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Chapter 7:
Money

 

We all know about cash. And we all love to have a thick wad of it. The smell of a stack of new, crisp $100 bills -- or whatever serves as your favorite currency -- is just heavenly, isn't it? 

For those of you who studied economics, you learned that money serves as a store of value, a medium of exchange, and a calculation unit. A store of value is like warehousing grain or gold; a medium of exchange means you can go to the store and pay for strawberries with paper currency rather than offering to walk the owner's dog around the block. And finally, money is a calculation unit, a way of keeping score.

But besides cash, have you thought about other forms of money? Well, there are coins. There are checks. Take a look at this list and ask yourself, "Which of these have I ever received?"

Some current forms of money:

  • Cash (currency notes)
  • Coins
  • Checks
  • Electronic: deposit or transfer (direct deposit of paycheck, debit card, ATM transfer from savings to checking)
  • Wire transfers
  • US Treasury bills
  • Ownership in a business (shares of stock, partnership interests, etc.)
  • Metals: gold, silver, platinum, bronze, brass, pewter, iron, nickel, magnesium, lead, zinc, tin, aluminum, copper

Note that I haven't included credit cards, since they are instant debt. They serve as a medium of exchange and may be accepted like cash or check, but you repay the debt with cash or check.

Money transforms as it flows: your electronic paycheck deposit turns into cash from an ATM that turns into a merchant's bank deposit which turns into a check the merchant writes to pay its vendor.

Here are some interesting past forms of money:

  • Tools: hatchets, spades, knives, axes
  • Weapons: arrowheads, lancets
  • Foods: barley, salt, palm oil, tea, cocoa beans
  • Drugs: tobacco
  • Shells: cowry shells, wampum (strings of polished beads made from mussel shells)
  • Livestock: cattle and hogs
  • Animal parts: Sperm whale teeth and beaver skins
  • Stone boulders
  • Metal in various shapes: bars, rings, spirals

Some of the categories for which you can receive money:

  • Salaries
  • Wages
  • Interest
  • Dividends
  • Capital gains
  • Commissions
  • Fees
  • Bonuses
  • Penalties
  • Gifts
  • Credits
  • Deposits
  • Debt forgiveness
  • Royalties
  • Licensing
  • Profits
  • Rental and lease income
  • Expense reimbursements
  • Direct payment of expenses
  • Loan proceeds: from a credit card, institutional lender, a business, family or a friend

I didn't include one category which won't apply to you until you run your own country: taxes, which governments receive.

Expanding the ways you think about money beyond cash, check, or credit card is very helpful. You'll see opportunities to pay for purchases (and create wealth) beyond the two standards of cash (and check) or credit. For example, publicly owned corporations create their own private money, called shares of stock, which they use to buy other companies. ("In business news: ABC Corp. buys XYZ Corp. for $13 billion in cash and stock.") As a kid, I traded baseball and football cards with my friends. A valuable card might be worth 5 less valuable cards. The cards themselves served as a store of value, a medium of exchange, and a way of keeping score. As an adult with a real estate brokerage, I helped my investor clients exchange properties for other properties. The properties were valued in US dollars, but payment was made with property and some cash. (Read other ways of creating money.)

There are lots of ways to reduce your need for cash in life. Sometimes, it's easy for the other party to exchange what you want, since they already have it; it's an easily negotiated benefit. An apartment building owner already has an apartment to exchange if you'll be the resident manager. A computer manufacturer already has a computer to exchange for your services. A cash-strapped restaurant can exchange meals for your expert consulting services. Some of these are fringe benefits of employment, but take them into consideration as you look at the opportunities that cross your path everyday. And depending on where you live, some of these may be more likely for you. Take a look.

Housing: Exchange services for housing:

  • Resident manager of an apartment building. The rental market value of my friend's apartment is $1,500 per month, or $18,000 per year, in exchange for light duties; most of her time is free, which she uses to write books and give presentations. Additionally, the building owner pays her phone and utility bills and gives her cash.
  • General manager of a hotel. With the money saved from not renting, combined with his salary, my friend built a retirement home in a beautiful area, and has already built up his retirement savings to an impressive level.
  • Light maintenance work on a large estate. My friend, uneducated and whose only likely marketable skill is minimum-wage raw labor, enjoyed a room in a beautiful home in exchange for a few hours of work a day.

Housing: Rent out the house you own:

  • The entire house. Depending on the monthly expenses of your house or condominium (mortgage, insurance, property taxes, maintenance), you might free up cash by renting the entire house and renting a smaller place for yourself. You merely need to determine what your financial goals are and how much change you will accept for how long.
  • A portion, such as a room or the downstairs level. A friend of mine had a huge home, and his wife took a year off out of state to get her advanced degree at a university. Taking their two kids with her, my friend was left with an empty house for a year. His solution? He carefully screened prospective tenants, rented out the rooms, including the beautiful master suite, and lived in one of his kid's rooms for that year.

