Oct 26

How Understanding the Marginal Utility of Money Will Make you Happier



Money is a very interesting thing, and not as simple as it seems at first glance. I really didn’t understand it’s complexity until recently. We go to work and in return we receive money as payment.  We spend this money on stuff. This is as sophisticated as most people get. I thought of myself as intellectually fancy because I understood compound interest and investing, and other such complexities but it turns out I hadn’t even scratched the surface. What I didn’t understand is how the value of money changes with respect to utility and time depending on how you use it.


There is a paradox that I want to explore with you and it is this:

A dollar (or pound, euro, whatever) is the same whenever you earn it, whether it is the first dollar or the millionth. It has the same spending power, same value; it is an indistinguishable commodity. A dollar is a dollar. Early on in my life this was all I knew, and for most people this is as far as their understanding goes. There is more to it though.


Depending on when and what you spend the dollar on, the value is usually drastically different in the amount of additional comfort or happiness it brings, and, after all, the stuff we buy with money is just a means to this end goal of happiness. The millionth dollar does not bring as much happiness or utility as the first. In fact, at some level each additional dollar probably brings a small amount of unhappiness in the form of additional complexity, worry and dependence on the next dollar. This concept was popularized in the book Your Money or Your Life.


Using my sophisticated drafting and artistic skill set I’ve provided you with a series of graphs illustrating my point.*




In this first graph you can see that the more money you spend, the more happiness you obtain up to a point. This point will be different for everyone. The first dollars you spend bring you more happiness because presumably you are spending them on things that bring more utility and are more important to you. At some point additional spending has very little effect.


Money = Time


To expand this thought, money is really a representation of our time. Money is a store of value. We trade time and energy (our life energy) for money – with the expectation that we can trade it back to other people in the future for either stuff or their energy.


For most of us the relationship between time and money is more or less linear. After we obtain our training we trade X time and get Y money.  2X time = 2Y money. Not always, but often, and especially when we think of it in terms of years worked. For some people there is a little upward curve to the graph, or the slope changes with a promotion or new job title.




This is where I was in terms of my understanding of money a few years ago, after deciding to work on my early financial independence and freedom. What I didn’t appreciate until very recently was that although trading time for money is usually necessary for most of us, it ultimately is a trade that is not in our favor as we get older. The longer into life we make this trade, the worse the exchange rate gets for us.


Confused? Let me explain. It took me a while to wrap my head around this too.




Our time is limited. It is a blink. As time moves forward it becomes increasingly more valuable because we have less of it remaining. Each day we march closer towards our inevitable death. Time becomes scarcer, although without knowing the exact time of our death we don’t know with certainty the magnitude of how this function changes over time.


Each moment we move closer to our death, whenever that may be, so each second ticking by represents a greater fraction of the remaining life we have left. One minute before we die that minute is our entire remaining life. Assuming equal health and life satisfaction this means trading time for money is a better deal earlier in our lives when we have more of it. **




To summarize: Each additional dollar acquired becomes less valuable because it brings us a smaller bit of utility than the one before it. Each unit of time we trade for that depreciating money is more precious.


How much is your time worth when you’re on your death bed? How much money would you trade for a few more days? Would you work or spend it doing something else?


I know, it’s a little depressing, but hang on with me here for a moment.


The key to taking advantage of this trade and maximizing it is to understand the marginal utility of money. The average household income in the United States is around $50,000. The first $10,000 of that total brings much more happiness than the last $10,000. Without that first $10,000 you would be completely dependent on others for food and shelter. You would be very limited in the decisions you make. You would have a low amount of freedom.


Conversely if you shave $10,000 off the total and are now making $40,000, your life is still bearable, and maybe even downright awesome. You may need to live in a smaller apartment, drive a little less expensive car, not eat out at as fancy of restaurants, get rid of cable and use the library instead of buying books, etc. The point is, even though a dollar is a dollar, the first ones you spend tend to matter more in your life. When something is scarce we tend to trade it for things that bring us the greatest value first. Most of us are happier with enough food and a warm place to sleep than designer clothes and a gym membership. Without the former, the latter doesn’t matter as much.


The effects become much more pronounced at higher income levels. Happiness studies have shown more or less that at about $75,000/year of spending the marginal benefit of additional spending does not really bring most of us additional happiness. It buys pleasure and comfort, but these things don’t always bring us happiness. Now this number will change depending on cost of living and many other factors, but the principle still stands. Anecdotally I have found this to be true myself. At some point you just have enough. When I look around at my friends and other people I know there is little correlation with spending and happiness after a certain point. I know some very unhappy people in the top 1% of income.


