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Over the past few weeks, as I’ve been writing my series on being your own bank, I started to realize that I hadn’t addressed underlying perceptions about money and assets. Without this framework, a lot of what I’m writing about in my series may be lost on people. I think it’s probable that when people talk about being their own bank, they are mostly only referring to being able to manage money themselves without having to rely on what we may call “traditional banks” or “financial institutions”. I mean, who wouldn’t love being able to do what they want, when they want, with their own money, at any time?

However, for me, being your own bank is much more than that. It’s actually a way of thinking that is quite different than what is usually seen or talked about, even by financial advisors.

And so, this week, I want to take a break from my usual posts and just write about the concept of money in general. I want to create a healthier foundation for the betterment of our personal finances by rethinking money.

So what Money?

Money is simply a medium by which we exchange products or amenities. I'm mainly referring to traditional fiat currency here, but this could go for any medium that is or has been used primarily for exchanges of goods or services between two or more parties.

In reality, money has no intrinsic value. Instead, it derives its value from one simple thing: trust. Conceptually, when I go to purchase a certain good, the act of exchanging my currency for that particular good is a confirmation of debt. Through my actions I’m saying that the person receiving my money is owed a debt which is worth the product I purchased. This debt can then be exchanged for different goods and services which have value that can be quantified in relation to the agreed upon debt.

Now, this medium of exchange needs to be regulated and protected. After all, if I exchange that medium of debt to you, but someone can just come and take it by force without consequence, no one would bother exchanging anything they have for said debt. Then, without anyone bothering to exchange it, either the medium becomes worthless (as in the case of many fiat currencies around the world), or if it has other use cases (i.e. gold), it’ll be hoarded by those with the best arms and securities instead of being distributed to the masses.

And so, we have the reality and consequence: we need a medium of exchange so that a farmer can buy computers, but we also need security of that medium in order to exchange with confidence. Thus, while having no intrinsic value, money gains what it lacked through trust. We trust that the debt owed to the person with money is true, and we trust that the debt exchange is protected by those interested in its security.

Then, through this medium, we may purchase things with actual real-world utility, and thus obtain things with real value.

The Problem

All that said, I think there’s a tendency in society to place a wrong value on money. By this, I mean that we tend to prioritize the accumulation of money as a sign of wealth, status, or even security, as opposed to other goods and services that actually bring us those things.

This is probably due to a lack of proper financial education, poorly learned behavior, or linguistic attribution to money. After all, the first time many of us were exposed to money was probably along these lines: We asked for something like a candy bar at a grocery store, and our parents either saying yes or no. If they said yes, they paid for it and eventually gave it to us, and we indirectly learned that ‘money’ got us ‘things’. Eventually, we learned that more money got us more things, or got us things that required more money. Thus, our philosophical foundations for it are often set in how to spend and accumulate money, rather than understanding what really happens in an exchange.

As we get older, money is often related to us through language. In the world, when we read up news on the latest stock analysis or business reports, we’re always hearing about how much companies are worth in dollars, or how a company is doing poorly because its stock is now trading at lower costs, or just simply things like the rise of the cost of gas. This kind of language, even indirectly, reinforces the idea that money has value in itself. Which, as pointed out above, is not true at all.

This really came to a head for me when I was reading through various discussions on cryptocurrency boards and forums. I saw quite a few people who wanted to invest in this new asset just so they could ride a wave of massive gains, after which they would sell wholesale to go back to fiat currency. And while cryptocurrency in general has a long ways to go until adoption for use as actual money (I’m excited to write about this in a future post), it was a bit strange to see people honestly have more value in a representation of debt that has decreasing worth than items or assets of true utility. It was ironic, considering how and why cryptocurrency was created in the first place.

An Inconvenient Mindset

I’ve noticed that different groups of people have certain tendencies in their thinking about money as well.

For example, those who live at or below the poverty line tend to believe that all their problems would be solved if they could just get more money. Now, especially in the United States, these people tend to have little responsibility in terms of paying taxes, worrying about upkeep of a home they own, and maintaining and growing businesses. Thus, without having any experiential knowledge with these other things, there’s an expected tendency to lean towards a mode of thought bent towards accumulation and spending.

