The Four Different Ways To Spend Money By Milton Friedman

Back in 2010, I first addressed this topic because I was frustrated by how much I was paying in taxes. I was regularly working ~70-hour weeks and faced an ever-higher marginal income tax rate. I was burning out and needed a change.

Who knew that two years later I would negotiate a severance and permanently leave the well-paying finance world behind.

In 2020, I’m much happier because I no longer have to work or work nearly as much, don’t make as much, and don’t pay as much in taxes.

With potentially higher taxes on the horizon, I think it’s worth revisiting the four different ways to spend money by Nobel prize-winning economist, Milton Friedman. This post should get you in the mood for the election and the kerfuffle that will probably ensue!

The Four Different Ways To Spend Money

As a Financial Samurai, I believe in fiscal responsibility. Therefore, I have long been bothered by the government’s general lack of fiscal discipline. Instead of trying to spend within the government’s means, like most of us seeking financial independence try to do, the government tends to just borrow and spend more.

To get us thinking about our future government, it’s worth watching this short clip from Professor Friedman on how to spend money.

1) You can spend your own money on yourself.

If you spend your own money on yourself, you’re very careful on what you spend it on. You make sure you get the most for your dollar.

2) You can spend your own money on someone else.

When you spend your own money on someone else, you’re careful on not spending too much. You don’t worry as much about the gifts you buy for other people as the things you buy for yourself.

3) You can spend somebody else’s money.

You’re careful to get good things for the money. But you’re not very worried about getting the best bang for your buck. You’re happier to spend more of somebody else’s money within reason.

4) You can spend somebody else’s money on somebody else.

You become a “distributor of welfare funds.” You’re interested in making your own life as good as you can. But you’re not going to be anywhere near as careful as spending this money on other people.

In an environment where we are accustomed to spending other people’s money on someone else, we end up not maximizing the value of the dollar. We also don’t end up appreciating money as much either.

Economic Waste Is A Shame

I think we can agree that spending somebody else’s money on somebody else usually doesn’t result in the most efficient use of funds. There’s just too much economic waste because people don’t have as much or any vested interest.

However, I do recall that when I used the company’s corporate card to entertain clients over a lavish meal or a show, I wanted to maximize the expense because my boss ultimately had to sign off on the bill. If I spent too much, my judgement would come into question. If it did, my year-end bonus would be in jeopardy.

The four ways to spend money by Milton Friedman

Government Spending Is A Different Matter

As an individual, spending someone else’s money on someone else is one thing. It’s a whole other level of waste when it comes to the government spending the taxpayer’s money on someone else. The government doesn’t have direct accountability for how they spend our money, so they are OK with being billed $700 for a paper clip.

Yes, politicians are supposed to be good people who have their voters best interests at heart. However, to become a politician, you also need to have a big ego and an unusual amount of narcissism. Being a politician goes completely against my beliefs of stealth wealth and avoiding fame.

If you don’t pay a lot of taxes, you probably won’t mind as much that the government isn’t allocating your tax dollars efficiently. You are probably the largest advocate of tax hikes because you want the government to spend somebody else’s money hopefully on you.

But if you are paying a lot of taxes and you’re miserable at work, you’re going to want the government to spend more responsibly. You’d much rather keep your own money to spend how you please.

Professor Friedman says that people spending someone else’s money on others is a “distributor of welfare funds.” So long as these funds are actually spent on helping those less fortunate, being a distributor of welfare funds is good for society.

People Are Naturally Self-Serving

Unfortunately, there are many instances where the system breaks down. For example, millionaire early retirees receiving health care subsidies shouldn’t be happening if welfare funds are being properly distributed.

The thing is, people tend to be more self-serving than genuinely magnanimous. If this wasn’t the case, you would see a lot more people willingly donate more money to the IRS. But billionaires like Warren Buffett who thinks he’s getting taxed too little still isn’t donating his money to the government to spend on somebody else. He believes Bill and Melinda Gates are a better steward of how to spend his money on others.

I know one millionaire early retiree who wants to vote on legislation to raise taxes on other people. However, to no surprise, she won’t have to pay more income taxes herself if such legislation passes. Further, she and her husband happily receive $1,400/month in health care subsidies, which takes away from people who really need financial help.

The reality is we can’t change human nature. The majority of people are going to rationally do things in their best interest. It’s why we have politicians who sing the virtue of public schools, but send their kids to private school.

Virtue signaling has become somewhat of a sport in today’s society. It’s up to us to see through the inconsistencies.

Be Consistent With Thought And Action

When it comes to your money, you should spend it however you see fit. Hopefully, many of you have saved a tremendous amount of money to spend during times like these. If you can spend money to counteract the negatives of a bad situation, you should.

Although I’m no longer in the firing zone where my income taxes could be raised, I still hope there is more congruency in beliefs and action.

In other words, if you believe we should raise taxes instead of cut costs, then you should be willing to pay more taxes as well. After all, the goal is for all of us to help other people, not just tell other people to help other people.

If you believe in equality between men and women, you should fight to abolish the marriage penalty tax rather than do nothing because your household income isn’t negatively affected. Just because you are not being discriminated against doesn’t mean discrimination is OK.

Spending other people’s money on someone else is fun to do. I get it. But if we can all be more consistent with our beliefs and actions, I’m sure our nation would be much better off as a result.

Readers, do you agree or disagree with Professor Friedman’s thesis that the 4th way of spending is the worst way of spending?  If you do agree, why do you think people feel it’s OK to spend other people’s money as they wish?


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