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.
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!
Header Image taken from here.