Now a lot of people I know, and probably some who read this blog, are not entirely satisfied with their work (and many are outright miserable), yet many people continue to work harder and harder for that additional dollar. Take, for example, the executive that works 80 hours a week to climb the corporate ladder to increase his income from $150,000 to $250,000 and consequently hates his life. Understanding the marginal utility of spending that money can help us realize that it’s just not that important – especially at the high end of the income range.


Simply put, going from 50k to 75k may matter, but going from 150k to 250k probably doesn’t matter all that much even though it represents a greater amount of money. You are most likely buying comfort and pleasure and calling it happiness.


There are other reasons people chase a higher income of course, including ego driven attachment to their job, career, and ‘success’. Some are sacrificing to buy their freedom first. The former is usually not a good reason to earn more; the latter may be a good reason which probably warrants a whole other essay.


Ultimately though, we are trading a commodity which is becoming more valuable (time) for a commodity which is becoming less valuable (money).  As the end nears, time is all that matters, money has zero value.


It is a dilemma that doesn’t really have a solution, only tradeoffs. Trading time for money isn’t inherently good or bad, it is a choice that has consequences. As far as I can tell, most people play this game and make the trade too long.
Some people truly do not have much of a choice, but most of us do.


Now, the best of all worlds is to trade your time for money doing something that brings you happiness. This is a pretty good trade and the best of all scenarios; unfortunately I think this is less common than it should be.




This is where frugality comes into play. Frugality gets a bad rap, because people associate it with cheapness, but really it is maximizing value. Frugality is finding the sweet part of the money/value curve and spending no more than necessary for contentment. Frugality is the deep understanding of this trade. It is spending on the things that matter most to you. Frugality 2.0 is the understanding of how time relates to this trade.


Most people will not believe me and seek to maximize their earning and spending, and if this is you I wish you a long and happy life. But for the rest of us, how can we apply this principal to bring us happiness?


I’ve developed a simple process that is not new (although it may be new to you). It is not complicated.


  1. Figure out how much money you need to fulfill your basic needs: food, shelter, transportation, etc.
  2. Think deeply about what in life brings you happiness (not pleasure, but happiness) and how much money above what is needed for basics you need to provide for this. This will take time and tinkering and will change over time, as what makes you happy will change as you evolve.
  3. Cut out all spending from your life that does not bring you joy. Examine everything you spend money on and ruthlessly eliminate or downgrade. Optimize everything that is left over.
  4. Use the saved money to buy your freedom.
  5. Use your freedom to do the work you love, or do less of the work you hate.
  6. If you are still working reassess and see if the trade makes sense, if not go back to step 1 and repeat until satisfied.
  7. If you don’t have enough money to get past step 1 you need to figure out how to make more money.


It’s really pretty simple when you strip away all the distractions. Stop trading your limited time for a few fleeting luxuries and pleasures OR make sure when you trade your time that the trade brings joy in and of itself.


Learn when enough is enough and the trade doesn’t make sense any more. This will happen earlier than you think.


When people are on their death bed no one says ‘I wish I would have driven a nicer car’ or ‘I wish I would have worked harder for the company’. They regret how they spent their time or managed their relationships. They wish they hadn’t spent so much time being angry or worried.


Understand that frugality is not cheapness, and it is not inexpensive. You are buying something. You are buying freedom.


You are trading short term pleasure for freedom, with the expectation that freedom will bring you happiness, or at least the ability to pursue it on your own terms.


Once you frame this concept correctly in your mind, frugality does not seem like deprivation. In fact, just the opposite, it feels like abundance. It allows you to savor what truly matters and what is truly limited – your time.


*Our educational system does not, cannot, and will not teach us this lesson. We are taught to be employees and consumers, work until our 60’s, and save very little. We are not taught what money is or what it represents – time. It is up to you to learn it, and if you have children it is up to you to teach them about it.

**This is actually changing constantly because our behaviors and risk factors and luck will determine probabilistically the time of our death. The overall trend is towards time being more valuable and scarce though.


UPDATE: Read part 2 here!












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    • J'Mo on October 26, 2016 at 8:51 pm
    • Reply

    HP – well said, my friend.