Now, I’m certainly not looking down on anyone here. And it’s not necessarily wrong to think this way. After all, it’s true: the more money you have, the more power you should have to purchase things. However, having this as the foundation of your financial life is a bit detrimental, since you're only acquiring money just to spend it. The vast majority of goods and services take money away from your pocket over time rather than put it in. For example, a car doesn’t have just the initial cost, but upkeep costs such as gas and repairs that have to be done on a constant basis. As a musician, I’m always doing repairs and maintenance on my instruments. And so, while it is true that having more money can get you more stuff, more often than not, we all purchase things (either out of desire or necessity) that end up costing more and more in the long run.

Then there are those in the “middle class”, a supposedly shrinking category of people. I’ve noticed that those in this category tend to believe that as long as they save enough money, they'll be fine. They tend to try to get out of debt as soon as possible, and budget their money so that, as they earn higher wages through job promotions or changing occupations, they can save more and more. Then, they attempt to grow their savings through investments or IRA’s and the like, so as to have a ‘secure’ financial foundation for future retirement.

I’m not here to say that saving is bad. In fact, getting out of bad debt and learning to save money is often a good step towards managing money well. But it's still a faulty foundation. Believing that saving money and putting it into stock investments so that you can pull it out at a later time is actually pretty risky. First, unless you’re at or above retirement age, pulling out the money will force you to pay a hefty tax. Second, the market, even though it goes up on average, has been known to capitulate at the most inconvenient times for many people (i.e. 2008 case-in-point). Third, even if you are saving money in a savings account, inflation will eventually overtake your ability to spend in the future. This is why I believe the middle class may be dwindling. It's not a lack of capital. Instead, it's not realizing that money has no intrinsic worth.

A Mindset of Wealth

This is why in my banking series, I write about purchasing and leveraging assets. I’ve learned that wealth is not really the acquisition of more money or more savings. Rather, wealth is a mindset of understanding key assets, goods, and services that, over time, always retain value over the long term. These assets retain value because they have proven desirability and utility across decades and centuries.

Money, on the other hand, does not retain its trusted value over time. Because economies inflate, money tends to lose its purchasing power. As it does, other assets may seem to gain value, because more money is required for the purchase of that same asset. It’s not that the asset is actually more valuable. Rather, it has stayed the same. It's money that's lost value in relation to the asset. And so, when we own these assets, we can collateralize them, and thus constantly using their value to leverage more and more money through which we buy and purchase other things.

This accomplishes a few things. First, after we’ve purchased the asset, we no longer need to worry about a tax event on our capital since we’re not planning on selling it. Second, it allows us to have desirable facilities which are independent of any kind of currencies (i.e. USD, Euros, Pesos, etc.). Third, when we own the right kinds of assets, those assets can be used for additional income, which can then be used to purchase other things, even more assets. This cycle is what eventually brings true financial freedom, since we're no longer reliant on what others perceive the value of any particular currency to be.

The fascinating thing about this is that, especially today, most of these assets (and the services for them) are available to the average person. The majority of them don’t require anyone to be rich. And there are always legal ways to gain the capital required for the ones that do require a bit more to start.

A Foundation for the Future

All we really need is this understanding of asset value rather than believing in the (virtually nonexistent) value of money. It takes awhile to get used to (at least, in my personal experience). After all, most of society is inundated with the idea that the worth of something is evaluated through denominated currency.

I once had a friend tell me that she would never pay any higher than $5.00 for a cup of coffee, no matter what. Her justification was that she was once a barista, and so knew the ‘proper’ price of the service and product. I didn’t tell her at the time, but in a few years, she would be completely priced out of buying any kind of coffee, just because of economic inflation. In fact, by zealously refusing to pay above a certain price for a commodity, she was actually telling me how much value she placed on money, rather than what the coffee was really worth. It revealed to me more of a lack of awareness and financial education rather than the quality of the beverage.

I hope this was helpful. In the coming weeks I’ll be continuing to write about being our own bank. I’m actually pretty excited about the next two assets, since both of them require very little capital to get started (and thus almost anyone can get started with them), and they’re both not well known in the public eye.

