The 7 Incarnations of Money

Have you ever thought about money?  Not about your finances or your investments.  About money.  I mean really sat down and thought about it and all the things that it can do.  I spent some time recently thinking about all of the different forms, or incarnations, that money could take and has taken over history.  I thought I’d share the results of my pondering with you today, so please allow me to wax philosophical for a bit during this post.

1. Money as a Medium of Exchange

This is probably the aspect of money that most of us are familiar with. If I want something, I buy it with money.  Then the store that I patroned pays its employees with money, who in turn go and spend the money on other things.  And the cycle continues.  For example, if I want a mechanic to fix my car I pay him with money, which he can then use to go buy food.  I don’t have to barter three chickens and a jar of oregano for an oil change and a tuneup.

Being able to trade money for goods and services has tremendous advantages.  It allows for the specialization of labor and for products of ever increasing quality and complexity to enter into the market and make our lives better.  Capitalism is pretty awesome like that.

 

2. Money as Labor

Remember how I paid the mechanic to fix my car in the above example?  Basically, I turned money into labor.  By paying him to fix my car, I didn’t have to waste my time doing it.  Which is probably a good thing, because given my mechanical aptitude the car probably would have wound up exploding had I tried.

 

3. Money as Employees

But I’m not the only one who can use money to buy labor.  Let’s say I took my car to a big garage to be repaired.  I didn’t pay the mechanic to do the work, rather I paid the garage company.  The company paid the mechanic.  And I assure you that the garage skimmed a bit off the top of my payment and kept it back as profit for the owners.

The owners of the garage turn their money into employees by paying them to fix cars.  The labor of these employees in turn brings in more money and the garage skims some profit off the top.  This process, assuming that the garage is well managed, is a self perpetuating cycle.  It’s entirely possible that the owners of the garage don’t even fix cars.  They may just sit around all day in a beach villa sucking back mai tais while a general manager handles all the operations. Through the power of investing in their garage, the owners used their money to produce even more money.

That is a sweet gig.  You’d have to be stupid not to want in on some of that beach villa lounging mai tai imbibing action.

But what if you don’t have enough money to buy an auto repair shop?  Or lack the connections to find a good general manager?  Or what if you could buy an auto repair shop, but were afraid that the business was risky and that you might wind up losing money?

It wasn’t until sometime around the 17th century when people finally figured out how to surmount these hurdles with the creation of the progenitors to the modern corporation, known back then as chartered companies.  The idea was simple, pool investments from a bunch of people to make inroads into the exceedingly lucrative spice trade.  Seriously, spices were where it was at in the 16th and 17th centuries.  If the adventure went bust, everyone lost some money, but not enough to send them begging in the streets.  If the endeavor was successful, the investors would be the ballers of the mercantilist era.

Corporations evolved over time, as did the markets in which one could buy or sell stock in a corporation.  Today, shares of the biggest and most powerful companies on the planet can be bought and sold any Suzi Homemaker or Joe Sixpack with a few mouse clicks and a couple of bucks to spare.

It is a shame that most people never make it past thinking about money as a medium of exchange.  They bring in money from their day job and immediately trade it in for whatever they fancy at the moment. If they opted instead to save and invest their money through the purchase of stock or other investments, they would be well on their way to unlocking the true potential of money.

As I hope I’ve illustrated above, investments are incredible inventions that allow money to produce more money.  Money that can either be used to purchase further investments or traded for whatever goods or services the investor’s little heart desires.

 

4. Money as Security

The only reason most of us have a roof over our heads or food to eat is because we pay for it.  If we stopped paying for these basic necessities of life, they would dry up.  Money is security for us.  It allows us to fulfill our needs and acquire our wants.

The personal finance world is obsessed, for good reason, with reminding us about the importance of having an emergency fund.  What if your car dies?  What if you lose your job?  What if you have some unplanned medical expense?

Why does the personal finance community stop short at just covering six months or so worth of expenses.  The ultimate emergency fund would provide for all of your basic needs and probably even some of your more important wants.  Not just for a few months, or until you found another job, but until the end of history!

And that ultimate emergency fund is buildable by anyone willing and able to make saving and investing a priority.  I’m working on building my ultimate emergency fund by saving at least 50% of my income and investing in solid dividend producing stocks.

 

5. Money as Power

Many people believe that Social Security will provide for them in retirement. And given America’s pathetic savings rate, Social Security is all that they’re going to have in retirement.  Unfortunately, this means that retirement for most people is not going to consist of exotic vacations to the French Riviera or annual memberships to Che Expensive Country Club.  No.  Their retirement will consist of sitting around in a small apartment watching daytime talk shows.  I think this is actually one of the nine levels of hell – let me check  my Dante.

People often equate money with power, but only if that money is being wielded by some obscenely rich caricatured movie villain.  This is short sighted.  All money represents power.  Money is the closest thing that we currently have to pure potential.  Every time I pick up a penny off the ground, I think to myself that I just acquired another small shard of potentiality.  Mario had the right idea! 

The more money you accumulate and put to work generating additional income, the more power that you will have.  If cartoon villain power is off the table, then what kind of power is left?  The power to buy what you want.  The power to do what you want.  The power to be who you want.  The power to do the kind of work that you want.  The power to do no work whatsoever, if that’s what you want.

If your have enough income from your investments, then you get to call all the shots in your life.  Not your credit card company, not your boss, and not the bank holding your student loans.

 

6. Money as Time

Every day most of us go to work and trade our time and talent for money.  But few of us realize that the trade off works the other way to.  Income from investments can be used to buy back hours of our time from the workplace since we will no longer need as much of their money to support us.  In the best case scenario, we won’t need any of their money to support us and work becomes entirely optional.

The harder you work now to increase your income and direct it towards investments, the faster that you will be able to escape the proverbial rat race.  What would you do if you never had to work again?

 

7. Money as Legacy

The unfortunate reality is that we are all going to die sometime.  Unless Ray Kurzweil is right about the Singularity.  But there are a few things that will transcend your inevitable demise.  Your children, and your money.  Go to any major museum or university and you’ll see the names of their donors, usually big recognizable names like Vanderbilt or Rockefeller.  Or think about those major philanthropic foundations created by the captains of industry, the Ford Foundation, the Pew Charitable Trusts, the Welcome Trust to name a few.  These institutions and organizations are the legacies of their founders.  Through them, the ideas and values of their founders have lived on decades after their death, and will continue to live on for decades more.

It is, I suppose, unlikely that any of us will be the next Henry Ford.  But if you have goals, ideals, or passions you can support them long after you die by directing your accumulated money and investments towards them.  You could set up a scholarship for local students, or fund a home for orphan kittens, or direct your money towards supporting biomedical research grants.  The sky’s the limit, constrained only by your imagination.  If you could support a cause for the rest of eternity, what would it be?

Readers:  How do you use your money?  What’s your motivation for achieving financial independence? Security? Power? Time? A legacy?