    1. Thank you 🙂

    • RocDoc on October 26, 2016 at 9:59 pm
    • Reply

    This information is so valuable and NEEDS to be taught in all schools. It would be so liberating for young people to be able to pursue these concepts from the time that they first start their working careers. The Internet and Blogs such as yours are powerful tools to dispense this information. Could you imagine all the positive changes that would occur in the world if most young people started thinking along these lines? It would save resources since consumerism would decrease at least somewhat. And some of these young people who are financially freed from working dull jobs could do amazing things now that their minds were freed to do something that had real value to them. I know many young people may initially disregard valuing their time more because like you say, they have more of it left. It doesn’t seem as valuable to many of them yet. But none of us really have very much time here.

    1. I’m not sure how receptive I would have been to this advise when I was a kid, just tough to think in these terms when you are young because you feel immortal and the future feels so far away. I am a fan of teaching people how to think for themselves though, something I feel is a but underrepresented in traditional education. I completely agree with you that freedom leads to greater creativity. Think of what humanity could accomplish if everyone was free to work on ideas that truly excited them. Happiness, creativity and innovation are a virtuous circle.

    • Steve on October 26, 2016 at 11:17 pm
    • Reply

    Great points to ponder.

    I ask my 58 yr old self quite often-Where has the time gone?

    Thanks for enlightening us HP!

    Take care!

    1. You’re welcome Steve.

      I ask myself this same question, usually after watching something my kids do for the first time. They change so slowly, until all of a sudden they change overnight. It distorts perception of time for me.

    • Joe (arebelspy) on October 27, 2016 at 6:31 am
    • Reply

    One of your best articles to date. Well done!

    1. Thank you sir! This one was fun to write.

  1. As I approach 50 (will be 47), this becomes much more apparent. For my genes and background, living to 80 would be amazing. That gives me 33 left. Doing my darndest to keep on making impacts in a positive fashion on those around me.

    Great post!!!
    cd :O)

    1. Thank you Chris. For some reason my mind places 50 at a tipping point. It will be interesting to see how I react to it when I get there.

  2. You make some great points, and the scariest part of that last graph is that you don’t know when the Reaper will pay you a visit. It Should happen sometime after age 80 if you’ve lived a reasonably healthy life, but he could be lurking around the corner.

    That’s not a reason to live in fear, but to enjoy the time you’ve been given. You know, just in case. Understanding the role time and money play in life’s enjoyment is key.


    1. Quite true. Not knowing when we will die does confound the situation, but ultimately we just have to guess and plan accordingly. At the end of the day I think we can just try and live as much as possible near the present moment and enjoy this unique experience called life. One of the most liberating concepts is getting past fear of death. Naval Ravikant talked about it in a podcast I referenced in this post. http://thehappyphilosopher.com/happy-philosophers-weekend-reading-volume-3/

    2. Great points by both of you. I want to point out another sad factor in the time/money relationship though:

      Just like every passing second represents a great fraction of the time we have left, so it also represents a lesser fraction of the time we’ve been around. Which is possibly one of the many reasons that time generally seems to move faster as we age. If you’ve been on this earth for 80 years, one more isn’t much to you. But if you’ve been here for three years, it’s one third of all you know, which feels huge!

      It’s just another reason to pay attention to the relationship between money and time, even if in the opposite direction of what I’m usually preaching: Time wasted today may “feel” like more of a waste than time wasted tomorrow! (Even disregarding health concerns adding to that effect…more activity is usually available to a younger person than older based on health, so the opportunity cost of wasted time is higher.)

      Anyway, enough rambling. The visual aids are incredible. You should make a plugin for the rest of us to use.

      1. Very true. Another way to think about it is each additional tine unit represents a smaller fraction of your memories and total life experience. In this way do people that can’t form memories feel like they are living forever as they can not live in the past. Interesting thought experiment.

        My computer skills are just north of the average 5 year old. I can barely figure out how to get pictures into WordPress so I think making a plugin is probably not going to be done by me. I’m just a simple country philosopher 😉

  3. Great post! I’ve always tried to be conscious of time and the fact that it’s finite but I never fully thought about how time becomes more precious as we get older. It makes sense since value goes up as supply goes down. I recently wrote about how we should look to save time in the same way we look to save money. We always talk about being conscious with our spending decisions but we don’t talk much about wasting time, which is just as important if not more important. If you’re frugal with your time, you can allocate it to the things that bring you more joy and you don’t have to wait for FI to make those happiness improvements.

