Keep Balance in Your Net Worth Composition
Often, when I speak with Bitcoiners, I hear questions like, "How much would I need in my Bitcoin stack to start my own business?" I'd like to offer another perspective here. Whatever you do for work to earn money, whether as an employee in a company or as an owner of a company, you are essentially generating value for other people, i.e., your clients.
Understanding the Difference Between Three Types of Goods: Monetary, Consumption, and Production
Economic goods can serve three purposes: 1) as a medium of exchange (monetary use), 2) for personal use (consumption), and 3) for creating other goods or services (production or capital). There is nothing inherent in the goods themselves that dictates their use; rather, it is how we choose to use them that determines their functional role. Additionally, a single good can simultaneously fulfill two or even all three functions.
Consider the example of a house. Depending on its use, a house can be a monetary good, a consumption good, or a capital good. If we use the house solely as a place to live, it is a consumption good.
However, if we set up a home office or use the garage for income-generating activities, or if we rent out a spare room or apartment within the house, the house serves as both a consumption and a capital good.
If we buy a house with the intention of selling it in the future and do not plan to live in it or use it for any production, the house functions as a monetary good.
The house can also be used exclusively for one purpose at a time. For example, if we rent it out entirely, it is considered a capital good. If we buy it solely to sell it in the future without any intention of living in it or generating income from it, we are using it as a monetary good.
The key principle is to always maintain enough cash within your net worth to maximize its growth potential through practicing giving transactions with 10-20% of it. If you adopt a full Bitcoin standard, Bitcoin will be the major part of your cash balance because you will hold very little fiat (enough to cover a couple of days, or at most weeks, of your average expenses). Thus, you will practice zero-based budgeting with Bitcoin.
To grow your net worth effectively, follow the rule of thirds: no more than one-third of your assets should be in consumption assets and no more than one-third in capital assets.
When the purchasing power of your money increases, you can increase your consumption assets and capital, ensuring each does not exceed one-third of your net worth.
When the purchasing power of your money decreases, you should reduce your consumption assets and capital if they exceed one-third of your net worth, by liquidating a portion back to money.
The aim is to always keep at least one-third of your net worth in cash (Bitcoin) to maximize the Giving portion of your budget. This budget only considers cash, not illiquid assets.
For example, a $1 million net worth with only 5% in cash (Bitcoin) will allocate only $5,000 to $10,000 (0.5% - 1%) to the Giving portion. Conversely, with at least 33.3% in cash (Bitcoin), the Giving portion increases to $33,000 to $66,000 (3.3% to 6.7%). If 80% of net worth is in cash (Bitcoin), the Giving portion rises to $80,000 to $160,000 (8% to 16%). This last scenario enables the fastest growth rate due to a stronger spirit of generosity.
Always monitor the items you own and their current market prices. This is crucial for expensive items like real estate and vehicles and also beneficial for less expensive items.
Your total net worth is the sum of the current market prices of all your assets minus all liabilities (debts). The first step is to run a zero-based budget, the second is to eliminate all debt, and the third is to establish a giving practice from your liquid budget. At this point, your net worth should have zero debts.
Balancing the structure of your net worth ensures its growth remains optimal over time. This might involve selling part of your capital or consumption assets to increase cash or buying capital or consumption assets, but only up to one-third of your total net worth for each.
Remember, the composition of your net worth will change with fluctuations in Bitcoin purchasing power.
The Fiat Standard Way: Cash Is Trash
In the Fiat standard, the more liquid cash we keep on our balance sheet, the more purchasing power we lose over time, due to an increase in the money supply through fiat debt creation.
This is why most people are used to keeping as little cash on hand as possible.
The Bitcoin Standard Way: Cash Is King
Keeping your cash balance in Bitcoin increases its purchasing power over time while maintaining high liquidity.
Keep No More Than a Third of Your Net Worth in Consumption Goods
Ownership of consumption assets, as defined in this manual, includes ownership of the land, real estate (buildings) on it, and all large durable goods on it (furniture, household appliances, art, electronics, vehicles, etc.).
We define consumption assets by their function: we use them for our leisure (non-labor) time. We can also think of consumption assets as a collection of all our goods (more or less durable, movable, or immovable) that we consume. We track the value of consumption assets if each of them represents more than 1/60 of our total net worth.
For example, we may have a house with all the furniture/appliances (approximately $190k) and a car (approximately $10k) that we only use for leisure, both of which are worth approximately $200k. This means that the land is worth around $200k.