If you haven’t read any of my series on being your own bank yet, you can start here. Otherwise, see you in the next post!

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Header Image taken from here.

So now we’ve come to the fun part of the series. For the next few weeks, I’ll be making the case for and against a few assets that I’ve found helpful or even integral to the process of becoming our own bank. In this part of the blog series, I’ll be explaining the specific mechanisms behind these assets and how they assist our banking functions.

If you haven’t read my previous posts in this series, here is Part 1, Part 2, and Part 3. But here's a small recap: The primary functions of a bank are storage of assets and lending in order to maintain and increase the value stored at the bank. Because of general economic inflation, part of the bank’s job is to make sure their lending beats the rate of inflation, while being paid for their troubles. Banks are helped in doing this by a system called Fractional Reserve Banking, in which the money they hold in reserve only needs to be a fraction of that which was deposited to them. In this way, they put a multiplier effect on the functional liquidity of the economy, because they get to use the same dollar in multiple ways. While we can’t be legally as effective as banks in this endeavor, we can find various goods and services which achieve a similar function for us through collateralized loaning, allowing us to also use our money in more ways simultaneously.

Goods versus Assets

Just to be clear, most of us actually do use our money in multiple ways already. After all, things like cars or computers are often used for different things at the same time. Cars are mainly source of transportation, but can also be vehicles of income (being an Uber or Lyft driver, for example). Our laptops and computers are also multi-functional. However, each of these goods often depreciate in value over time. A car loses much of its value once it is driven out of the seller’s lot. And even a refurbished computer is never bought for its original full price.

So, when I talk about assets that we can use to serve us as a bank, I want to stick to assets that, on average, almost always appreciate in value. Furthermore, because we are taking a loan on these assets rather than selling them, the assets need to be worth the loan while still appreciating all by themselves. This is what primarily gives us multiple uses of our dollar.

What’s the Deal with Gold?

And now we come to our first asset class to collateralize: Gold, silver, and other precious metals.

There’s a sense of nostalgia and fondness when thinking about acquiring and using gold for personal banking. After all, for a long time in human history, we used these things as actual currency. Gold was the major medium of exchange all the way up until the 19th century for most civilizations, empires, and nations.

The case for gold can be made in its utility and rarity. Since gold is so rare relative to many other naturally mined metals, demand for it outstrips its availability and supply. Additionally, gold doesn’t oxidize like many other metals, retaining its allure and usefulness. It’s also extremely malleable. This combination allows gold to be used in a wide variety of applications, from jewelry to technology.

The utility argument can be made for other precious metals as well. Silver, for example, is used in much of the modern world, including in semi-conductors and solar panels. These metals, while not having gold’s legacy, have maintained their worth and demand across long stretches of time.

How to Use Gold and Precious Metals

For our purposes, gold and precious metals can be collateralized in a few different forms: Jewelry, coins, and bullion. Jewelry is the most prevalent form, since this is the normal use case for most people. It’s accepted by nearly all services which will offer a loan on it. But the percentage of pure gold or silver (or other precious metals) in jewelry is quite low, and so we wouldn't be able to loan much from it. Coins are a rare form, difficult to obtain, and are only really existent in old coinage that was used in centuries past. Bullion, or bars, is probably the best way to get a loan for the metal you are offering. However, these are far, far more expensive, since the entire bar is purely and singularly that material.

Once you have the metal you desire to use in one of these forms, obtaining a loan is quite easy. There are many storefronts, banks, and even online services that can provide financing for your loan. The value of the loan can be up to 60% or 70% of the actual value of the item. This is where the general appreciation of the item comes into play. While you are taking the loan out (and paying it back), the gold being stored still appreciates in value, often matching and beating out inflation. So after the loan is done and you receive your gold back, when you collateralize it again, there is a high probability you can obtain a higher loan amount for it.

This is the value of loaning rather than selling an asset. By loaning, we retain ownership of the item in question, and because it’s an appreciating asset, we never truly lose value. Furthermore, we never need to worry about taxes, since loans are not a tax event. Thus, we get to keep more to spend. This value compounds upon itself over time, earning us more money from the money we initially paid for in the first place.

