Joel Hainley : San Francisco Bay Area Software Consultant

Ask anyone, “Would you like a big pile of money?” and iff there are no strings attached I doubt very much that they would turn you down, and even if there were, you’ll probably still get quite a few takers. However, ask those same people, “what IS money?” and you’re likely to get a wide range of answers, “It’s a vacation”, “A chance to get out of debt”, “The new car/dinette set/clothes i’ve been wanting”. Some of your more philosophical friends might reply with things like, “freedom”, “peace of mind”, “space”. All of these are certainly ways to describe money, or what money can provide, however I don’t think they give you a real taste of what money IS. In other words, they don’t provide a mechanism for you to internalize what money represents.

In this article, I’m going to be giving a defintion for money that will give you a way to evaluate the value of of your money in terms that are highly meaningful to you. I am not claiming this is the de facto, absolute definition of money, it is merely a way to look at it in a perspective that you may not have viewed it before.

A theoretical history of money :

There are many theories about how money evolves in cultures but one of the theories I have heard and subscribe to is that it’s an extended form of barter. This makes the most sense to me, and is the basis for the subject of this article, it goes something like this.

When specialization crept into a society whereby a blacksmith, was a blacksmith all day, and a cobbler worked on shoes all day, and a farmer farmed all day. We began to see bartering coming into existence, as a way to sustain this specialization. For instance, the farmer would need a plow blade repaired, and the blacksmith would need food for his table, so the farmer and the blacksmith would agree on how much produce represented the effort needed to repair the plow blade. They would exchange goods, or goods and labor in this case, so that they could both get their needs met, and continue plying their trades.

Now lets pretend that the blacksmith has been doing work for a lot of other farmers, and finds he doesn’t need any more food for a while, but our farmer hit a large rock preparing a new field and he needs his plow fixed. The only thing he can offer the blacksmith is food for payment, however the blacksmith tells the farmer that he needs shoes because he keeps dropping bits of red hot metal on his feet as he works

The farmer knows the cobbler so he goes to him and asks him if he needs any food, the cobbler informs him that he does need some food, and he would be glad to trade some food for some shoes. The farmer informs the cobbler that he doesn’t need shoes, but he will give the cobbler food if he makes shoes for the blacksmith, in turn the blacksmith will repair his plow for him. They all agree and whammo, we have a successful barter happen.

You can take this method of exchange involve many parties and get things done but it quickly becomes a veritable house of cards always to be on the edge of collapse, in fact, MASH had an episode where they took this to an extreme, and then one person fell through on the deal and the whole house of cards collapsed.

Now consider this for a moment, what if instead of trading directly for items we had beads, and each bead represented a certain amount of value, such that a bushel of corn, a pair of shoes, and a fixed plow was worth say 10 beads. Well then, the farmer could have gone to the cobbler and sold his shoes for 10 beads, then take his 10 beads to the blacksmith to get his plow repaired, the blacksmith would then be able to go back to the cobbler, and give his 10 beads in exchange for a pair of shoes.

See the beads themselves didn’t have any intrinsic value, it was merely an agreement between all parties that made the beads worth anything at all. This is the basis for monetary systems, an agreement that funny looking bits of metal and slips of paper represent some fixed value.

Pretty simple so far right? You can begin to see that if a lot of people all agree on the value of money then money can help alleviate impossibly complex bartering processes. To boil this all down when you work at whatever job you do, you add value, or perform a service of some kind, and you get paid for that. You then use this money to buy goods and services for you and your family, and it keeps going around and around in a terribly complex set of interactions.

When you work for your money, you generally get paid by the hour, and if you don’t then you can normally equate it back to an hourly figure of some kind. This ability to equate money in terms of an hourly rate of some kind is where we’re going to derive our definition, and our valuation, of money.

Money is simply a measurement of the value you add while performing an hour of labor, in other words, you exchange hours of your life doing some task for some amount of money. It may sound a little dismal but bear with me here, it’s a very powerful way to look at money.

