Financial literacy is an interesting subject. Few people get it and I think there is a reason for that.
I spent a little time checking what passes for education on this subject and to the extent there is any, it falls into a single category. Not useless, but by itself dangerously incomplete. Methods of doing financial things.
How valuable are methods if you don’t know what you are working with or trying to accomplish?
How credit cards work? What’s a mortgage? How do car loans/ leases work? What about income taxes? How to get a student loan? (70% of students who get student loans don’t understand what they mean.) Scary!
Methods are tools or techniques that make something happen. They are not more useful than a precision tool in a factory that comes with an operating manual, but no one knows what it is for. Knowing how to run it is not enough.
If you know everything there is to know about borrowing money, investing money, shopping for bargains and paying income taxes, you are ahead of most. Let us further suppose you know how you get paid and will get paid in the future and that you know what a pension plan and employee benefits are worth.
You are not done. There is another and more important part. Strategic financial literacy. The “What is money for?” question.
Money is for trading. All transaction between people are a trade. Money is not anything by itself. Once you realize money represents value in a barter transaction, it gets easier. You trade time and skill for a paycheck. You trade the money that provides for food, clothing, a car or whatever. Money just makes it easier.
Every transaction is barter. Trading money instead of things is easier.
Having money lets you trade in a way that is independent of the resources you want and have. If you go to a clothing store to buy a suit and all you have to pay with is salmon fillets, you may leave empty handed. The store may not want your fish now, and worse the fish may go bad before they do want them.
Money lets it happen. You trade your fillets for money to someone who wants them now and then trade your money for the suit you need. Money is a “Medium of exchange.” It lubricates barter.
Money has three purposes:
- Money is a medium of exchange. Something that fits between the trade you make to get it and the trade you make to get what you want.
- Money stores the value of what you have to exchange. It won’t spoil. Far better than fish fillets.
- Money is a unit of value and that helps in accounting and in pricing. It would be very hard to price a car tire in terms of what you might have to exchange. Fish fillets, carrots, bushels of wheat, tulips or liters of gasoline. No one could keep up or be sure the relative prices were fair.
The key parts of this are,
- Money is valueless by itself. Only the belief in its value makes it work
- Barter involves giving up something of value, usually money, for something else of value that you want.
- Until you see the idea of trading of your values for money and the trading of your money for other things, money will be hard to understand in a way that can benefit you.
We know how you get money. You trade something of value for it. If someone has a lot of money it could mean two things. They have traded valuable skills many times or they have spent only a little of what they earned.
Tomorrow we will talk about what will bring more money your way.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772