It’s important to shop around with various services and banks, since different places may offer higher or lower rates for your loan.

Next, let’s look at the pros and cons of using this asset class to become our own bank.

Advantages of Using Gold and Precious Metals

The first advantage for using gold and precious metals is the ease and efficiency of using it. More often than not, you can liquidate your gold within a day, as the process of evaluating it and getting the loan is very fast. Even online services don’t often take more than a few days to respond, after which it’s still an easy and quick process to obtain a loan based on your items.

Another advantage is that, unlike real estate (which we will talk about soon), upkeep for most of the items in this asset class is almost non-existent. Gold itself doesn’t oxidize or rust in a normal environment, so keeping it doesn’t get much more complicated than simply buying and storing it somewhere safe. For those that do rust or oxidize, like silver, there are ways of storage that keep the metals mostly clean, with a need to only take care of it once in a while.

These advantages allow gold and precious metals to be an incredible store of value that is easily liquidated without much trouble. However, there are a few key disadvantages that we must be aware of.

Disadvantages of Using Gold and Precious Metals

The first disadvantage is that, in the loan process, we don’t often hold onto the item we are using for the loan. Instead, it’s in possession of the bank or service provider until the loan is finished. Because of this, whether someone buys and participates in using this asset depends on whether or not the services which provide the loans are trustworthy in securing their customers' assets. If you don’t feel you can part from any gold or silver you purchase, or don’t trust the bank or service to keep your items secure, then this is a dead-end in terms of its banking functionality. Yes, these assets can still be kept in storage, but it will only be fulfilling a single function rather than multiple functions at a time.

A second disadvantage is the high interest rates these kinds of loans usually go for. The lowest interest rates that I’ve found hover between 10% and 11%. However, more often I’ve found interest rates that go as high as 15% to 20%. This is on top of the fees required upon transaction. So for any collateralized loan, the investments we make with that loan need to exceed, at minimum, a 10% return. This isn’t the most difficult thing, if you know what you’re doing. But if we’re attempting to simply augment our current financial situation by becoming our own bank (rather than investing in or starting new businesses), this asset class may not be the best for us.

The third, and probably worst, disadvantage is in the valuation of the assets themselves. The general consensus is that gold, silver, and other precious metals always appreciate over time. This is not necessarily true.

Let’s take a look at this gold valuation chart across the past century.

As you can see, while gold has been relatively stable in the past five years, across 100 years, it has actually fluctuated a lot. And even though it seems to have risen quite a bit from the early 2000’s, when we extend the time frame of investment to the 1980’s, the current valuation of gold has actually not yet even reached its past peak. In fact, gold has stagnated below that peak the last few years.

It gets worse. Let’s look at the valuation of the dollar.

As we can see, from the peak of the 1980’s the dollar has actually lost about 30% of its value. So when we take this rate of inflation into account, we realize that the current value of gold has depreciated as much as 55% when compared to itself.

This seems pretty damning until we remember one thing: we are comparing gold to itself. If we take all the past century into account, even given the parabolas and accounting for inflation, gold has still generally increased in value. Yes, it depends on when it was purchased, but on average it’s still a steady line of increasing value compared to the dollar.

Furthermore, we are not spending this asset as we would spend dollars. Instead, we are collateralizing it for dollars to use. Whether the dollar to gold ratio (or any precious metal for that matter) is higher or lower, we get multiple uses out of the asset we have purchased, providing we do our due diligence in terms of income and interest.

Evaluation: Good or Bad Asset?

Whether or not you decide to use this asset for your banking functions depends on a few things.

Disclaimer: Again, as I've said before, I'm not a qualified financial advisor. Please do not take anything that I've written or posted as financial advice of any kind. I believe each person should do their own due diligence and research before making any kind of decision for your own personal finances.

First, you need to determine whether or not the asset value, with its fluctuations, is worth your trouble. Second, you need to determine whether or not investments or loans you make to others will give at least a 10% return on your investment (ROI). If you can, then you will need the capital to obtain the gold or silver or other precious metals.

