Livin’ Large: The Money Curve

Every now and then you hear about some celebrity, bigwig, or tycoon filing for bankruptcy. You always ask yourself, “How could that happen? He had more money than God!” Then you go on to answer your own question: “Livin’ Large!

For those of us who have no scratch to speak of, it seems absurd. We tend to say, “That would never happen to me! I would be smart. Not like that guy! No entourage packed limos headed out for a night of clubbing and $500 champagne (for everyone). No 200 million dollar house staffed by monkey butlers. I would invest!”

But what if it all creeps up on you?

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This is the Money Curve, otherwise known as “Diminishing Marginal Utility“. It illustrates how the more money we have, the less important it becomes.

At the bottom of the curve we are broke, and spare change off the street is very crucial. The percentage gains at this stage are staggering. If someone with a penny is given a dollar, his net worth has just increased by 10000% (statistics are often re-framed in just such a manner in order to deceive). It sounds impressive until you find out we’re talking pennies, here.

At this point there is no net worth, all money is spent on survival. But as income increases and we travel up the curve, excess cash can be accumulated and spent on capital improvements.

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And at a certain point, the phenomenon known as “Disposable Income” begins to appear. This is where the curve begins its first gradual shift from hyperbolic rise to gently climbing slope. You can now buy a pizza. Rent a movie. Afford a girlfriend!

moneycurve3_girlBe careful! A bad decision in this area can send you right back to the bottom!

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As more and more wealth is accumulated, money becomes less and less important. One tends to think of it like air – which you never notice until it’s gone. The curve continues to rise, however gently, due to “Lifestyle Inflation“. This is where more money is spent on fancy basics (expensive house, exotic car), simply because it can. The most successful avoid this trap. You would never guess that your average suburban next-door neighbor is worth upwards of 7 figures, at least, not by his lifestyle. Although this can be carried to extremes. One millionaire nightclub owner I once knew would wear bummy clothes, and a rope for a belt. When opening a new club, he would direct traffic in the parking lot himself, rather than hire someone. Thinking he was indigent, patrons would give him dollar bills, which he would gleefully stuff in his pocket! This particular breed of wealthy individual never leaves the near-vertical section of the money curve – no matter how much wealth he accumulates.

moneycurve_miser

J. Paul Getty, billionaire and world class miser, was the quintessential example. He installed a payphone in his mansion for the use of workers, staff, and guests, and when asked, “How much money is enough?”, he replied, “Just a few million more!”

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