Tuesday, April 15, 2008

Found Money

Found money comes to us in a number of ways. You might find a forgotten $20 bill in an old jacket. You might get an unexpected $1000 bonus at work. Or you might get a $50,000 inheritance from a long-lost aunt.

Many people believe that it’s okay to spend found money (or at least some of it) frivolously to bring a burst of happiness into their lives. Let’s examine this line of thinking.

We all have things that we like to do, but are forced to limit how much we do them for various reasons. You might like coffee, but you limit your intake for health reasons. You might like hosting huge parties, but are limited by the cost.

We tend to look for excuses to do the things we like:

“It’s Friday, let’s have a beer.”
“I just got a bonus. Let’s blow it all on some fireworks.”
“My inheritance just came in. Let’s remodel the kitchen.”

For some people, these things could be the best use of money. However, when it comes to found money, we often tend to blow it on things that are not the best use of the money.

Does this mean that we shouldn’t ever have any fun in our lives? Absolutely not. In fact, I’m about to argue that found money should be spent in a way that brings the most happiness possible over the long term.

For an avid golfer, wouldn’t it make more sense to put the bonus from work toward a golf membership than to spend it all on fireworks that are gone in less than an hour? There is no doubt that setting off fireworks can be a lot of fun, but the golf membership is very likely the better choice.

For larger amounts of found money it becomes more important to stop and think. Imagine a couple who get a $50,000 inheritance. They have very modest incomes and have a mortgage, a car loan, and a line of credit. They really want to remodel their kitchen.

Their choice is to either pay off the car loan and line of credit or go ahead and remodel the kitchen. Because they are dealing with found money, they may give in to their temptation to remodel the kitchen. But, they are almost certainly much better off to pay off the loans.

Choice #1: Get the shinier kitchen. A week or so after the kitchen is remodeled the new kitchen excitement will wear off and all the money will be gone.
Choice #2: Pay off the car loan and line of credit and eliminate $1000 per month in interest payments for the next 5 years.

For a couple of modest means, Choice #2 is far better. If the kitchen really is a disaster, then a compromise is possible where they spend, say, $5000 on improving the kitchen and the rest goes to debt repayment. But, this only makes sense if the kitchen improvement is truly needed. It makes no sense to waste even a fraction of a large sum of found money on something that doesn’t have a lasting effect on your happiness.

It may seem like this way of thinking will prevent you from ever letting loose. This is not true. Our couple can let loose with some of the extra $1000 they won’t be spending on interest every month. The larger the sum of money you are dealing with, the more important it is to think your choices through carefully.

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