After that, however, the process of using gold to become your own bank is quite simple. By collateralizing it, you are now on your way to earning more money with the money that you already have, and will perpetually have, as long as you don’t sell the asset.

I hope this was a good primer and help for your decision on whether to use gold or other precious metals to become your own bank. Next week, we talk about Real Estate!

Index

Header Image courtesy of Pixabay, taken from here.

Charts from Macrotrends, taken from here and here.

Over the past couple weeks, I’ve been writing about the idea of being your own bank. The impetus behind blogging this was to put into writing a few things that I've been doing the last few years to gain more control over my own finances, and rely less on traditional financial institutions or banks. I believe this way of managing my own life has really benefited the way I think about money, and something I wanted to share with others as well.

In my first post, I explained that the primary function of banks was storage and lending. By storing assets, banks hold value that customers can use to exchange for other goods and services they desire. The most common thing stored for customers is fiat currency, which is really just a note backed by the government that created it. The second function, lending, allows bankers to do two things. First, it makes a profit for the bank, thus paying them for their managing duties. Second, it allows them to stay ahead of general economic inflation.

In my second post, I outlined the troubles of inflation, and why it isn't just a rise in price levels, but represents a loss of value over time for the money we earn. Banks used to help their customers stay ahead of inflation with high interest savings accounts. However, those days are long gone. If we’re going to become our own bank, we need to find storage services that are far better at helping us stay ahead of the curve of inflation.

This week’s post is about a key principle that allows banks to lend money as they do. It allows them to effectively put money to work, earning more money, which can then, of course, be used to earn even more. It has caused the world economy to boom and bust historically. It is called Fractional Reserve Banking.

The Fractional Reserve System

Fractional Reserve Banking is a pretty old idea. Basically, banks only have to keep a small portion of the currency deposited in them, as determined by whatever sovereign nation they exist under. Because of this, each deposit into the bank creates a multiplier effect on the value of each bank asset.

For example, if the reserve amount is 10%, a customer can deposit $100 at the bank, and the bank only needs to keep $10 on hand and loan the other $90. The bank then charges interest on the loan, so that the money returned would be greater than what was deposited. Loaned at 5%, the $90 comes back at $94.50, and the bank now has $104.50, from which they can lend $94.05. Keep in mind, the customer who made the deposit still has $100 available to them this whole time. So really, conceptually the bank now has $100 for that customer and $94.05 to loan to others. Thus, the functional liquidity added to the economy is now $194.05. With the fractional reserve system, they have increase liquidity through the each deposit.

This system is extremely effective in increasing the flow of money in an economic system. The problem lies in the responsibility and management of the bankers. Because most people don’t withdraw all of their money immediately from the bank, there’s a cushion of time where banks can lose from an unpaid loan without much concern. Since most banks are conservative, they tend to lend only to customers they trust to pay them back. However, as banks become bigger and bigger, their customer base grows larger than their ability to delineate between those who will and won’t pay their dues. And if they lend to more and more customers who don’t pay them back, they soon won’t be able to afford simultaneous withdrawals from other customers, thus dissolving the bank.

By becoming our own bank, we can avoid being affected by cycles of recession and inflation. But, if we want to be effective in the long run, we must exercise caution in our spending, so that our own reserves don’t run out.

Rethinking the System

The key concept we learn from fractional reserve banking is using the same dollar for multiple purposes. After all, banks are simply using any deposit for both that customer’s account and lending it to others. So, instead of thinking about the system as how much we can keep versus how much we are able to lend, we can think of it as being able to use the same asset for two or more simultaneous things.

Let’s say I put $100 dollars into a normal bank account. Also, let’s say the bank pays me an interest of 1% on it annually (we’re going to use simple interest to keep things easy). At the end of the year, that account would have $101. However, if I wanted to use it to purchase a $5 coffee, I need to take out money in order to do so. That means that the interest on that account would only grow it to $95.95. I haven’t just lost 5 dollars. I’ve lost $5.05. In fact, every purchase I make, I’ve not just lost the amount I paid, but also the interest that could have accumulated.

