What is Money For?

Googling "money" gives us this:

Anything of value that serves as a (1) generally accepted medium of financial exchange, (2) legal tender for repayment of debt, (3) standard of value, (4) unit of accounting measure, and (5) means to save or store purchasing power.

But I don't think money ends there; it has a much more profound meaning.

Money buys you time.

Time is the most precious asset that we have as humans. There is only a finite amount of it, and once we lose it, we never get it back.

With wealth comes the ability to choose how to spend your time. The greater your wealth, the less you are obliged to earn money for survival. And, at some point, you can have enough wealth where you aren't obliged to earn money for survival at all.

This all works thanks to the fact that money can earn more money. Because of a generally growing economy, money, if invested properly in appreciating assets, will earn interest. If we have a big enough nest egg, the interest it earns can be greater than our living expenses.

Unfortunately, if you don't allocate the money properly towards appreciating assets, you lose out on this precious ability to buy back time.

That's a great baseline goal we should all strive for, regardless of how far you are in the hole with debt, or how inflated your lifestyle has become. I can't think of a reason not to want this.

If you think about your own mortality and the fact that you will eventually be gone one day, what other conclusion is there, than to value our time as if it's our only finite resource?

8 Financial Fitness Maxims

There are a lot of parallels with various kinds of 'fitness'. Whether it be financial fitness, physical fitness, or some other kind of fitness, there's an attitude shift that needs to occur for an individual to become 'fit'.

When we are physically fit, exercising regularly and eating healthy is a part of our identify. It's what we do, simply because we wouldn't have it any other way.

There are universal maxims in becoming financially fit, just like how the physically fit take part in some form of regular exercise and healthy eating. It's unfortunate that our current education system does not do these things justice. Perhaps the cynical point-of-view is that the capitalistic society works better if people are enslaved to debt, but that's a discussion for another day.

In order for these financial fitness maxims to be appropriate, we have to first understand why someone may be interested in financial fitness.

Unfortunately, most people don't even think about the fact that money can fundamentally only be spent in two ways: 1) On things that generally increase in financial value over time, or 2) on things that generally decrease in financial value over time.

Even fewer people understand what it means to be financially free.

It means to have enough appreciating assets that your net worth is appreciating at a greater rate than your expenses. Put more simply, the money your money makes is greater than your living expenses. This means you no longer need to work for money to cover your expenses, hence the word "free" in financial freedom. Note: This does not mean one no longer works because they are financially free — they quite often continue working — it is simply stating the fact that they are not obliged to.

And finally, like basic physical fitness, financial fitness is necessary and appropriate for everyone, regardless of one's circumstances. An individual's circumstance does not alter the soundness of the following principles.

Each one of these personal finance maxims deserves it's own post, but here's my summarized list:

  1. Begin by understanding that time is an indirect but key part of the equation that determines your net worth. How you spend your time has a way of altering your earning potential, which is undoubtedly a key component of your wealth equation. Spending time unproductively equates to losing hypothetical money. Actions and purchases that cost us hypothetical money is known as opportunity cost. Financially fit people understand that the way they spend their time is as important as what they spend their money on, because of opportunity cost.
  2. Make an effort to purchase more appreciating assets. This includes things like, individual stocks, mutual & index funds, bonds, a home (in the US. or in other areas where home prices generally increase — though a home is, in some ways, a riskier purchase since they can't be easily sold), etc.
  3. Make an effort to spend less money on depreciating assets like a car, a boat, and many other frivolous things. (Remember, the goal is to own enough appreciating assets, not depreciating ones.) On that note: don't hold onto cash. Generally speaking, the value of the dollar is decreasing in value thanks to inflation. That means that cash is a depreciating asset.
  4. Learn how to do big picture math. Make sound calculations for how to spend your time and money accounting for things like sunk costs and opportunity cost.
  5. Audit your finances and understand your financial situation intimately, at least at the onset of improving financial fitness. How much are your assets in total? How much do you owe? How much do you have in your bank account? What are you monthly expenses? What is your monthly after-tax income?
  6. Set a goal for your savings rate, not a dollar amount. Adjust your behaviors to match the target savings rate. This means you 1) make more money and/or 2) cut spending. As an extension of this maxim – there's no need to set a goal to achieve some amount of net worth. If you know your savings rate, achieving some net worth is simply a matter of time. Setting a goal isn't directly indicative of the behavioral changes necessary to amass more wealth, while setting a savings rate ensures behavioral changes. Most of all, don't look at income as a sign of wealth. How much one saves in a month is far more indicative of wealth potential.
  7. Do your best to stay clear of debt on depreciating assets. Borrowing money to purchase something that does not give you back money in return is not a sound investment. This is not a hard and fast rule, but it's especially effective to follow for beginners.
  8. Think critically about student loan debt, or more generally any kind of educational purchase. Especially with the increasing prices of higher education, it is worth the time and effort to take a close look at what concrete things you are purchasing. What is the hypothetical return-on-investment for that degree? What are the career prospects? What concrete skills will you gain? Are they applicable in today's economy? What is the opportunity cost of the time you will spend to obtain the degree? What could you be doing instead to better your finances and your situation? After having thought through these questions, is the education still worthwhile?

Some key things to note:

  • This is all general advice, not specific advice for any individual; There are exceptions depending on circumstance, like all other generalities.
  • This is not a prescription that one should spend as much time as possible reducing opportunity cost in the name of maximizing financial wealth. These maxims indicate what ought to be understood and the perspectives that should be applied when making decisions with money and time. Obviously, not everyone should spend all of their time improving skillsets that increase their earning potential, at all times. This is appropriate at certain stages in life more than others, and spending time on things you value that improve your quality of life, despite not increasing your skillsets, are quite often what we need to do more of too.