If I had a million dollars… (“Free” money)

A friend of mine recently received a $1000 bonus at work and jokingly remarked, “I’m going to go spend this all on clothes now.” I laughed since there was a shade of truth to the comment, but it really stuck with me so I wanted to type up my thoughts and get some feedback.

Compounding my deep thoughts was the fact that on my drive home that day Barenaked Ladies came on the radio with “If I Had a Million Dollars.” That whole song is espousing the mentality of spending “bonus” money on nice things – the line from that song that really gets me is “We’d take a limousine, ’cause it costs more.” ‘Merica.

Let me start by saying I will never be mistaken for a “Mustachian“, I don’t have any pressing desire to retire early or even achieve complete financial independence – I kind of have the personality where if I didn’t have a job I’d completely waste all of my time. And if I had financial independence I’d probably just waste all my time at my job if I still had one.

I’d say my instincts are still more to save first though, I don’t mind spending money on nice things but I’m also not going to waste money on things for mere convenience (though that standard has been getting a bit more lax with the kid and simplicity/convenience has been winning out more).

Also let it be said that I have a wife who thinks I waste money on everything. The point to this is not that I agree with her that my spending is wasteful, but that while I believe I am likely a bit more frugal than average, my wife ensures that our household is definitely more frugal than average (at least in my estimation). Blah blah blah okay moving on.

There’s something psychologically interesting about getting free, bonus, unexpected, or whatever you want to call it money. At least for me, my natural inclination goes something like this:

– Wow, free money

– I should spend this on something cool since I didn’t expect it and it’s above budget so I can “splurge”

– Oh, but wait, maybe I should save this money

– But that’s kinda no fun, I mean, it was unexpected and free after all!

– Alright fine, I’ll just splurge a little, say, 10-20% of the lump sum, and then save the rest

– New video games!

I don’t think I’m too unusual. The psychological draw of free money is so great that people don’t have any problem throwing money at lottery tickets or purposely withholding more taxes so that they receive a refund in April.

Even when I save the free money I get (and I tend to do this more often than not), something about the money being “free” has an effect on me. Like, what I should and would do is invest the extra money where the rest of my money is – in regularly rebalanced low cost index funds. But if I got a $1000 bonus, I might tell myself, “Hmm…they’ve been opening a lot of Whole Foods lately, maybe that’s worth a $1000 investment.” Semi-true story there, by the way.

Or maybe I’d use the $1000 to update the tile in my bathroom. Or buy a new TV. Etc. etc. I’m not saying any of these are bad ways to spend the money, I just find it interesting that these are the ideas most people default to instead of paying down debt or saving.

Speaking of which, I will posit there is one “bad” use of a $1000 bonus – using it for anything besides your credit card debt if you have any (which you shouldn’t!). I wouldn’t necessarily automatically pay my mortgage, student loans, or even a car down with a bonus (it’d be prudent I think but completely unfun, also depending on your returns there is a debate to be had), but buying a $1000 TV while paying 18% on $1000 of credit card debt is just ridiculous.

As my thoughts meandered, I also wondered if this concept of “free” money and its psychological effects extend to the world of points and miles. My guess is it does – at least it does for me. I thought of at least three ways I treat points and miles as free money.

First, I use them to book tickets that I would never pay with cash. Because of this, my subconscious often treats these tickets as “free”, even if they’re really not. Nevermind how much a trip actually costs in cash, there’s also the time and effort required to get the points.

Though deep down I know better, I often justify some spurious costs on a trip because I know my flight was “free”. Sometimes this is change fees to get a better flight (which I’ll justify to myself instead of just sucking it up, although as a parent it’s become easier to justify). Other times this will be splurging on a hotel or an experience.

The other way I treat miles and points like “free” money is on the other extreme – the part of me that puts “free” money in the bank wants to hoard my miles. Since it’s so easy to quickly build point balances these days, I’m often tempted to save these “free” miles to use at a later date.

Unlike real money, however, investing in miles is a fool’s errand. Aside from the fact that we keep getting hit by devaluation after devaluation, miles have no real monetary value – in fact if you pass away nobody can even inherit them. When you save real money, you can invest it and earn a good return on it. Sitting on miles you’re just liable to “lose” money in a devaluation.

The third way I use miles and points as “free” money is that I use them to splurge. I generally tend to use my miles to redeem for premium travel – first class, business class, really anything but coach if I can avoid it. Just like someone might want to buy a fancy outfit with a work bonus, I like to use my miles to get fancy seats on airplanes.

Final Thoughts

Pardon the rambling, I just had a lot of thoughts and decided to type them out. I’d love to what people like to do with their “free” money and miles – judgment free zone!