It gets worse. Remember (from my previous post) that inflation averages around 4% annually? This means that I’ve actually lost around $8 in total, which, in this case, is 8% of what I earned. When such losses compound across years, I’ve actually lost a lot of money!

But what if we could do both? What if we could take that $100 and use it to accrue interest and purchase coffee? Or use that same $100 to purchase coffee, earn more income, and beat inflation? In effect, we would have created our own ‘fractional reserve’ system.

The Collateralized Loan

The overall basic vehicle we can use to be our own bank is called the collateralized loan. The idea is simple. Rather than investing your money in a traditional bank account, which is really just an asset with high liquidity, we use it to purchase assets that we can use as collateral for loans. The assets should have an average value increase greater than the average inflation rate, which means by the time we pay off the loan, the asset itself has gained in value, helping to offset any loss we would have had otherwise.

There are a couple advantages to this approach. First, it liquidates an asset without destroying it. The money we loan to ourselves is at least a portion of that asset’s worth at the time of loan, and we can (most of the time) use that loan to do whatever we want, including purchasing more assets or lending to others. Second, since a loan is not a taxable event, we can use the entire loan for ourselves without worrying about owing any governmental authority.

Over the next few weeks, I’ll be writing about the products and services we can use to do this. I’ll explain and evaluate different systems and services that already exist, and see the positives and negatives of each approach.

A Sneak Peak

Here is a preview of what I’ll be talking about:

Precious Metals and Gold – Some of the oldest forms of currency comes from precious metals and, of course, gold. While no nation (as far as I know) uses the gold standard anymore, this is not necessarily a bad thing. What it’s done is turn these once legitimate currencies into assets that can be collateralized, and so now anyone can use them for banking.

Real Estate Investment and Ownership – Real estate is one of the oldest asset classes that allow you to become your own bank. Since it’s so old, the way to do this is actually pretty well known. I will be talking about how each banking function is fulfilled in a mortgaged property, and the pros and cons of doing it today.

Participating Whole Life Insurance – This asset class is surprisingly not talked about or used much. It’s perhaps due in part to the stigma attached to all kinds of insurance, from a legacy of scams and other things. Nevertheless, if leveraged correctly, Participating Whole Life Insurance is one of the most effective boons for anyone desiring to be their own bank.

Cryptocurrency – Although cryptocurrency is a very new asset class, if used and managed correctly, they can fulfill every single banking function I’ve written about. As more and more utility comes to this space in the next couple decades, this asset class could become one of the most important financial vehicles created in the past couple centuries. This is due to crypto’s ease of access, allowing it to become a bedrock on which anyone in the world can participate in the global economy, and so have the opportunity to enrich their own lives. However, because it still has a fairly nebulous future, much of what will be in this post will be speculative rather than fact-based.

Disclaimer: Please keep in mind that, while a lot of work and research has been done, everything which I talk about is still my own opinion. Do not conflate anything I write as financial advice. Also, I am not selling any goods or services related to what I’m talking about above. I won’t be telling you to buy a some package or deal in this series. I believe it’s imperative for everyone to do their own research so as to meet their own individual needs.

This list is what I’ve explored so far, and certainly doesn’t encompass all services and systems that allow us to be our own bank. Thus, I will add to this series as I find new or different products or services that achieve the same things, even after it is done.

After reviewing each of the things mentioned above, I will look at the avenues through which we can use our loans to make a profit, and so put money to work earning more money. Thus, we become our own bank.

So there you have it, the roadmap I’ve planned to be your own bank. See you in the next post!

Index

Header Image was taken from here.

In last week's post, I wrote about the fundamentals and principles behind banking. I talked about how the primary functions of a bank are storage of assets and lending, and in that way, both local and large banks are able to make money. A key idea was that, through these functions, banks are able to beat average inflation rates, allowing them to make sure the assets owned or stored at a bank retain their value. In this post, I'm going to be talking about why this is so important to understand, even for the average person not very interested in money or finances, especially when it comes to the storage function of banking.

Why talk about Inflation?

