Steven here from munny.club, a weekly newsletter where I share a different perspective on personal finance concepts. If this doesn't interest you or you don't find it valuable, you can unsubscribe at the bottom of this email. If you have feedback, just shoot me a reply!
Alright, I think it's time for us to change topics a bit. For the last few weeks, I've talked a lot about savings. Today will be focused on a more fun part: spending. We are going to take two concepts—one from finance and one from video games—and smash them together.
Let's get started.
Leverage 101
Have you heard of the term leverage before? It's most often used in reference to levers or finance. In grade school science you learn about the power of levers to move objects otherwise too heavy for you to move on your own.
When something is low leverage, the impact and resources are often tied directly. For example, if you cook a huge meal (with leftovers) for yourself, you make one person happy. Cooking for one is low leverage.
When something is high leverage, it means you're able to have a larger impact with limited resources. For example, if you cook the same meal and serve a couple of friends instead (2m apart of course), you now have multiple happy people. Cooking for a group is high leverage.
I don't know if these examples are strictly accurate, but you might start to get the idea. I hope. A financial example would be when you are buying a house, you leverage your savings (down payment) to take out a mortgage to purchase a house beyond what you could afford without it. You are able to drive out-sized impact (purchase price) with a limited amount of resources (your own cash).
Lessons from Video Games
In video games, there are generally two categories of items you can purchase: consumables and upgrades. Each of these serves different purposes but is helpful for us to understand our own purchases.
Consumables are things you consume (no duh). In games, these are typically items such as food, potions, or items used in battle. In the real world, this includes things like food, one-time experiences, or supplies (like soap).
Upgrades improve your character, things like armour, weapons, or new skills. In the real world, upgrades are things like knowledge (education) or equipment (hardware, a camera, a bike, etc). An interesting case is a book. It's technically a consumable but what you potentially get out of it is an upgrade to your life. This is what makes books so interesting and appealing to me.
Both of these purchases are important and serve different purposes. A helpful heuristic is: low leverage = buy once, use once whereas high leverage = buy once use many times/forever.
Back to IRL
If you haven't caught on yet, consumables are generally considered low leverage, as they are single-use. Upgrades are high leverage purchases that can change your life and apply in many different scenarios.
One piece of advice I find unhelpful and disagree with is when people say "spend on experiences, not things". To be fair, they aren't thinking about leverage. They want to avoid materialism because, in their words, "things don't bring us happiness". To me, this is the wrong lens and division of spending. My stance is not necessarily for life advice, though I personally think it's helpful framing.
High leverage products enable far more interesting and repeated life experiences than one-off experiences. For example: instead of spending money going out for dinner with friends that one time (low leverage), spend on cooking lessons and some serving gear. This high leverage purchase enables you to host gatherings for years to come, with a simple investment, getting multiples of happiness and quality time for a lower cost as well.
For this reason, purchasing something like a camera (product) or photography lessons (experience) enables you to experience the world differently. This simple reframing allows you to better distinguish low leverage purchases from high leverage ones, and understand what type of purchase you are trying to make. There's plenty of room in life for both.
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