Financial Literacy – Preface – What is money?

Money.

What a weird word. Many people make and handle money but don’t understand its value. This chapter is in the Literacy series is going to focus on the most important fundamentals to understand the concepts you will need to manage your money effectively and that begins with the idea of money. When people are asked “what is money?”, many people will tell you that it is the thing that you use to pay for other things and while that is true, it doesn’t offer a complete definition, one that you will need in order to start to build resources or wealth. Let me be direct and present this definition : Money is a storehouse of value. You go to work and provide services that someone sees value in and pays you with money. It is a trade of value into a form that you can present and redeem for services or items. Revolutionary right?

Why is this important?

It is important for two reasons. 1) It allows one to separate the idea of time and money and 2) It allows you to see money as value and not just currency.

Yeah but what does this even mean? You aren’t making sense right now. I’m glad you you’re asking questions!

To elaborate why the first point is so important, im going to explain it with another phenomenon you are probably more familiar with, batteries. Batteries allow people to call electricity on cue. Whether you need electrical power to start a car or just to power your cell phone, batteries are a storehouse for electricity. We as humans have cleverly devised a way to bottle lightning and if something requires electricity to work, you no longer have to be restricted to a wall outlet or tethered by cables, you can instead plug a battery into the equation and the problem is solved. You can walk away from the original source of this power and take it with you wherever you want.  It removes the need to gather resources like electricity when you need it and instead, allows one to choose to store it away for FUTURE use. It presents the idea of using electricity independent of WHEN it was captured or produced. This too is what money represents. It allows one to provide value and trade it for a money “battery”, equally independent of when you provided that value to another. You see, it does not matter where the original source of the money comes from, or when, what matters is that you have taken value and bottled it up just like the electricity in the battery. Which feeds into idea number 2…

Money represents far more than just currency. You can surely use money to pay for services and goods, but that is the most basic use for money. What many do not really see here is that money is value.

You’re going in circles! You’re using one definition to explain another! Is this a joke?

Ha! Lets get into it then my good friend.

Value is more than what it sounds. Value can be many things to many different people. Some people value time off from work, others value materialistic things, like a brand new cell phone or car. Others still value time spent with the family and making memories. Value is MANY different things.

Ok, I’m following, go on. Why is it important i understand this to manage my money?

It is important because this is what you hold in your hands. All those possibilities of whatever it is that you may want is represented by the currency you hold in your hands with all of the ornate prints and the different numbers written on the corners. Value that you have first given to someone else, is being traded back to you in a package you can carry around and use as you would like, whenever you would like to use it. Here is the really weird thing, you have traded an “immediate” value for “bottled” value. Much like the battery holds “bottled” electricity, you have traded present value for “future” value. As we discussed before, value can be anything. It changes from person to person, circumstance to circumstance. So the idea that you traded something that one person highly valued (your work or product) for something you could redeem for other things that same person values not ( like a video game or comic book) is the foundation of building wealth and resources. Get it?

Ahhhhh……No… Ok, let me put it this way.

You have traded work (“present” value to your employer) for money (“future” value) that you can then use to buy things that your employer doesn’t care anything about. It is important to understand this fundamental principle to understand how to wisely manage your money.  You trade value you can provide now for value you can use when you don’t have value to give. Much like saving money now that you are working, for money later when you’re too old to work. Trading items you have produced, for items that you are not capable of producing yourself. Trading services you can do, for services you are not able to do. Lastly, you take present opportunities and preserve them into future opportunities. This one is important. If you manage your money wisely, you can trade present value for future value. This sets the stage for the mindset needed for proper money management and investing. By understanding that money is not bound by time nor is it bound to any single value, you understand the principle that you can manage present and future opportunities and trade excess “now” for “later”.

This is going to conclude the first conversation on the fundamental principle of financial literacy. It is the most basic lesson and one you should fully understand before we continue on the topic of financial management of present or future values.

Any questions?

If you do have any questions on this topic, please post a comment or contact me and ill do my best to answer.

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