I believe that inflation in economics is very often misunderstood. According to wikipedia:

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

If you don't like wikipedia, Merriam-Webster says basically the same thing:

a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

These definitions are technically true. When the cost of the same good generally increases over time, this is considered inflation in economics. Additionally, unless something horrible like the Great Recession in 2008 happens, all economies on average inflate over time. But this doesn't actually get at the heart of why inflation has a negative effect on the average person.

Story Time!

Let's dive into this a little. Since I'm a musician, I'm going to use buying a guitar as an example. When I was teenager, there was this guitar that I'd been really wanting for a while. It cost $279.00 USD. I worked hard tutoring kids in math and english and saved enough money to buy it. I purchased it, went home, played with it, and fell absolutely in love with it. In fact, I still have this guitar today.

A few years later, I was looking online, curious about whether they still sold the model guitar I had. They did, but now it was worth around $379.00. Initially, I was ecstatic. I thought, “Wow, my guitar gained in value! If I ever wanted to sell it, I could sell it now for more than I bought it for! I would make a profit!” But then I looked at the other guitars that I had been pining for, but couldn't afford at the time. Those guitars had also increased in price, some more than mine.

This troubled me. The guitars being sold hadn't changed. The parts were all still the same. If anything, the companies who made them probably outsourced those models to cheaper factories over time, so not only were they charging more for the same, but probably making a bigger profit because they were cheaper to build. So the guitars themselves, from my point of view, hadn't changed in value. Rather, as I realized, the money I was using to purchase them had lost value, because I would have to pay more in order to get the same good. The “profit” I would have made selling my guitar is erased, because the goods I wanted to purchase had also increased in price.

Here is a key concept I came to understand: money is simply the agreed upon intermediary for an exchange to happen between someone who desires the product or service, and another who offers it. The value of that good or service is determined by the person who wants it, and how much they are willing to give in order to have it. However, because of inflation, the currency we use to purchase anything actually decreases in value over time in comparison to the good or service. It's normally not that the product is more valuable (providing it hasn't changed in any essential way to the buyer), it's that the currency used is worth less, because more of it is required to exchange for the same thing.

Inflation and Storage of Value

So, as we can see, because of inflation, any fiat currency we hold in storage over time actually loses value when compared to the goods and services we want.

Since the US Dollar is currently still the global reserve currency, I'm going to use the US inflation rate. According to Zacks, over the past century, the average inflation rate in the United States is nearly 4%. So on average, the money we store in our banks loses 4% of its value year after year. If we're going to be our own bankers, this is a problem we're going to have to solve if we're going to keep the purchasing power of what we earned over time.

What about Bank Savings Accounts Interest Rates?

Historically, beating inflation as a service for their customers used to be a primary goal of a traditional or institutional bank. Savings accounts had higher interest rates so that customers of those banks could leave their money safely in them and not worry that their stored asset would lose any value over time. However, presently, savings accounts have such small interest rates that storing money with these institutions and services actually means you're losing value over time.

As I wrote about last week, traditional banks need to pay their money lenders and managers. In light of what inflation really is, by putting our money in one of these banks, we’re actually paying them simply for storing depreciating value, rather than having a service that manages those assets we put in the bank so that their value stays the same (or better) against inflation over time.

This is probably one of the biggest reasons that drove me to begin searching out options aside from storing money at a bank. Of course, I still use traditional banking services. I constantly use my debit card or take advantage of various credit card benefits. But I no longer rely on these things to make sure that my money and assets retain their worth over time.

Instead, over the past few years, I've looked for and found various services and products that perform the storage and lending functions which traditional banks offer, but better. Not only do they offer things like better interest rates, but now I have more control, which means I get to be the primary decision-maker about the worth of my hard earned money.

In this series, I plan to explain and evaluate these various services that I've found. However, for next week's blog, I'll be writing about how money is put to work. Just like how inflation has a negative impact on the storage function of banking, I want to share about how lending has been impacted negatively by typical banking practices, and how we can avoid their pitfalls while still doing what they do, albeit on a smaller scale.

Hope this was a helpful! Until next time!

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Header Image was taken from here.

If you haven't read my previous post (it didn't show up in the “New” explore tab in Coil due to a bug), you can read it here.