What is Money? Unlocking Key Concepts for Young Professionals

Have you ever thought to yourself, what is money anyways? Yeah…we’ve all been there! We show up everyday and work our jobs in exchange for money. But many people never stop to consider what they’re actually working for?

Why do some people make so much more money than others? Well, if you want to join their ranks you need to increase your understanding of money, what is money, and its role in our society both historically and in the past. Money can be a complex subject, but in this post we’re going to simplify the concept for you. In our following posts in this series we’re going to explore specific topics in the 3 pillars for financial success: make money, keep money, invest money.

Decoding the Essence of Money: Beyond the Dollar Signs

So what in the hell is money anyways?

Let’s get something out of the way first thing. Money isn’t real! Sure, currency is real. Debts and bills are real. Gold and silver are real things. But none of those items are “money”, which begs the question, “What even is money?”. To answer this question we need to seperate money into it’s practical function and its emotional components.

Money is a store of value.

Functionally, money is theoretical concept which serves as a medium of exchange and a unit of account. We use money in order to facilitate exchange of goods and services and to keep track of things of varying value. To boil it down, money is a store of value.

Don’t confuse money with currency (the numbers in your bank account or the cash in your wallet). There has always been money, but the currency used to exchange money has changed over time.

Money is complicated by human emotion.

If you ask 10 people what money is, you’re likely to get 10 different answers. If money is simply a store of value, then why does everyone seem to have so many different interpretations of money? Well, money is a highly emotional subject. In our society of individualists and capitalists, money is not only how you get things like a new motorcycle or life saving medication, it is also a way to demonstrate status.

Everyone has values around money which are driven by underlying emotional needs and assumptions. These can manifest in money beliefs such as: money is reward for hard work, money is security, money is freedom, only beautiful people have money, I’m not smart enough to understand money. These are all emotional projections onto the store of value.

These underlying money beliefs drive behavior and influence spending, saving, and investing choices. The tactical understanding of money is fairly easy and straightforward. The emotional nature of money is 90% of the game and where everyone gets tripped up.

Rethinking Money: A Store of Value, Not Just a Commodity

What’s your armchair to chicken ratio?

Let’s look back at the evolution of money to understand how we get here today. Let’s pretend that you were living in 3,000 B.C. and were the local furniture builder in your village. Your buddy is a farmer who needs a new armchair so he comes over to make a trade. How many chickens are you going to ask for in exchange for your armchair? Don’t have any idea? Yeah, me neither. Now imagine having to do this for everything you wanted and you understand the barter system and economy.

The bartering system sucked. What if I didn’t need any chickens? Does my neighbor not get his chair? Everything was used as money and no one really agreed what things were worth. To solve for this eventually currency was developed. The first currency appeared around 1,100 B.C. and by 650 B.C. coin mines were operational in China. Now, people use currency as a middleman in the barter which stored the value of their goods overtime and allowed them to trade that value for many different items.

From fact to faith. Fiat currency.

For a long time the currency itself was valuable as it was often made of rare and precious metals. The U.S. created their first currency in 1775. The currency was pegged to an underlying asset, gold. For a long time you could redeem $1 for a dollar’s worth of gold. What can you get for a dollar today in 2023? Nothing!

In 1971 the U.S. abandoned the gold standard. The need to store and trade physical gold for currency became logistically difficult. This policy also meant that the government could not create more or less currency in response to economic conditions thereby slowing or speeding the economy up. Now, a dollar is worth whatever you can trade a dollar for and the reason that people accept this is that the U.S. government said that a dollar has value. Aka., backed by the “full faith and credit of the U.S. government.”

This new ability to change how much money there is in the economy means that the government has expanded power and can make more aggressive policy decisions (known as monetary policy). Monetary policy in the U.S. is set forth by the Federal Reserve, known as the Fed. The fed wants the economy to grow at a slow and steady pace indefinitely.

Inflation: Cash = trash

Inflation is the devaluation of currency over time and deflation is the opposite. Economists are afraid of deflation because, if you’re money is becoming more valuable over time, there’s less incentive to spend money today. This will slow down the economy. Instead the Fed wants to keep inflation slightly positive (targeted 2% average increase per year currently) so that people are encouraged to spend and invest today to stay ahead.

