If you’re addicted to social media like I am, you may have seen a TikTok that was circulating last week. It featured a “net worth”.
You can skip this abomination of cringe by reading a brief summary.
Guy with a net worth of $500k (really cool!) He goes out on a date with his wife. He checks his net worth ($500k), at dinner, to make sure they’re still on track with their portfolio goals before ordering two $13 drinks.
Seriously.
He was very proud of the fiscally responsible decisions he made. If the market had been in red that morning, I can imagine his wife being stuck with just a ham and water sandwich for dinner.
The video has been (rightfully!) dunked across social media. But this guy’s behavior may not be as absurd as it seems. Although we don’t base our date night budgets off the intra-day movement of the S&P 500 index, there are subtler examples of the same phenomenon.
Over-financialization in everything.
Many of you already know that I am currently in business school. It is common for people in their mid to late 20s to wonder whether they should attend graduate school or not. But how do you decide what “should” be done?
We ask, in most cases, if the investment makes sense financially.
You are probably all familiar with DCFs, or discounted cash flows. DCFs, for those who don’t know, are financial models we use to estimate a company’s value now on the basis of our projections of its cash flows in the future. Modeling cash flow estimates for a number of years and using a discount rate to determine what the future earnings are worth today is called ‘discounting.
A DCF is a model that can be used to determine the value of future earnings based on different scenarios.
Math can be a big obstacle, especially for those who already have high-paying careers. To graduate school. Why would you, for example, abandon two years of prime earning to take on $100,000+ of debt in order to return to school?
It’s hard to understand the numbers.
It’s not just for grad students. Our lives are shaped as DCFs from high school.
What school do you attend? The school that is the least expensive and/or will help you earn the most money after you graduate.
What are you studying? Your major is the most likely to lead you to a well-paid job. What companies, promotions, and cities are you best suited for?
Make the most of it, whatever makes you money.
Don’t get me incorrect, it is important to weigh the pros and cons of a financial decision. Financial pros and cons should not be the only factors we consider.
The DCF can help you to estimate the financial impact of your decisions but cannot help you to weigh these financial impacts. The DCF may show you the way to earn the most money but will not help you to use that money in the best way. The non-financial exchangeoffs are not visible.
Zoom in.
This is the experience of Aaron Tang in his most recent article.
Hetty Green, the richest American woman of her time. In the early 1900s, despite being a woman in a predominantly male era, Hetty Green was a centimillionaire. She was considered a peer of tycoons such as J.P. Morgan and Andrew Carnegie. Many would say that she was a success if they only looked at her numbers.
If you’ve ever heard of Hetty, you likely know her by another name. According to legend, she never turned the heat on, wore shabby underwear and sent her son Ned, who broke his leg, to a clinic for the poor. Poor Ned had to have his lower leg amputated.
Hetty Green had F.U. Hetty Green had a lot of money, but she didn’t seem to be very happy.
What did she do with all the money?
Overfinancialization would be understandable if money were the only driving force of our lives and if we lived in a dystopian Black Mirror world where shareholder value was more important than anything else.
You are not the CEO of a life-long corporation and you do not have to maximize shareholder value or your net income. Profit is not the goal. It’s just a tool that helps you achieve your goals.
Decide what you need the money for before you ask what route will make the most money. What is your goal? What will you do with the money?
A DCF cannot calculate the value that good friends and novel experiences bring to life. The DCF may show the most lucrative career, but it does not reveal the cost. The non-monetary cost is what makes a difference.
