Ways to Spend Money

Money, get back
I'm all right Jack
Keep your hands off of my stack
--Pink Floyd

Milton Friedman proposed that there are four ways to spend money:

1) Spend your own money on yourself. When spending money on yourself, you are very careful to both economize (not spend too much) and seek highest value (get as much utility from the purchase as possible).

2) Spend your own money on somebody else. Buying a Christmas gift for someone else or donating to charity, for instance, you generally spend far less energy worrying about the value the other person gets from the purchase than you would spend on yourself. You do worry, however, about how much you pay out.

3) Spend someone else's money on yourself. When dining out on a corporate expense account, for instance, you will pay more attention about the benefits that your meal will provide than on what it will cost.

4) Spend someone else's money on someone else. If you are a welfare administrator, for example, then you will exert relatively little effort worrying about how much is spent or whether the purchases maximize value for the welfare client.

Stated differently, 1) provides the most 'bang for the buck' while 4) provides the least.