For you, this means that money will become worth less over time. If you’re earning less than the the rate of inflation, you have less actual money. This can be the case even if you have more dollars in the bank. Remember when a hamburger was 5 cents? Me neither, but there was a time.

Money is a tool that must be put to work, else it becomes worthless.

“Money equals value. If you want more money, you need to become…more valuable.”

– Jim Rohn

Harnessing Money’s Potential: A Tool for Value Generation

Money is a catalyst for growth

Because money is used to store value, large amounts of it can be built up or pooled together and leveraged to fuel growth. Don’t get discouraged by the amount of money that you currently have or the amount of money your investments generate initially. I get it. A 10% return on $100 is still only $10. But next year you’ll have 110 earning 10% leading to a $11 return. If you started this with $100 at age 25 until age 65 you’d have $4,526 (a 45X return). Add a few zeroes and you can see how compound interest can make even modest amounts of money unfathomably large. Get the financial habits in place early and as your income grows, your investment returns will grow as well.

Investing for the Long-Term Returns

The last paragraph should have you inspired. You don’t need to be a financial genius or make millions of dollars to have millions of dollars. You just need to invest early, often, and systematically.

Compounding works both ways too. If you take on debt, overspend and don’t invest you can quickly work your way into financial insolvency, aka bankruptcy.

This is why you want to invest in things that appreciate over time. The 3 most common items are stocks/bonds, real estate, and business equity.

Navigating Money’s Dual Role: Accumulation and Purpose

Balancing Accumulation and Enjoyment

So at this point we know that money is a store of value which loses money over time and must be grown through compounding to maintain its value. We also know that behaviors around money are emotionally driven. Let’s discuss how to think about that last part.

There is always a trade off between spending what we have now for present day enjoyment or delaying gratification by saving and investing for future enjoyment. If you’re reading this site, my guess is that you want to be at least somewhat rich, eventually. Being frugal will not get you to higher levels of wealth, but it is an important skillset and tool to help you get to the point where your compounding returns are personally meaningful.

I recommend being very aggresive early on. You’re young with lots of energy and low responsibilities and expectations. Keep living like a college student and get rich in the meantime. Ultimately, everyone is going to have to decide what balance is right on spending vs. investing though. This is why it’s important to have a vision for the future and a plan (read: budget) for how to get there. Check out these spending and investing tips for help getting started.

Aligning Money with Your Values

It is easier to delay gratification if you’re working towards an exiting vision for the future or event. For instance, you may feel better about saving money if it is to spend on your wedding in a few years, to buy your next house, or to retire early (my personal favorite). If you don’t have a vision for the future that gets you excited check out my article to guide you in creating these for yourself!

Everyone has different things that they value and the only way that you’re going to be successful is to align your behavior with your vision and values. You can only go against your nature for so long before discipline and motivation break down.

The Transformative Power of Money: Cultivating Financial Mindfulness

To master your financials, you’ll need to be mindful and purposeful with your finances. It is the same as with relationships, health, and spirituality. What gets measured gets managed and without intentional effort things tend to get worse over time. Discipline and motivation are fleeting, but habits make remove the need to use so much willpower. Identity changes make your habits congruent with your identity and self-actualization.

This struggle to master your finances is more of a blessing than a curse for this reason. In the process of creating these things you develop discipline, planning, strategy, and other positive life skills.

Building Healthy Financial Habits

The habits you need are related to the 3 areas of financial management: earning it, keeping it, and investing it. The first and most important habit is to learn to develop a plan. A financial plan is also called a budget. Learn to live within your means and budget to pay for the things that you want. Learn to save a certain percentage of your money. Lastly, learn how to consistently and effectively invest your money.

Consistency and tracking your expenses are critical to ensure that the process works and to know if you’re on track over time.

Live Long and Prosper!

You’re now a financial rockstar. You have a more sophisticated understanding of the nature and value of money than 90% of the population. Money is a store of value and to get more, I need to exchange more value. I can save this value and use it to compound through investing. And that the process of goal setting and budgeting will ensure that I make my financial vision and dreams come to life.