    To the point of your article, we just naturally seem to take our time on this planet for granted even though we intellectually all know our time is limited. Getting perspective from articles like yours is helpful. You don’t want to wait for a heart attack or old age to gain the appreciation of spending our time wisely.

    1. “If you’re frugal with your time, you can allocate it to the things that bring you more joy and you don’t have to wait for FI to make those happiness improvements.”

      I like this concept of being frugal with your time. Treat it like the precious commodity it is. Thanks for the comment.

  4. Interestingly enough the thought of marginal utility jumped into my head about an hour ago in response to a commenter on a post I wrote earlier this week on using opportunity cost to determine what to keep and remove from your life. The comment was about whether it was ok to spend money on splurge on something if you already save 50% of your income. In a way its the same concept: Saving, extra income, and spending all have additional marginal utility.

    For example I could work my tail off and move up to the executive management level at work, but would the extra income be worth the time lost from the hours a VP puts in? In my case no.

    1. Absolutely. Marginal utility applies to many aspects of our lives. I think the trick is knowing which things these are. For some areas in life that first curve probably flattens out quite a bit. Those are the things to splurge on.

    • VagabondMD on October 30, 2016 at 7:39 am
    • Reply

    Great discussion of a nuanced topic that was first presented to me about 5 years ago, and it was presented in the context of investing and wealth accumulation. It was Marginal Utility of Wealth 1.0, and the main point was that after a certain point, as in your first graph, the increase in wealth by an additional 20% does not provide as much happiness as the amount of dispair created by losing 20%. Therefore, after a point, one should reign in the amount of risk so that you are less likely to slide down the steeper part of the curve (toward the left).

    I like how you applied the concept of time, as a limited resource, that gets incrementally more limited everyday, and contrasted it with money, which behaves in the opposite fashion. I think of my 84 year old father, who has a sizable nest egg but limited time, along with some (though not a lot) regret of things that he did not accomplish in his life and now never will. Time, money, regret, and happiness are all related to one another– time and money are the rough tools that we can use to maximize happiness and minimize regret, though we know that we will not be perfect–we just have to do the best we can.

    1. Slightly different concept, but absolutely related. William Bernstein said something to the effect “when you’ve won the game, stop playing”. Loss aversion is an interesting concept. As you point out losing X is more painful that gaining X is pleasurable.

      I don’t think it is always a bad thing to die with a huge nest egg, after all the 4% rule is based on massive over saving most of the time. I think we can all agree though, that making it to our 80’s with the knowledge that we lived a good life and were careful stewards of our time is a good thing. For me I am experiencing less and less regret as I make it through my 40s. I credit this to finally starting to listen to myself more, and to society and other people less. Realizing that I am completely responsible for me happiness and freedom is terrifying and liberating at the same time.

    • VagabondMD on October 30, 2016 at 7:41 am
    • Reply

    Ha, as if on cue, the next article I see on my Twitter feed…


  5. Excellent post. Excellent charts. Excellent argument in support of buying freedom, not stuff.

    1. Thank you Joe. Much appreciated.

    • Oobleck on November 1, 2016 at 11:10 am
    • Reply

    Amazing post and the one that introduced me to your blog through the mmm forums. I really appreciate your detailed thoughts on philosophy and have been working my way through the posts.

    I’m fortunate to have discovered the time-value of money concept at a young age. My $11.50/hr summer job six years ago naturally taught me to equate time to money. It’s easy to say no to an $8 beer when you can equate that to an hour of hard labor.

    1. Thank you Oobleck, I appreciate the comment. I’ve seen a lot of readers from the MMM forums for this article 🙂

      The YMOYL concept of time and money is perhaps the most valuable lesson about finance I’ve learned.

    • Curt Morrison, MD, FACC, CFA on November 8, 2016 at 11:27 am
    • Reply

    Respectfully disagree that time is more valuable as we age. I should have quite a few decades remaining, but I would trade them all for the decade between 18 and 28. Those years are much more valuable.

    Physical vitality declines with age. Most things that matter are better when young. YMMV.

    1. The value of time changes, but I don’t know if it is true that it feels more valuable when you are young. Happiness studies would argue otherwise. Also, is the time more valuable, or does it seem more valuable in retrospect as we look back upon it. I think we don’t realize what we had until it is gone. As they say “youth is wasted on the young”.