We’ll use an example to try and make things a little clearer. Let’s say that you make $10 / hour, and you want to buy a widget that costs $100. Utilizing the definition we got from above you will have to spend 10 hours of your life working to acquire the widget. Not so bad, right? A little over a day of effort for a really cool widget.

“But what if I make $20/hr?”, someone may ask. well then the ultra-cool widget will only cost you five hours of your life. This is one of the nice things about this particular viewpoint, it adjusts to your income level, providing a useful indicator for the real costs to you for any purchase.

Let’s take a few more purchase examples, then we’ll move on to some other ways that you can use this measure to evaluate your money.

Let’s say you are looking at buying a new SUV just like the one the guy on your bowling team just picked up. You shop around and find a deal at $50k, for a brand new one with all the trimmings, dvd player, satellite radio, gps, the works. Let’s pretend that you make $65k/year, the actual amount you make isn’t really important, what is important is to look at how much time it will require for you to get to earn the purchase price of the car. In that case you would be paying approximately 1538 hours for your car, a little over 192 days for a car. Of course, that’s without interest, tax, license, maintenance, insurance, and fuel ( a valid concern with today’s fuel prices).

That’s 38 weeks you’ll be working and putting every dime you have towards your car, not counting the interest that will be accruing on your loan. For purposes of of comparison let’s take a baseline economy car that gets good gas mileage and can hold a family with relative ease, and we’ll say it costs $20k, I know that models can be had for cheaper, but this is good enough to make my point. That’s about 615 hours, or 76 days, or 15 weeks to pay off that car.

So we have 38 weeks, over half a year, versus, a season. There are, of course, other considerations besides simply, which costs less, what we’ve done is put the value of the car in terms of how much time you’ll spend working to obtain it. You will often notice that people speak of auto purchases in terms of overall cost, but they often negotiate the per month payments. It is often much easier to agree to $400/month instead of an outlay of $50k.

k enough about purchases, lets take our new techniques for looking at money and turn them towards debt. I think the public’s attitude towards debt has changed over the last 30 years or so, and i think a lot of it has to do with the invasion of credit cards into our culture. I received my first credit card before I was out of high school, before I had a fulltime job I had the option to rack up $2500 in debt. I tend to think I was the rule and not the exception, and at timesI think it is a reflection of our consumer focused culture, sometimes I realize it’s just the credit card people trying to get people hooked into the mentality of instant gratification sooner.

I hear this often “it’s only $12k I could pay that off in a few weeks no problem.” At first blush this seems to be a valid argument, it’s not really a lot of money right? Well let’s use our new tool for evalution money to put some meaning behind that $12k of debt.

Assuming once again a $65k salary, and no other financial obligations, and no interest, you’re looking at putting everything you make for over 38 days towards paying your credit card debt. That’s one-tenth of a year. Of course most people have other financial obligations to fill and so you cant just expect to get this all paid off in one lump sum, and then the interest rates begin to kick in, and before you know it, your 38 days have turned into 45, 60, or even more days.

I’ve found this to be a useful way to analyze purchases before I make them. It has saved me a lot of money over the years by keeping me from making purchases and has also given me a grounded look at what I was doing when I went ahead with a purchase.

When I first showed this article to a friend of mine, he said that this didn’t hold up in situations where you picked a stock, inherited money, or won a jackpot at the casinos. “In those situations you didn’t exchange your time for money, your viewpoint doesn’t take these things into account”. The obvious response would be that a person probably did spend some amount of time to get the money in each of these cases, i think there’s an even better answer. You apply the same rules that we have been discussing to evaluate the money that has been turned over to you, it will give the money a little more meaning to you.

See, just because you got some money for nothing, it doesn’t mean that the money is meaningless, it doesn’t invalidated the definition that we have created here.Even though you didn’t have to perform any labor to obtain this money, it still represents some number of hours of you working at your profession at your current salary. So you could say, that when you win the lottery, inherit some money, get a big bonus, someone just gave you some time.

Hopefully you are beginning to see how looking at money from this perspective can help you evaluate your purchases with a grounded view on what the costs are to you, and not just how much money it is. I know that for me looking at things in this manner has saved me a lot of money over the years, hopefully it’s helpful to you as well.