Food:

  • Restaurant meals for consulting services. I frequented a restaurant serving exotic menus to unfortunately few customers during the months following the September 11 tragedy. This gave me the opportunity to talk with the owner and offer ideas, which he liked. With his business slow, he didn't have cash to pay me, so I exchanged my services at a marked up rate for cash-equivalent dining credits. I ate well free for a year - saving $3,600, or $10 a day - and treated my friends to rabbit, buffalo, and ostrich steak dinners.
  • Fringe benefit of working in a restaurant
  • Volunteering at a food bank. I volunteered hundreds of hours and, although not compensation for volunteering, they often gave me a box of perishable food on Fridays to take home in gratitude. (The food would have deteriorated by the following Monday, and couldn't be given to food bank clients.)

Clothing:

  • Fringe benefit of working at a clothing manufacturer or retailer

Transportation to fixed place of work:

  • Mass carpooling. In Berkeley, California, in what's called the Casual Commute, people line up at designated train and bus stops and hop into arriving cars (including shiny leather-upholstered Mercedes and Lexus models). Three people per car, they speed along the carpool lane into San Francisco, bypassing toll booths and the morning traffic crunch. Annually, the driver saves 7,200 minutes, engine overheating, and $480 in toll charges, while each passenger saves $600 on mass-transit fares and enjoys a guaranteed seat on a comfortable chauffeured drive. (If the passengers drove their own cars before, they save even more in time and on money for toll charges, parking fees, gasoline, and car maintenance.) 

Education:

  • Reduced or free tuition for employees and family

High-speed internet access:

  • Sharing an existing connection at work, home, or a friend's home or business). I share the DSL connection with my roommate's kids. The connection is on their computer, and during the day, they are away at school. Since I work from home, this gives me full internet access.

Computer:

  • Fringe benefit of work environments. Many companies will allow you to use your computer -- connected at high speeds to the internet -- for personal purposes outside work hours.

Fax machine:

  • Receiving faxes. Don't get many faxes? Get a free e-fax account at efax.com. Faxes are e-mailed to you as file attachments; you download free software to read and print out the file, and you can store the file on your hard drive, CD, floppy disk, or online - like any other file. Benefits:
    1. Portability: you can receive and forward faxes anywhere by e-mail.
    2. No costs for a dedicated line. You save $25-$50 a month or $300-$600 a year

From the list you just read through, you can see there are a lot of ways you can reduce your need for cash in life, by meeting your needs in other ways. The common element in each of the examples above is involving other people in your solution.

Relative value of a national currency

It's important to remove yourself from thinking that your country's currency, whether as cash or coin, is money with an absolute value.

The US dollar, which most US residents don't think about in relative terms, fluctuates in value when using another currency to determine its price. During 1983-1993, the US dollar ranged from 79 to 246 Japanese yen.

It also fluctuates in value when using a commodity, such as gold, to determine its price. Gold might be priced at $300 per ounce, and $400 one year later. The gold remains the same: one ounce. It's the US dollar, not the gold, that fluctuates in price. Viewed this way, the dollars fluctuates from $1=0.025 ounces to $1=0.033 ounces.

One factor affecting the price of gold or silver when priced in a currency is the strength or weakness of the currency itself due to inflation. When priced in 1998 US dollars, silver hit its all-time high of $806 an ounce in the year 1477. (note 1)

US currency also fluctuates in value over time due to inflation. The US government puts more currency notes into circulation (known as inflation). Keep in mind that each US currency note, whether $1 or $100, costs about $0.04 to print. Printing currency is a very profitable business for the US government.

The US government also increases the quantity of coins while decreasing their value (by lowering the value of their metal content). The first silver dollar coins in the US, minted in 1794, contained 0.86 ounces of silver, equal to $4.30 today at $5 per ounce of silver. The first gold dollar coins in the US, minted in 1849, contained 0.04837 ounces of gold, equal to $18 today at $375 per ounce of gold. Today, the Eisenhower dollar contains no silver or gold, only about $0.09 of copper and nickel. The metal value of the dollar coin has dropped 97.9% to 99.5%.

In the US, you were once paid in a currency that had some intrinsic value. You could trade the coins in for the precious metal content: $1 for 1/20 ounce of gold. The term "dollar" originated as a unit of weight for gold: 1/20 ounce. Currency notes itself were certificates for the actual gold or silver, and you could trade those certificates in for the precious metal.

There certainly is no absolute value in a piece of paper representing $100 that costs only $0.04 to manufacture, and very little in a round metal piece representing $1 with $0.09 of metal. It only has value because you and others accept it in exchange for other things, a value whose fluctuations can be easily measured when using gold or another nation's currencies as the comparison.

Let's look next at that piece of paper representing US$100 and the stuff of value it can be exchanged for.

Note:
1. From a chart of silver prices from 1344-1998, at the website of the Gold Information Network: GoldInfo.net

 

continue to Chapter 8:

Stuff

 

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