However, if we use the same house and car for labor, the total value of the land is less than $200k. If we have a home office equipped with furniture/appliances used solely for work, constituting around 30% of the market price of the house, and we use the car around 50% of the time for work, we should account for the value of our land at $133k (70%) for the house and $5k (50%) for the car, for a total of $138k.
Non-Monetary Goods Cost of Ownership Tracking
First and foremost, do not exceed the rule of thirds. Large durable goods are part of your net worth's consumption and/or capital (production) segments. Before purchasing, calculate the total cost of ownership. After purchasing, regularly update the value of the consumption goods and/or capital to keep track of the depreciation rate.
When deciding whether to buy new or used, consider the cost of ownership calculation as well as the depreciation rate for the vehicle you are considering.
Remember the rule of thirds: allocate no more than one-third of your net worth to consumption goods and no more than one-third to capital (production goods). People typically use vehicles as both consumption goods and capital (they drive to work with it or directly use it to generate inflows), so the vehicle you purchase can be considered both a production and a capital good.
For example, if your car is worth $10,000 and you use it 20% of the time for leisure and 80% of the time for work, you should consider that it contributes $2,000 to the value of your consumption goods and $8,000 to the value of your capital goods.
Example net worth composition decision making process:
I've seen many examples among my family and friends of hesitancy to rent and a bias toward owning non-monetary goods.
In the fiat standard, this hesitancy originates from our desire to reduce the amount of cash we hold due to its loss of purchasing power over time. The opposite occurs under the Bitcoin standard, where we are more hesitant to take on ownership because owning non-Bitcoin assets results in the opportunity cost of increased Bitcoin purchasing power in the future. Consequently, we are more likely to think carefully about what we want to own, making renting more normalized under the Bitcoin standard.
On a full Bitcoin standard, we want to avoid the habit of rushing into ownership of something that will continue to decline in value in terms of Bitcoin over time. This habit of rushing into ownership stems from the fiat standard, which urged us to get rid of our liquidity, which was losing purchasing power over time, as soon as possible. The full Bitcoin standard reverses this habit, eliminating the need to own something to offset the loss of purchasing power over time.
This is why, on a full Bitcoin standard, we need to know when to own and when to rent to make informed decisions. We must understand the distinction between ownership and possession. When you need to use a product for a set period, you should rent it.
We established a method for calculating and tracking the cost of ownership (depreciation, maintenance). This helps you see if owning something fits with your other budget goals and net worth. Renting something instead of buying it might provide the same benefits without the cost of ownership. Renting means paying the owner for the use of something for a set period.
Renting can be a very effective tool for increasing your net worth because you can get the value of something if you plan your usage over time. By running a zero-based budget regularly, you will better understand the value you can derive over time by using the item without necessarily owning it.
Consider renting items in the "Consumption" and "Capital" categories. A proper framework is to ask, "For how long do I plan to use this item, and for what purpose?" rather than "I want to own this item." There is such a thing as "house fever" or "car fever," where people become fixated on owning a house or car they cannot yet afford and fall into the trap of going into debt to do so. The antidote is to consider renting the same house or car for a period to experience how it feels to use them. Often, this leads to a more rational consideration of the purchase, especially after performing the cost of ownership calculation.
mobility/transportation (daily vehicle(s) - rent vs ownership, used vs new
shelter/housing (rent vs ownership)
Let's calculate the monthly rent payment you can afford if you start with $10,000 in savings (in bitcoin), want to end up with $5,600 after 4 years, and need to pay a 3-month rent deposit upfront, which you will get back at the end of the rental period.
Step-by-Step Calculation
Initial Savings: $10,000
Target Savings After 4 Years: $5,600
Growth Rates: 48%, 44%, 41%, 38% over 4 years
Deposit: 3 months of rent, which will be returned at the end
Let's denote the monthly rent payment as ( R ).
