Pay to Play

Tom Welsh

OUR WEALTH IS usually measured by net worth, which is total assets minus all debt. But there’s an alternative measure—which is to assign our wealth to the purposes it serves. What purposes? Two come to mind: physical and social.

Let’s start with physical wealth. We’re talking here about a family’s ability to maintain basic physical comforts, such as enjoying decent food, a comfortable home, a reliable car and access to good health care.

You don’t have to be rich to afford these. Typically, a lower-middle-class income is sufficient. How do you measure your physical wealth? Think about how long you could maintain these comforts without working. During your working career, it might be a matter of months or years. If you’re retired, it will—fingers crossed—be the rest of your life.

Meanwhile, social wealth relates to mental pleasures. It’s about ego and entertainment. It’s about our purchasing power relative to the rest of society—a zero-sum game. Social wealth is often shown off via status symbols. We humans are competitive creatures who enjoy recognition. After all, is an adult driving a luxury car much different from teenagers flexing their muscles on the beach?

Unlike physical wealth, social wealth can be expensive, requiring a six- or seven-figure income to purchase McMansions, luxury cars, exotic trips and so on. For a new retiree, it may require a net worth of more than $2 million.

Differentiating physical from social wealth can affect our decisions on current spending. Along with funding basic physical needs, we all indulge in “social spending,” whether we can afford it or not. How can we tell if we’re engaging in heavy social spending? Two simple tests can help you analyze your own degree of social spending.

Test No. 1: Did you pay $57,000 or more for your car—a 50%-plus premium to the average $38,000 new car price?

Test No. 2: How many rooms in your home are used by people every single day? Divide that number by the total number of rooms in your home. Is it 50% or less?

A “yes” to both of these questions puts you in the land of excess and ego. Within reason, there’s nothing wrong with social spending. It is a sport everyone wants to play, but it requires a personal risk assessment. If physical wealth is mandatory, social wealth is discretionary. A basic tradeoff: To what degree will you put your physical security at risk so you can display social wealth?

Those who are financially conservative may avoid significant social spending until they have enough physical wealth stashed away to cover the rest of their life. Those who are more aggressive may practice “classflation,” or heavy spending to appear in a higher social class than they can currently afford. While this imagery can jeopardize future physical comfort, it’s a popular pastime.

The physical vs. social wealth tradeoff also affects career decisions. You can maintain basic food, shelter and health care with most jobs. By contrast, acquiring significant social wealth might mean becoming a 60-plus hour-a-week workaholic. Is it worth it?

In addition, physical vs. social wealth could drive your investment management. Your “physical portfolio” might hold enough money to maintain basic physical comfort without working for the time period you desire. A 30-year-old may choose to keep just one year of physical wealth, while a 60-year-old might look to protect 10 years or more. In investing lingo, this could be called “assessing your risk tolerance.”

The physical portfolio is invested in dull, safe stuff, such as money market funds, short-term bonds, life insurance cash value and similar financial assets. Any amount by which after-tax earnings from these safer assets falls below inflation is, in effect, an insurance premium you pay to protect the money involved.

Your “social portfolio” can be like Las Vegas, without needing a plane ticket. Being discretionary, you may choose to buy risky investments—the kind that can beat inflation, but at the risk of large periodic losses. They are great sport, offer respectable gambling and could allow you to indulge in even more social spending. If your physical portfolio provides downside protection, your social portfolio offers upside potential.

Whether it’s spending or investing, only you can decide how best to balance your physical and social wealth. It’s basically another version of the fear-to-greed continuum. Where do you stand? To get at the answer, try assigning monetary values to your physical and social wants and needs.

Tom Welsh is a certified management accountant in Raleigh, North Carolina. He has been the chief financial officer at several manufacturing companies and is founder of Value Point Accounting, where he helps businesses manage product and customer profitability. Tom can be reached at

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