Tuesday, January 22, 2013

How Money Works IV: The Big Secret

Anything that can hold value and be traded or exchanged is money.  Your time is money.  Your life is money.    Your skills, knowledge, beliefs and actions are money.  Your tools, resources, possessions and property are all money.  But the most important thing about money is that it can be created at any time.  The difference between people who create money and people who don't is not as obvious as you might think.  They can look the same, act the same, and even sometimes have the same bank balance.  What the rich and the poor don't do is think the same.

Consider farming for a moment.  Working on a farm can either make you wealthy or keep you poor, depending on how a person thinks.  If you accept no more than a daily survival wage in return for your labor on someone's farm, then you are poor and will probably stay that way.  If you own the farm, working on it could be making you rich.  Yes, the exact same activity can have two opposite results!  The rich always get richer and the poor always poorer because the poor simply don't know how to a) get the most value out of their time and abilities, and b) use their existing wealth to make more wealth.

"But," you say, "thinking and owning are not the same thing!  You claimed thinking made the difference, but your example showed that ownership is the real cause poverty!"

Wrong.  Ownership is not the primary cause of anything; it is merely a result.  Ownership is both the long-term outward manifestation of rich thinking and the principle that creates all employment opportunities.  Ownership or lack thereof always adjusts itself to match the mental activity of the individual.  If the land-owning farmer didn't understand the secret of money and the worth of his own land, his ownership would be a temporary thing.  If nobody owned farms, then farm laborers wouldn't have jobs at all.  On the other hand, if the landless laborer understood exactly how money works, then sooner or later he would manage to arrange things differently.  He would gradually convert to using money to generate an income rather than his back.

The reason many poor and middle-class folks don't do that is because they are missing this secret about the nature of money.  This is it:

There are two kinds of money:  There is money you never, ever worry about trying to save, and money that you never, ever, ever, never never NEVER EVER spend.


The money that must not be saved is that which meets your everyday needs.  It's like perishable food: you either eat it, share it, or throw it away.  Trying to save a scrap of lettuce here or a crust of bread there consumes more resources than it is worth.  (Pro Tip: if you hate to throw food away, get yourself a chicken.  They eat almost anything left over from your table and convert it into useful eggs.  Way better than dogs, which do nothing more than convert your valuable wealth into useless noise, hair and poop.)  If your budget is to live off of 70% of your weekly income, then spend all of that 70%.  Spend it joyfully and without flinching or scrimping.  It is money that must not be saved, because it is what you and your family live on. You are exchanging it for priceless life, and it's a bargain at whatever the price.

The money that must never be spent under any circumstances is that money which is enabling you to continue to earn your living.  If a farmer gets hungry, does he exchange his plow, cattle, or land to buy food?  Of course not - he uses them to grow his own food.  Who would consider for a minute selling a finger or a toe every day in order to buy food?  Far more sustainable and preferable in other ways is to use your limbs to earn your living.  Eat the eggs, not the chicken that lays them.

A carpenter does not earn his living by selling his expensive and valuable tools.  If there is a market for tools, there must be an even greater market for what those tools can produce in the hands of a skilled and efficient craftsman.   Those tools are money, but the kind one never spends.  They are the kind of money that earns money.

Many people refer to this kind of money as assets or investments.  If you can exchange one asset for an asset of even greater value to you, then do so.  A sewing machine may be valuable, but not so much in the hands of a carpenter.  A planer is likewise of little use to a seamstress.  But an exchange of these creates tremendously greater value for both.  Both are able to earn a living from these assets once they are in the right hands.

The fundamental difference between an asset and any other form of money (exchangeable wealth) is that an asset produces or allows you to produce value on an ongoing basis without itself being consumed.  An asset  enables you to produce far more value than you could without it, even working twice as hard.  Or even ten times as hard, in many cases.  Some assets allow you to do things of value that would be absolutely impossible otherwise.

But the poor often don't value their assets.   The middle-class often do not recognize them for what they are. The difficulty is that today we have an extremely liquid economy in which practically anything can be converted into cash value at any moment.  This makes it difficult for people to spot the difference between money that must be spent every day and money that could be earning them a living.

If a middle-class individual manages to get a job that pays well, they are often unsure about what to do with the money once they have spent as much of it as they can on daily requirements.  They don't know what an asset is, and instead exchange their stored labor for bigger and faster ways of consuming their wealth.  Boats, cars, TVs that rapidly depreciate in value, clothes that are out of fashion before they leave the store, food, drugs or drink that make the body unfit for either work or play, or artificial significance/connection/purpose  in the form of vast piles of "collectible" rubbish sourced on ebay or at yard sales.

Worse still, the poor aspire to be middle-class by copying those behaviors, thus ensuring their continuing poverty.  The only difference between poor and middle class is just one little temporary, fleeting and uncertain thing:  a job.  The vast majority of Americans are no more than two paydays away from being out on the street, homeless and under a mountain of soul-crushing debt.

The thing about being poor is that even if you give a large amount of money to a typical poor person, in five years they will be right back in the same poverty situation if not a worse one.  You see, it was not the lack of money making that person poor.  Rich or poor is determined not at all by a bank balance, but by what is happening inside the person's brain.

Even with no cash, a "rich" person sees opportunities, knows how to value his labor, and understands that using the right assets can make earning a basic living a matter of no more than a few hours per week, with the rest of the time spent building more assets.  Because everyone is free to change what happens inside his or her own brain at any time, anyone can become rich whenever they want.  The change of thinking can happen very quickly, although the bank account can sometimes take longer to adjust itself to the change.

Once the secret of assets is known and its full implications are appreciated, poverty becomes optional.

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