One of the essential challenges in life is understanding the difference between money received and value created.
Knowing how much money you get paid is relatively straight forward. You generally know how much you get paid.
Value is a much trickier concept. While value creation should imply an expectation of money being received (or less needing to be paid), there can be a significant time gap between the two, as well as an uncertainty as to when and how much will be received (and indeed, in some cases you may not receive any). And there is no necessity that the money or saving will come to you – intentionally or unintentionally, others might get some or all of the benefit.
Unfortunately, humans have a tendency, when faced with a difficult problem, to subconsciously replace it with a much easier problem. A lot of people intend to largely optimise for value created. And if you optimise for money when you actually mean to optimise for value created, you’ll be making the wrong decisions.
Obviously, it isn’t unreasonable to at least make sure you are paid enough to survive. And someone might actually want to maximise the amount they get paid in a particular period, or ensuring that all, or as much as possible, of the value will lead to them benefitting. But if you’re doing that, it should be a conscious decision.
There are a number of causes of difference between valuation creation and money you get paid:
- Investing in your future, or borrowing from the future
- Collecting on past investments, or paying back past debts
- Taking from others
- Giving to others
- Luck (for example, a lottery ticket paying out, or not)
It isn’t always obvious when these are occurring, and people often subconsciously misinterpret them – for example, convincing themselves they have created value when really they were just taking from others or borrowing from the future. Taking an honest view in distinguishing takes real effort, but it is crucial in order to make the right decisions.