Money, and especially the accumulation of money, is an important and sometimes misunderstood concept. Many people want more of it. Some don’t know where it comes from. Fewer know what it means. Some primary ideas may help.
Money exists because we need it to make societies work more easily. It helps us by allowing people to trade skills and goods. Without money, we would all be required to do what we need done and make what we need now unless someone else could supply us and needed what we had to offer in exchange. Stupendously inefficient.
Barter does not work efficiently because of the “coincidence of need” problem. We can only trade effectively when we both have needs and each has a surplus supply of the thing the other needs.
Dispose of surplus goods, to someone who needs them, for money. Some other day use the money to acquire the things you need. It is still barter but without the “coincidence of need” problem.
Money characteristic number one is the “unit of exchange” idea. It is something that can be always be traded for what you want. It is a universal gift certificate. Bitcoins satisfy this need but not other important elements of money.
Money characteristic number two is as a store of value. Two-day old money is still worth what it was when you acquired it. Not so true for two-day old bread or fish. The store of value idea is what connects our present wealth to our future wealth. It is an important part of planning.
Money characteristic number three is as a unit of account. Without this feature it would be impossible to deposit money with someone for safekeeping or for investment. A pound or a yard is a unit of account, so to a Dollar or Euro. You must know the unit of measure to assess the size of the holding.
There are two things we need to take from this.
First. The store of value idea is problematic because the value of most currencies is influenced by governments. Some think that inflation is always a monetary effect caused by governments, but that is not empirically provable. Nonetheless inflation exists and is important. We need to factor inflation into our calculations of future need. Be aware, tax effects are magnified by inflation.
Second. People have stores of money because they have in the past traded something of value for money and have not yet spent what they received. People trade time and skill for money and they spend it or keep it. Those who have more money, traded more value or consumed less. It is essentially fair but envy is a problem.
Money accumulates to those who have and employ skills. If they are uncommon skills that people want, need or find fashionable, the owner can command a higher price.
Sometimes the item can be replicated so one instance can be traded many times. Think Seinfeld re-runs. Or Beatles albums. This multiplier is very wealth enhancing.
Sometimes, scarcity is an issue. Few can swing a bat as hard as Jose Bautista. If someone needs that skill they will need to bid against many others to get it.
Having a lot of money is about providing a lot of value. Value is determined by the payer because they can always choose to not buy at a given price. Prices are ultimately set by the purchaser not by the vender.
Alternatively you can have a lot of money if you trade less but do not use any of it for consumption. The miser approach. If you wait to spend and while waiting, invest well, the time value of money will add to your pile. Interest.
So, to be wealthy you must be skilled and able to trade that skill for money or you must wait to consume.
No one can acquire wealth for nothing because it is based on trading. If you think that you can have something for nothing, then you must also believe that it is allowable to have someone else with nothing for something.
To succeed develop more and unique skills and find better ways to offer them to others. Then, consume less, invest in more skills and start the power of compounding interest working for you.
Ultimately you are your own wealth.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
email@example.com | Twitter @DonShaughnessy | Follow by email at moneyFYI
“You are your own wealth”. I like that.
How about dictators who accumulate tremendous “financial” wealth, but nearly no ethical or moral wealth? Their means have nothing to do with trading value for money. TThey spread pain and suffering and get “paid” for it. In my book, those are the poorest of the poor.True wealth is an encompassing experience…
The article is enlightening. Thanks!
Thanks for this. It really helps people like me to understand money better, when it’s explained simply. I suppose it’s the same with anything.
Great article, and well written as always.
First time to your blog – now a follower. Many thanks for this insightful and practical article!
Thank you. I hope you will find more “insightful and practical” in future. All the best for a Happy and prosperous New Year!