❝Money is something we choose to trade our life energy for.❞ -Vicki Robin
In the movie Without a Paddle, three friends go on a trip to find D.B. Cooper and the money he stole. Eventually, they stumble into a hole, where they find Cooper huddled in a corner with his parachute. They were surprised to find out that he burned most of the money for warmth.
It turns out that the only way the stolen money was useful to Cooper was as a source of heat. Alone in a hole, nobody was around to trade his money with. There was nobody around to lend his money to. There was nobody around to give his money to.
Money, it turns out, is useless in and of itself.
So what is money?
Money is defined by most economists as an agreed-upon form of payment that serves three primary functions; a medium of exchange, a unit of account, and a store of value.
A medium of exchange means that money is accepted as a way to pay for goods and services. It’s a way for people to exchange in a common currency so they don’t have to rely on a barter system.
A unit of account is just a way to say that money, because it is a universal unit of measurement, can be used to account for the value of things. It allows us to compare the relative value of various things in the same unit.
Store of value means that money more or less maintains its value over time. Another way to think about this is as a means to shift obligations in time, or defer payment. It allows us to buy things we otherwise wouldn’t be able to afford. It allows us to use debt to finance future consumption.
But what is debt?
As most basic, debt is about lending. It’s the intersection of people who have money they don’t currently need and people who need money they don’t currently have. Most commonly, this is done between consumers and banks, where banks hold onto deposits from the customers.
People with extra money can lend it to people who need it. This isn't free, though.
Money has a cost, and that cost is called interest. Interest is what enables lending; it encourages it. Those who need money can borrow money from somebody who has too much - in exchange for interest. The flip side is that those with too much money can lend it to somebody in exchange for interest.
Borrowing money goes by many names. Sometimes it’s called a mortgage if we borrow money to pay for a house. Sometimes it’s called using a credit card (more accurately described as a debt card). Generally speaking, though, it’s called getting a loan. This could be a student loan to pay for education, a car loan to pay for a car, or just a loan in general.
Borrowing money gives you access to money that wasn’t available to you. When you borrow money, you are obligated to pay that money back. In addition to the money that you borrowed, you also have to pay back an extra sum of money. That’s the interest. That’s how much it costs to get access to that money.
The flip side is lending money. Lending money also goes by many different names. If I lend my money to a bank, it might be called a deposit (into a checking or savings account). If I lend my money to a corporation or a government, it is called buying a bond.
Lending money is how you grow wealth over time. When you have extra money (think of it as savings), you can let others use it. When others use it, you eventually get your money back in addition to a payment for letting them use it. That payment is the interest.
Now, even though borrowing gives us access to money we didn’t have so that we can consume more than we otherwise could, that doesn’t mean it’s a good idea. Borrowing money means you have to pay that money back with interest. The more debt you have, the more you will pay just in interest, let alone the initial amount. Debt must be used carefully because the more debt you have, the fewer options you have.
Lending money is something you can do when you have access to money. Borrowing money is something you can do if you can’t afford something you need, but it needs to be paid back. How do we go about earning money?
Vicki Robin, author of the popular book Your Money or Your Life, famously says that money is something you trade your life energy for. That means something different for everybody. It might be interesting to pause and reflect on what it means to you. Effectively, it boils down to having to work for money. For some, the equation is simpler because they get paid by the hour, but it’s the same idea for those who are paid a salary. In order to earn money, we must do something that somebody else (employer or customer) is willing to pay for.
Of course, some jobs are more efficient, meaning they pay more money per unit of energy put in. The trick, then, is to increase the value of our work.
Increasing the value of your work (or, as economists would call it, increasing the value of your human capital) boils down to gaining skills others are willing to pay for. If you have the same set of skills as everybody else, there’s more competition for work, and the price of the work will be lower. If you have a very specific skill (or set of skills) that others are willing to pay for, then the price of your work is higher.
One way to increase the value of your work is to gain more skills, through education or experience. When you have complementary skills, there are fewer and fewer people you’re competing with to offer those skills to the marketplace.
But that’s not to say that the number of skills you have in the value of your work move in lockstep. It’s actually better than that.
The reality is that complementary skills make you exponentially more valuable to potential employers and customers. And you don’t even have to be top-tier at any particular skill. You can be “pretty good” at many skills, and those will still grow exponentially.
Making money in general, and making money efficiently specifically, allow you to lend your money and earn interest. This gains you flexibility in the future and helps you gain financial independence – not having to depend on a paycheck.
And yet, much like D.B. Cooper in Without a Paddle, money is worthless in and of itself. Without the first component of money – money as a medium of exchange – it serves no function. If there’s nobody around to accept your money, then you may as well not even have any money.
Philosopher Alan Watts has said that money represents wealth, like a menu represents food. A menu is not food. The menu only represents the type of food you can get.
In much the same way, money is not wealth. Like our friend on the desert island with a stack of cash, if you can’t use it, then it’s worthless. Money is not a goal. Money is only a tool. Money is only as good as how you use it.
And since life is finite, and many people get to the end of their lives feeling like they’ve mislived in some way, we have a choice about how we use money. We have a choice about how we make it and how much we need or how much is enough. We have a choice about how much we work. We have a choice about what metrics we use to judge ourselves.
Money is important, but it’s only a tool. It’s an essential tool we need to learn how to use, care for, and be responsible with. But it’s just a tool, and how we use that tool matters.
You get one life; live intentionally.
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References and Influences
Adams, Scott: How to Fail at Almost Everything and Still Win Big
Akimbo Podcast: Money is a story Ariely, Dan & Jeff Kreisler: Dollars and Sense Hagen, Derek: Your Money, Your Values, and Your Life Housel, Morgan: The Psychology of Money Kahneman: Daniel: Thinking Fast and Slow Krueger, David & John David Mann: The Secret Language of Money Newcomb, Sarah: Loaded Robin, Vicki: Your Money or Your Life Seth's Blog: Most of all, money is a story Wagner, Richard: Financial Planning 3.0