How I View Money

What is money? Dollars, Euros, Pesos; they are all forms of value. Money in its most simple state is just a means of transferring value from one individual to another.

For money to be money it needs to be:

  • A unit of account
  • A store of value
  • A medium of exchange

We like our money to be relatively stable so that we can transfer value in a stable manner.

People think that money is what makes you rich, but this is not true. What makes you rich is owning wealth. Wealth is any asset of value that either: produces positive cash flows (dividends, rent, interest) or has opportunity to appreciate. We simply use money to transfer wealth. We use money to purchase real estate, equity, or invest in ventures.

The average person has a completely different view of money compared to the wealthy individual. The average person thinks of money in terms of consumption; what it can buy. The wealthy individual thinks of money as potential opportunity.

I think these are the fundamental ways you can use money:

  1. Time: you can use money to afford yourself time (paying your living costs/burn)
  2. Investment: you can use money to invest in assets, projects and businesses which you expect will produce some return over time
  3. Consumption: you can use money to consume goods and services which you don’t need, but make you feel happy

The average person prioritizes these uses differently than the wealthy individual. Covering expenses is first for everyone, but the degree to which expenses are minimized differs. After the cost of living is paid excess dollars can be invested or consumed. My belief is that the average individual will not prioritize investment over consumption, or they will not prioritize investment to the degree of the wealthy individual. I believe that consumption should be seen as the lowest tier use of money, for the person who is still reliant on the time-for-money trade.

My guess as to why people tend to consume more than invest is due to their view of money itself. When money is seen as a means of consumption (how its mostly used), investment takes the back seat. I believe that money should be seen in regard to how its acquired as well as the financial position of the individual. Most acquire it through the time-for-money trade; so it should be seen as a function of your time (not your consumption ability).

The number one thing you should prioritize is owning your time. Money can also been seen as a way of transferring time. People work for people, and they trade money. Time-for-money is a horrible trade, but the one most people make. Your time on this planet is limited and precisely scarce. Money however is printed and is both fungible and NOT scarce. You need to move away from a scarcity mindset and toward an abundance mindset when it comes to money and wealth.

What we seek is Financial Independence: the ability to pay your living expense and still own your time. This basically means finding a way to produce enough cash flow to cover your living expenses so that you can decide what you want to spend your time on.

Nobody will value your time to what it is truly worth. Nobody will give you the wage you are deserve. Only you can value your time effectively. But the catch is, if you are not capable of figuring out how to best use your time; someone else will. And I guarantee that they will not be able to use your time to what its worth (principal-agent problem).

So, if you are not yet financially independent then you must focus on prioritizing money as a function of time. You will need to make the time-for-money trade to build up reserve (savings), but when you have accumulated some savings you must think of those savings in terms of time.

Those savings can cover your living expense for x weeks, months, years. And that is time you can then utilize to focus on the problem of becoming financially independent, how to produce positive cash flows while not making the time-for-money trade.

Secondly, and this ties into the first priority, you need to think of money in terms of what it can do for you. You need to think of money as opportunity to invest. Money spent on investing is money that will ultimately make you more money and as a result afford you more time (financial freedom).

Owning your time is not enough if you don’t also know how to invest your time/money into positive cash flow opportunities.

You can invest in many different ways. Some people like to own Stocks, some like to own Real Estate and some like to own Small Businesses (entrepreneurship). There are many other ways of securing a return on your money: multiplying your time.

Finally, after you have secured financial freedom and created wealth, comes the use of Consumption. Consumption is the use of money which makes you feel good, it makes you feel rich; but doesn’t make you rich. The average person sees a wealthy individual (presumably) driving down the street in an expensive sports car and thinks to himself that that is what being rich is about. He subconsciously enforces the idea that to be wealthy is to consume, and while wealthy individuals do consume more than the average, this is not their view of money.

A consumption expenditure on a sports car or a watch or clothing is a liability NOT an asset. These expenditures should be seen as money that will never be returned, they may make you feel rich but they will make you actually poor (if you don’t balance the first two).

So back to the mindset: the average individual sees being rich in terms of how much you can consume, he sees money as the medium for consumption. The wealthy individual sees being rich in terms of being able to own his time and to invest, he sees money as the medium for time and investment.

If you want to move from an average individual to someone who owns their time and can utilize themselves to the best of their ability: you must re-structure your priorities for money.

Stop viewing money through the lens of consumption and instead through the lens of time.


Disclaimer: I’m 22 and not financial free (yet)

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