When you think about it, money is a pretty funny thing. For a couple thousand years humans used precious things to represent this idea of “money” — ivory, colorful shells, precious gems, livestock, silver, and most notably gold. This worked well for humanity for a very long time… as long as the values were small.
The general inconvenience of physically carrying a whole bunch of “precious stuff” eventually gave way to paper certificates. Stand-ins for the real thing. After-all, nobody wants to cart around a wheelbarrow full of silver just to buy a new car. You were liable to get mugged by Robin Hood on the way to the car dealership….
Paper certificates were just so much easier and convenient. In the past, those paper certificates could be redeemed for the actual “precious stuff”.
I still have a few U.S. $1 bills somewhere from the 1950’s that are actual silver certificates. It used to be that a person could walk down to the nearest Federal Reserve and exchange those certificates for actual physical silver. Why anyone would want to do that? I have no idea, but it was possible all the way up into the 1960’s.
Back then, it was mostly the belief that you owned a precious metal that supported a currency. The fact that you could still convert it into precious metals was sort of a “bonus feature” for the currency.
All this ended in 1971, when President Nixon officially took the U.S. off the gold standard. The dollar became what’s known as a fiat currency, and around the same time most of the G-10 economies moved to fiat currencies as well.
The only thing really supporting a currency now is belief. We believe that money has value and therefore it does. Nowadays, most of our money is simply ones and zeros in a bank database …. data that probably resides in a secure data center somewhere.
Today, hardly anyone I know still uses physical money. We’ve simply moved on to credit cards, bank transfers, and digital payments. Only a few of the crazier people I know still keep gold or piles of cash at home.
In essence, money is now simply digital bits (in just the right order), shuttled around with electrons. Money couldn’t be more ethereal.
Money Is In Your Mind
Quite simply, money is a mental construct. It’s no longer a physical thing. It’s just an idea, but ideas have real power.
How we think about that idea (in the form of money and investing) makes all the difference in the world. Think about money in the right way, and you could become an extremely wealthy person. Think about it in the wrong way, and your life could be filled with debts and the endless struggle to get ahead.
Want to change your relationship with money? You simply need to change how you think about money.
As far as my own “money thinking” goes, I’ve written many blog posts on the topic over the years — you can find over 300 posts in the blog archives!
Most of my posts fall into a few broad categories of thinking:
Saving. Saving is super important to building wealth. It probably matters more than anything else on this list, which is why I’ve written hundreds of posts either directly or indirectly about saving. Saving is going to be your biggest long-term wealth builder. Most people tend to fool themselves and hide hidden costs about saving. This is one of the main reasons why individuals have difficulty maintaining high savings rates over long periods of time.
Speculation vs. Investing. Unfortunately speculation (i.e. gambling) is an extremely common occurrence in the world of money. Many people think they can predict the future or guess the direction of the market. That’s speculation. To tell the difference between the two, I always like to ask the question, “Where does your money come from?”
Investing is a different beast, and knowing the difference between the two ideas is an important part of mastering your money.
Compounding. Investing money is all about compounding. Unfortunately I don’t believe the average person truly understands how compounding works. If you ask, they’ll probably mumble something about interest earning interest in a bank account. Bank accounts are great, but then they go and drop the vast majority of their personal wealth into the stock market — where they have absolutely no idea how compounding works.
It’s a tragic shame, because equity investments can frequently compound value at rates much higher than other asset classes.
Dividends. Unlike many bloggers in the Financial Independence community, I actually like dividends. I have a whole category devoted to dividends. Share buybacks are great too, but they often can’t be done at favorable prices. That’s part of the dark-side to share buybacks. In my opinion, cash flow in the form of dividends is still an important part of compounding. Owning small pieces of businesses that spit-off cash regularly also helps insulate me from market fluctuations. So what if the market is up or down 50% in a given year? What matters to me most is the compounding of that cash flow. I call it the dividend snowball.
Investing Strategies. One of the things I like to do on this blog is to take a look at “popular” investing strategies to see how they actually perform. These strategies mostly do pretty badly against simple buy and hold investing (with index investing frequently being the lowest cost form of it). I’ve covered a number of investing strategies — From Book Value Investing, Defensive Stock Investing, Following Insider Trades, High Yield investing, High Growth investing, and even Low Beta Investing.
Most of these strategies fail to match a basic index fund over time. Buying and holding good businesses that can compound cash over time just works better than most “smart” investing strategies.
Price And Value. There’s an old saying — Price is what you pay and value is what you get. In my opinion, this idea doesn’t get nearly enough attention in the money world today. Maybe it’s just too “simple” so it gets overlooked. Maximizing value for what you pay is one of the great financial differentiators.
All to often, I think beginner investors ignore the value they receive for the price they pay. This is one of the biggest mistakes made in index investing today. In many ways, index investing today is seen as absolutely foolproof — many investors will drop money into an index fund at any price. To me, this is frightening. It completely ignores the sound money principals of price and value received.
Staying Humble. Staying humble, is probably one of the greatest yet most easily forgotten virtues of humanity. It’s unfortunate, but great wealth often leads to great arrogance. The Arrogance of Wealth can lead to all kinds of bad behavior — waste, over-spending, out of control debts, and the general belief that you’re smarter than everyone else. Unfortunately it’s just not true — wealth and great intelligence are not necessarily correlated. It’s possible to have great wealth and still make really dumb money mistakes.
This is why it’s so important for individuals reaching for Financial Independence to stay humble. Try to avoid the Dunning-Kruger effect. Don’t let the wealth go to your head. Stick to the humble knitting that got you where you are today.
Most of us aren’t born knowing everything there is to know about money. We don’t wake up one day and suddenly become money geniuses. Learning to be a master of your money requires A TON of learning. Unfortunately schools don’t really teach kids about investing or money. The topic is just something you have to learn on your own through the investing of your personal time.
It’s probably the most important investment you’ll ever make: Your money education. Maybe you start by reading a few good books, or follow a few of your favorite blogs (like this one!) focused on the topic. There’s plenty of good resources out there — both online and offline.
There’s plenty of bad advice too — Guru’s selling snake oil, hawking books and investing courses, pushing their “get rich quick methods”. Be on the lookout for that. The “bad actors” are not always easy to avoid.
The best defense against the money shysters is just to keep educating yourself. Never stop learning — eventually you’ll begin to see through a lot of the bad advice.
And remember, there is no fast track to instant wealth. It takes time to train your mind. It won’t happen overnight. There will be missteps along the way, but hopefully you can avoid the bigger blunders.
Good luck everybody!