      • RR on November 16, 2016 at 11:57 am
      • Reply

      Your past time is akin to a Sunk Cost. There is no Time Machine to go back and make that trade.

      What decision will you take now and in the future is what matters? Will you pick Time or Money?

    • Ebeard on November 11, 2016 at 4:42 am
    • Reply

    I read “Your Money or Your Life” 20 years ago and it changed my life. You have done a great job of distilling the information into a “fun size” morsel. Unfortunately people experience “new normals” in the opposite way by going to nice hotels on vacation and then nicer and finally the nicest. It’s like a drug thinking that spending more money will buy more happiness. It doesn’t in the big picture but each time you upgrade your experience there is _some_ elevation of joy but not nearly like the first. I’m guilty of inflating my lifestyle as I get older. That’s why I think major life changes are important and disrupts the natural inflation of accumulation and lifestyle creep. Sell all of your shit buy a 1984 Volkswagen Westfalia and tour the USA for 18 months. That’s what we did when we turned 30. Now at 48 and living in a house that is too big I’m feeling the itch to do it again. Thanks for the reminder THP!

    1. Thanks for the comment Ebeard. I agree, it is fun to increase lifestyle and I like your analogy comparing it to a drug. Maybe we need to re-frame the “detox” into something that is equally as fun because it challenges us and allows us to grow.

    • Jeff on March 18, 2017 at 8:22 am
    • Reply

    Thank you for this post… While it is true that our schools and for the most part our society do not teach this concept, I came across this concept right after finishing my training. I was actually invited to a network marketing meeting. I was instantly hooked for one reason: they talked about freedom. They talked about being full-time parents while your kids are young. They talked about doing worthwhile things with your time. I actually pursued the industry for 10 years and was reasonably successful. In baseball vernacular, I hit a triple but I did not hit a homerun (I became Diamond in a company with a supposed monthly residual income of $12,500 only for the company to implode 6 months later). Thus I am still working but using blogs like yours, Physician on Fire. and White Coat Investor to inspire me towards freedom through financial independence. My kids are in college now. I will not semi-retire while they are little because that is of course impossible. However, I hope to go very part time at age 60 (I am 55 now) partly as a result of inspiration from your blog…

    1. Thanks for your comment Jeff. It is this kind of feedback that inspires me to keep writing. Good luck on your journey towards freedom 🙂

    • snowcanyon on May 14, 2017 at 9:17 am
    • Reply

    I think this graph and theory do not hold true for those who live in high COL areas. Some of us really are from California or New York and just want to be near family and old friends.

      • Samantha on July 18, 2017 at 10:12 am
      • Reply

      “Its my choice to live in an expensive state therefore I can’t be happy or save any money.” Did you miss the entire point of this article? I’ve realized there are two types of people – “how can I do this?” people and “this is impossible!”people – and you are the bummer type. #excuses #specialsnowflake

    • Duke on June 16, 2017 at 9:38 pm
    • Reply

    I’m a teacher…it can and is taught every day. Amish live this…those in urban poverty live this. Pop culture and the fake media refuse to condone this. Hell some Churches don’t condone your thoughts.
    I liken..active.spenders and passive spenders. End the end let’s don’t loose our sense of humor.?

    1. Keep teaching brother! 🙂

    • pdxlager on July 20, 2017 at 1:05 pm
    • Reply

    Very nice article, but I think it’s missing one important point. The value of time or money is not a universal constant, it’s a valuation at the individual level. You write: “As the end nears, time is all that matters, money has zero value.”

    We extend our lives (so to say) by having children. We can maintain our legacy and “watch over” our children (and their children) by leaving a large and well-managed nest egg behind. The value of that money at the very end is hardly zero, unless all you value is your time. Some of us value the time of others as well.

    Either way, the trend in your charts is accurate, but not at the extreme ends. It’s like the Laffer Curve, it makes intuitive sense until you start plugging in the numbers at either end.

  6. I see your point, but I’m talking about something slightly different. In the chart there is no mention of money, only the value of time as you approach your death. At the end, money has no value to you (but as you point out it may to someone else). I agree with you though, for some people accumulating assets to change the world after they are dead is the thing that makes them happy and feel purpose. Hopefully my children will be financially independent before I die so it becomes a moot point 😉

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