The Marginal Utility Of Money

The Marginal Utility Of Money

By Mike Piper Published: 16 June 2010 – Updated: 29 May 2019

I know I'm taking a risk by starting an article by defining a term from economics. But please, stick with me. It's not a hard concept to understand, and it directly relates to your financial success.

Utility is a term used in economics to describe how much value or happiness one derives from a good or service. Marginal utility refers to how much additional value/happiness is derived from one additional unit of the good or service. Most goods and services are said to have “decreasing marginal utility.”

“Decreasing marginal utility” sounds like gibberish, but it's actually pretty easy to understand:

First slice of apple pie: “Yes, please!”

Second slice of apple pie: “Well…OK…one more piece.”

Third slice: “Oh, I couldn't. I'm stuffed.”

Each slice of pie provides less happiness (“utility”) than the previous slice. The same thing holds true with nearly every good or service.

In fact (or perhaps, as a result), this idea holds true for money as well. For many of us, an extra $500,000 in cash could accurately be described as life changing. But what if you already had a liquid net worth of several million dollars? An extra $500k would still be nice, but I doubt it would change your life meaningfully.

Get Rich Slowly has practically been a real-time case study in this concept. J.D. used to be deeply in debt, at which point he had a high marginal utility of wealth. That is, every extra dollar he earned and saved made a big difference to his well-being.

However, as he climbed out of debt, built his income, and built his wealth, his marginal utility of wealth has slowly declined. J.D. recently put it this way:

 “Debt used to be my biggest source of money stress. Then it became an obsession with frugality, which led me to cross the line to cheap bastard. Now my biggest problem seems to be an obsession with income:

 To continue reading, please go to the original article here:

https://www.getrichslowly.org/the-marginal-utility-of-money/