Tuesday, March 6, 2012

Opportunity vs Subsistence - A Preface to Revisiting The Sandwich

A lot of people missed the point of the Forty Dollar Sandwich post, so I'm going to revisit it. I think that post was unclear because I tried to get at too much in one go. So I'm going to break out one of the points as kind of an introduction to the rest. Because if you don't get this, you won't get the rest.

The Investment Mindset: Opportunity vs. Subsistence

One thing some people seemed to miss was the difference between what I called cash flow money and investment money. Another way of putting it would be subsistence money and opportunity money. (Or if you want to get all business-y: operational budget and capital investment budget.)

Subsistence money is worth less than investment money, because all you do with it is spend it. It doesn't work for you, like investment money. It just disappears into the gaping maw that is your daily living budget. And anything you do to make that money is also ephemeral -- your wages you earn are one-shot deals:

You work an hour, you get a specific amount of money, and you spend that money on food, and eat it, and you burn up those calories in living, and that's it. I hope you have some nice memories of it or learned something from it, because that's all she wrote. You want to eat more, you have to work more.

And you work a little extra to save money for retirement, but that isn't investing, that's just flexible subsisting.

Subsistence money is devoted to expenses, and we want to keep our expenses low. You won't survive if you don't, so we think stingy when we think about subsistence money.

That makes us think like people who are on a fixed income: we are willing to spend any amount of time and effort to squeeze our expenses to save just one more buck. We'll spend hours clipping coupons to save fifty cents. And that is not a bad thing to do, financially speaking. If you're on a fixed income. That is....

If that time can't be used to make more money, it's wise to use time to save money.

This is Where Investment Comes In

This is critical. And it seems to me that this is what the critics of the $40 Sandwich missed:

You pack a lunch, you save a buck.

We're going to assume that that buck is over and above what you need to subsist on. That is, we're assuming that the buck is not required to pay for gas to get to work, or to pay rent. You saved a buck that you're free to do whatever you want with.

What do you do with it?

You could by a candy bar, or put it away for a vacation, or you could put it in a savings account for a rainy day. These are all variations on subsistence. The interest rate right now is practically nothing, so even saving it is simply like deferred subsistence. You still did that cycle: work, consume, gone. You just put off the "consume, gone" part until later.

(NOTE: I'm not saying you don't need a rainy day fund: it's a necessary part of your subsistence, like gas money or rent.)

The other thing you could do with it is invest it.

Investment money worth more than subsistence money, because once you've earned it, the transaction isn't done. An investment keeps working for you -- it brings you more money. If you have enough investment property, it earns your subsistence money for you.

If you live on a fixed income -- any lifestyle where you can't convert your time into additional income -- then your only way of acquiring investment property is to save money. Which means your opportunities are pretty narrow.

But writers are not on a fixed income.

Writers have an opportunity that nobody else has: We are magical beings. We don't have to buy our investment properties with money. We create them. Out of thin air and time.

Which means if you have a spare dollar, you can invest it by buying more time to write.

If you want to make a living -- or at least an income -- from writing, you have to seriously stop and consider the value of your writing time. You have to know how much that dollar cost you in time, and you have to know how much it means in terms of writing time.

I can't tell you this. You've got to that for yourself. All I can do it tell you more about how I arrived at my figure on what my time is worth -- and I'll do that on Thursday with The $100 Blog Post. (Some of you got it the first time, so I hope you won't be bored. I am throwing in a fun video about making a Bento Box lunch to liven things up.)

See you in the funny papers.

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