Getting Value for Your Money — And Why It Matters

Losing_Money

We all want a good deal, and we feel bad when we don’t get one, especially if we learn later that we could have gotten something much cheaper than what we actually paid for it. In that case, we feel ripped off — that we’ve lost something.

Most of us don’t have a lot of excess cash. If we don’t use it wisely by getting good deals, we can quickly get into unmanageable debt, which, if it doesn’t lead to a serious crisis such as foreclosure of one’s home, can lead to a more gradual pressure on our lives in which our resources and energies get stripped into the servicing of debt. This can become a prisoner’s existence, with debts the shackles.

So let’s say that in your personal life you are being responsible, living within your means, not paying more for things than you should, and not taking on more expenditures than you should. Let’s also say that you are giving people good value for your services, not gaming the system, creating value, so that your gain is not another’s loss. In that case, it becomes disheartening to realize that much of your money is still not being used responsibly — not by you but by government and others (usually empowered by government) to skim off your cash with the full consent of the law. 

Many of us just go along for the ride. We know we are being had, but what’s to be done? Perhaps for now not much is to be done — the forces in play with access to our cash are powerful: government taxation, health and other forms of insurance, the medical-pharmaceutical complex, etc. All of these and more have title to significant portions of our cash.

Even such access to your cash might not be cause for alarm if the waste and excess could be controlled. But it seems that in sector after sector of our society, waste and excess have become endemic. Take the city of Chicago. Become an alderman for one year, and you’re looking at a $100k pension for life. Become a fireman or policeman, retire at 50 receiving your last year’s income every year thereafter.  As a consequence, to beef up one’s income, city workers put in incredible amounts of overtime their last year before retirement. It’s not uncommon in Chicago for police and other city workers who have since retired to have multiple homes and to be earning over $200k a year.

Chicago may be an extreme example, but irresponsible use of your money can be just as unsustainable without being quite so excessive. I say “your money” because your money is contributing to these public and semi-public boondoggles. Again, there’s probably not much you can do about this for now. But you can at least be aware of what’s going on and insist on getting value for your money when you have something to say about it.

In getting value for your money, one principle to keep in mind is that whenever a middleman gets to touch your money, you may be losing money. I say “may be losing money” because some middlemen facilitate economic transactions that would not otherwise happen and thus add value. The problem is with middlemen who simply grab their percentage cut and don’t add any value, whose only reason for being there in the first place is to enrich themselves at others’ expense.

We have many such middlemen these days, not least in the Federal Government. Why is it that so many tax revenues go from state to Washington back to state? Every time money is moved, money is siphoned off. Federal agencies that redistribute cash to the states could, in principle, have this feature of their charter eliminated, with states simply raising and using the cash directly.

The government has also become a middleman in education. Fifty years ago it was not uncommon for students to work during the summer to pay their college costs during the school year. With top private schools now costing upwards of $50k a year for tuition/room/board, with top public colleges now costing half that, and even more cost effective colleges saddling students with tens of thousands of dollars of debt after four years (debt that is not “dischargable,” so that even personal bankruptcy can’t get rid of it — only death can get rid of it), students being able to earn their way through college is now largely a thing of the past (there are some exceptions such as Cooper Union or College of the Ozarks, which charge no tuition).

The main reason that college education has become so expensive is that government is guaranteeing student loans, which then allows schools to keep jacking up their tuition and rates — “hey, you can afford us if you just get a student loan guaranteed by the government.” As a consequence, Harvard now charges total costs of about $58k for the year, of which $37,576 is tuition.

Tuition is supposed to cover actual cost of education. For full-time students taking ten 3-credit courses a year (i.e., 30 credit hours a year), that comes out to about $4k a course at Harvard. A course with 30 students is thus paying Harvard $120k. If the course meets 40 times for 1-hour each during the semester, the professor is therefore earning the university $3k for each appearance. Granted, the professor has some prep time here, but these numbers still seem unreasonable. Sure, this is Harvard, and a case can be made that just having Harvard in one’s resume will be hugely profitable later in life. But even lesser schools are not far from issuing such costs, and they can’t promise anywhere near the return on investment of Harvard.

So what’s the lesson in all this? Most of us can’t afford to be profligate. We are not into gaming the system. We have to live within our means. At the same time, as we see irresponsibility in the system that is unsustainable and must come to an end at some point, let’s be sure to hedge our bets and put our money in things that have real value and that will continue to hold value when the bottom drops out, should it do so. Just what it means to invest wisely I’ll leave to you to decide. It’s been said that things that can’t continue forever won’t. Wisdom therefore counsels investing in things that don’t have a built-in self-destruct mechanism.