K(NO)W MONEY - Let It Be (part of series)

byJoshCaleb

174 followers

5 years ago

Savings not good. Spending…good!

To start, I would like to take this opportunity to thank the people who took their precious time reviewing and commenting on my website and posts. And for everyone, thank you for being a part of WA community and continue working not only on making money but to becoming wealthy. Just to be a part and belonged to a wealth of great educators, high income earners, trainers, supports and well-rounded WA community means a lot to me and to everyone as well.

Let’s begin…..

Money is a currency and needs to flow.

At its core money is simply a medium that allows for the exchange of goods and services. The true history of money is lost in time, but it’s likely that money started in the form of unspoken promises, evolved through a barter system of some type, and has expanded over time into formal promises and legal contracts. Said differently, money is the medium by which we gain access to the things we desire. You can’t always trade a back scratch for a back scratch, but humans have resolved that issue by creating something that facilitates the exchange of most goods and services. For instance, if I want a back scratch, but I don’t want to scratch your back, it’s not a problem. Instead you scratch my back in exchange for $10, thereby voiding my need to provide you with an equivalent back scratch, and you can go buy whatever you want.

Money, while important, should never be confused with true wealth. Remember, money is merely the medium of exchange. It is a resource like many other resource humans create, and it provides us with a means to an end. While the ticket gets you into the theater, what you want is not the ticket. The ticket simply gives you access to the show, which is the true end. Money is merely the means to that end. Although money is a necessary component of modern life, it is not a necessary component of acquiring true wealth.

Most of the money in a modern monetary system is what’s called fiat money. It has no intrinsic value but is used as a medium of exchange because a specific government deems it so. In Latin fiat means “let it be.” Today’s monetary systems are designed as social systems that institutionalize and organize money under specific laws within specific societies. Governments regulate these monetary systems and identify the entities that may issue specific types of money. The US government regulates the US monetary system, which is designed around the private banking system. You can think of the private banking system as the playing field upon which the US payments system works. The government is the referee (regulator), and we are the players trying to obtain balls (money) to score goals (consume and produce). But if you want to play on the field designated and regulated by the US government, then you must use the ball that it deems to be acceptable, and that means engaging the playing field that is the US banking system.

Ironically, money is the very word we used to describe what we do when we’re “investing”. Interestingly, most of us are not actually “investing” when we buy stocks and other investments. We are just reallocating our savings. This sounds mundane and perhaps even unimportant, but I think it has important ramifications for how we construct our wealth.

In economics the word “investment” is defined as spending, not consumed, for future production.

In finance the word “investment” is often defined as spending with the expectation of future profit. We tend to use the latter definition to describe the purchase of stocks and other investments, however, I think it’s more appropriate to use the prior definition as it is more consistent with the economic concept of “saving” than “investment”. Let me elaborate.

If you earn some income that goes unspent you are simply saving. If you use some of your income to buy a shirt you’re spending on current consumption. But if you’re the entrepreneur who owns the shirt shop and you buy a machine that makes shirts then you’re spending on something that enhances your future production – you are actually investing it, or spending for future production. If the shirt shop goes on to do tremendously then the shirt company might raise capital so they can invest in more shirt making machines. They might even issue stocks or bonds to do this. These instruments are issued to finance the shirt company’s investment spending. And when these shares trade on a secondary market like a stock exchange, they are financing nothing. They are simply being exchanged at values that the buyers and sellers perceive the shirt company to be worth.

The kicker here is that the issuance and exchange of these shares can finance future financial and business growth, not actual investment. It is, more properly, a simple reallocation of savings (unspent income) which finances investment spending. When you buy shares of Amazon you are not spending for future production. You are reallocating your savings from cash to stock. If you happen to finance investment spending at say, an IPO (initial public offering), then you’ve reallocated your savings so a firm can then spend for future production.

Now, some people might say: “Who cares Josh? You’re such a stickler for details!” Well, this is true. But I think it’s an important distinction as “investing” conjures a sort of sexy get rich quick profit chasing endeavor whereas the allocation of savings is rather boring and conjures up a much more conservative sort of endeavor. The concept of allocating our savings is much more consistent with what most of us are doing when we seek growth and protection of our savings by allocating them to the financial markets. While this is a fairly minor change in thinking it’s one that I think many “investors” could benefit from as it will get them out of the mentality that they are involved in some sort of “beat the market” race to get rich and instead allocating their hard-earned savings in a manner that is more likely to serve their real long-term financial goals.