Initial Adjustment for Deposit
Deposit Amount: (3R)
Effective Initial Savings After Deposit: [ 10,000 - 3R ]
Year 1
Savings Before Rent: [ (10,000 - 3R) \times (1 + 0.48) = 14,800 - 3R \times 1.48 ]
Rent Paid in Year 1: [ 12R ]
Savings After Year 1: [ 14,800 - 3R \times 1.48 - 12R = 14,800 - 15R ]
Year 2
Savings Before Rent: [ (14,800 - 15R) \times (1 + 0.44) = 21,312 - 15R \times 1.44 ]
Rent Paid in Year 2: [ 12R ]
Savings After Year 2: [ 21,312 - 15R \times 2.44 ]
Year 3
Savings Before Rent: [ (21,312 - 15R \times 2.44) \times (1 + 0.41) = 30,050.32 - 15R \times 2.44 \times 1.41 ]
Rent Paid in Year 3: [ 12R ]
Savings After Year 3: [ 30,050.32 - 15R \times 3.85 ]
Year 4
Savings Before Rent: [ (30,050.32 - 15R \times 3.85) \times (1 + 0.38) = 41,469.44 - 15R \times 3.85 \times 1.38 ]
Rent Paid in Year 4: [ 12R ]
Savings After Year 4 (Before Deposit Return): [ 41,469.44 - 15R \times 5.23 ]
Final Adjustment for Deposit Return
Savings After Deposit Return: [ 41,469.44 - 15R \times 5.23 + 3R ]
Solve for ( R )
We want the final savings to be $5,600:
[ 41,469.44 - 15R \times 5.23 + 3R = 5,600 ]
[ 15R \times 5.23 - 3R = 41,469.44 - 5,600 ]
[ 15R \times 5.23 - 3R = 35,869.44 ]
[ R \times (15 \times 5.23 - 3) = 35,869.44 ]
[ R \times 75.45 = 35,869.44 ]
[ R = \frac{35,869.44}{75.45} ]
[ R \approx 475.47 ]
Conclusion
If you start with $10,000 in savings and need to pay a 3-month rent deposit upfront, you can afford to pay approximately $475.47 per month in rent to end up with $5,600 in savings after 4 years, considering the deposit is returned at the end.
rent. a boat story
Non-Monetary Goods Cost Of Ownership
The depreciation rate is the difference between the price of a new item and the price after it has been used, measured over time.
Higher maintenance expenses generally result in a lower depreciation rate.
Lower maintenance expenses generally increase the rate of depreciation.
Cost of insurance: insurance against item destruction or malfunction.
Insurance against theft/extortion (includes your local fiat government taxes).
Consider the last time you paid a higher price for something. Everything you buy, own, and use depreciates over time. For example, when you buy a new phone, unbox it, and start using it, the phone loses some of its value because it is no longer brand new and unboxed - you started using it.
Items have a market-based depreciation curve. Using the same phone as an example, you can figure out how much your phone is worth when it's used after a year.
When you buy something, keep track of its depreciation in your budget. When you buy a phone for $700, you should track it as an asset worth $650 (the $50 difference is due to the fact that it is no longer brand new). After a year of use, for example, you should assess the market price of this item, i.e. how much money you can get if you liquidate it.
Assume that figure is $500; you adjust it in your budget. This is something you keep doing while using the item. You keep doing this while using the item. Remember that using the item frequently results in additional maintenance costs over time. If, after two years of use, your phone's battery loses 30% of its charge, you may choose to replace the battery rather than the phone itself.
Cars, on the other hand, require a once (or better, twice) yearly maintenance schedule to ensure they run reliably and for a longer period of time. You should budget for these ongoing maintenance costs and keep track of the depreciation of your possessions as you go.
Keep No More than One-Third of Your Net Worth in Capital
Capital is defined as all assets / goods that we use to generate money.
In this practical context, we can define capital as all large durable goods (movable or immovable), as well as anything else used to generate cash flow and/or used during working hours (labor). Capital is also all investment vehicles (securities).
As an example, consider a merchant's inventory stock. tools for a car mechanic. A programmer's laptop.
Goods may be used as both consumption and capital goods.
For example, if you own a car that you use both for leisure and for work, you should account for its value in both the consumption and capital parts of your net worth.
By definition, capital also includes all financial instruments such as stocks, bonds, and investment vehicles such as mutual funds, index funds, and so on.
On a strict Bitcoin standard, consider whether you are using an investment vehicle as money. In today's fiat standard, there are many investment vehicles that are practically monetized, such as automatically rebalanced broad stock indexes like SP500 index fund. If you use any of these, consider upgrading their monetary use to Bitcoin.
When investing in capital, consider risk-adjusted expected return against expected purchasing power growth of Bitcoin (according to the power law). If the expected return is less then the growth rate of your Bitcoin purchasing power, don't invest in capital.
Keep at Least One-Third of Your Net Worth in Bitcoin
Cash is the most liquid and salable component of your net worth.
Use Bitcoin for this, ideally, and convert it to fiat when you have obligations denominated in fiat.
Cash (Bitcoin) should be the majority of your net worth, at least one-third.
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