Ironically, fully understanding this can help you become wealthy.
I remember the first time I learnt this concept — that money actually is not a real thing. It took me a while to fully grasp it, and as strange as it sounds, by appreciating this, I have been able to make a lot more of it.
What money is
But before I launch into what money isn’t, let’s start with what money is.
Money is very useful to have. You can do a lot with it.
You can buy things with it.
You can pay people to do things with it.
But if you mismanage it, you can go to jail.
And when it gets taken from us, we get really upset.
So in this sense, it is very real.
Having money (or appearing that you do) is also a status symbol that can bring with it, more respect, admiration, and social advantages. People often want to be around people who have more money.
In today’s society people who have lots of money, or who have things that produce lots of money — are revered.
No one says ‘I want to have less money’.
Money is power.
Money is the ‘economic’ part of ‘socioeconomic advantage’. People who are considered privileged are those who have more money.
So what is money? At its foundation, money is a medium of exchange that facilitates transactions for goods and services. It is also a verifiable record that is accepted as payment for these items.
It can take various forms, including fiat currency (more on this later), digital currency, commodities, representative money, and trade credits.
So why do I say money isn’t real?
And how could this help investors, or anyone, get rich?
There are multiple reasons why money is not actually real.
Let’s delve into them, then bring it all together with what this new perspective can do for us
1. No Intrinsic Value
Firstly, money itself doesn’t have a value. The cash we use (pieces of paper or coins made from cheap metals) are worth very little to almost nothing at all. It’s what the paper or metals represents that holds the value.
2. Money is a Social Construct
The reason we have money is twofold — firstly because we all agree that it has value and that we will accept it to exchange for goods and services. If we (society at large) did not accept it then it would not be of any use to us.
The second reason for money in society is actually taxation. It is only because we have money that governments can take some of it from us, for payment of their services. Money wasn’t made specifically for taxation, however, it’s stuck around partly because when you are bartering (exchanging goods or services directly for each other) it’s hard for governments to take a share.
3. The value of money can fluctuate significantly
Money’s value changes regularly, and sometimes dramatically. During periods of inflation or deflation, the value of money goes up or down and so even if you have a certain ‘amount’ of money in the bank, it won’t necessarily buy you the same amount of ‘stuff’ in 10 or 20 years as it does today.
This is very significant.
Don’t believe me? Ask the Brazilians who lived between the late 1980s and the mid-1990s. Their inflation rate commonly exceeded 1000% per year. (Yes, that’s the right number of zeros). In 1994 the country launched their current currency, which managed to stem the tide of hyperinflation. This currency was called the Brazilian Real (which is pronounced heh-OW in Portuguese — Brazil’s national language — but ironically, is spelt like the word ‘real’ in English, which, as we are discussing, it is not…)
There are many examples of inflation or extreme inflation (called ‘hyperinflation’) throughout history. In times of war this is relatively common. Even in times of relative peace, and in countries with more stable economies like the USA, Australia, etc, annual inflation rates as high as double-digits, have been seen. This still has a significant effect on citizen’s purchasing power and is a huge issue for anyone who wants to save, and later spend, their money.
4. These days, money is more digital than physical.
If the fact that paper money and metal money had no intrinsic value didn’t bother you, then you may not be as concerned as I am that nowadays, most money is digital. As I have written about many times, I am a property investor and one of the reasons I prefer property to shares is that my properties generally can’t just disappear. If a company goes bankrupt, the shares can have no value, overnight. If a crypto account gets hacked, your valuable crypto currency could vanish into thin air. Not being physical makes money much harder to keep a hold of.
This leads us to our last 2 points.
5. The value of money (or currencies more specifically) is influenced much more by perception than by any other factors.
Market sentiments, economic policies and geopolitical forces play a big role in the value of the money we use. Like I mentioned earlier, during times of war, or economic instability, money can lose its value very quickly. Money is worth what people think it is. People can be irrational — this is why it’s very hard to accurately predict market trends.
6. Money is created and destroyed at will by banks.
This last one is another big one. Money is made by the banks. They literally (and now also figuratively) print money. They also destroy it — again both literally and figuratively. When old paper notes get too damaged they are returned to the banks to be shredded. But banks also ‘write off’ debts on their bookkeeping systems, if the debts can’t be reclaimed.
I remember years ago, a banker came to an event I was running in Sydney and said to me that earlier that day he had written off hundreds of thousands of dollars. The bank (and the economy) lost this money in the click of a button. I remember thinking how crazy that was.
Money is made by banks through fractional reserve lending as I have discussed earlier.
Money is just a concept. It is not real.
So how does this knowledge help us?
Understanding what money truly is — and what it is not — helps us to demystify it, and can help investors realize that it is not as “real” or static as it appears.
Many people are held back by a fear of money or an urge to hoard it, often due to not understanding how inflation truly erodes its purchasing power over time. I have made this mistake and regretted it.
With inflation steadily reducing the value of the money held in savings accounts, leaving funds idle can result in a literal loss of value.
The key for investors is to put money to work by optimally investing in assets that outpace inflation.
If you aren’t yet being proactive in your investing, then hopefully this is the wakeup call you needed.
A deeper understanding of money’s fluid nature can also help investors to overcome their fear and deploy their resources more effectively, achieving growth rather than losing their purchasing power by keeping cash in the bank.
Hopefully you can now see money in a different light, and may feel a bit differently next time you make it, spend it, need to ask for it, or maybe lose it.
We can’t live without money, for sure, but we also don’t need to fear it, or be overly attached to it, either.
