three methods of valuing your money will be used in the future as different ways to consider the costs of hypothetical purchases. Before making any major financial decisions it is important to consider your situation and preferences to determine how you value the money (or lack thereof) in your bank account.

Up next disposable income and a better way to approximate your dollar in terms of time.