Fiat currency, Gold standard, trickled down economics, supply-side economics, GDP, and so much more, in terms of actually monetary knowledge, mean absolutely nothing. Money, as most people think of it, doesn’t exist, and what people should be watching in regards to economy is almost never watched.
Mistake #1: Thinking money has value.
“Of course money has value, I can buy stuff with it.” would be a response I might expect someone to make, to which the obvious answer is, “Yes, of course you can.” However, the catch there is I can also trade gold for something, I can trade my time for something, and I can trade many other things for something else. Literally, anything can be traded for another thing, so money’s value isn’t in it being “a medium of exchange”, it’s merely more commonly used for that. It’s also worth noting, the value of money can wildy fluctuate based on the market. This is not the trait of something that has intrinsic value. Something of intrinsic value has use for that purpose, making it’s price stable. Coal, gas, computer parts, etc. all have very predictable and reliable actions based on supply and demand. However, even though there are some currencies that are artificially stabilized by tightly controlling supply and debt, such as the American Dollar, if unchecked, it can fly off the rails and you can get rapid inflation or deflation. Similar things that can fluctuate in value like this are luxury goods like fashion brands. Some can been carefully held to constantly be considered industry standards and seem stable, but others can make a mistake and go crashing from top of the heap to useless fabric/paper a few months later.
The value of money lies not in the money itself, but in its perception.
And this mistake reveals mistake #2…
Mistake #2: Thinking (overall) more money = better or less money = worse.
Remember, money itself has no definite value. Doubling amount of money does nothing if what it does is halved. If people get $5 and can buy a hamburger for $5, it’s functionally identical if they have $10 and can buy a hamburger for $10 or if they have $3 and can buy a hamburger for $3.
And all of those examples are better than if people have $100 but a hamburger costs $200 and worse off than if people have 50 cents but a hamburger costs 10 cents.
The point is, inflation and deflation and changes in money value are almost meaningless in any regard than how it affects your savings, and since many people live paycheck to paycheck, if paychecks scaled with inflation, the very concept of inflation and deflation would be pointless.
And forgetting to take into account the value of other items leads to the next mistake…
Mistake #3: Thinking that value goes away when money is spent.
If you buy a watch for $100, you have not lost $100. You have just transferred that value into a watch. Any value gained/lost was due to how equivalent of a deal you got. If you bought something marked up and advertised, its cost of production and parts may only be $50 equivalent. If you bought it on sale, they may be getting ridding excess stock and selling at a loss, and you may be getting $200 worth of watch. For the sake of simplicity, we’ll simply assume that for $100 you get $100 of watch. Effectively, you now have a watch worth $100. It can be traded, bartered, etc. However, it also has the intrinsic value of being able to be used to tell time, or be a collector’s item. If you have a method to sell it for what you bought it for (such as ebay or similar), you still have the value, and added benefit of the watch’s utility in the meantime. When you spend money, the value doesn’t disappear, it just changes mediums.
Related to not understanding that value just doesn’t dissappear is the next mistake…
Mistake #4: Ignoring the cyclic nature of money.
Let’s say you heard that the government signed a new deal where they are spending a Billion dollars. Many people hear that and assume it’s a bad thing. “It our tax dollars paying for X…”
That’s not quite the whole story.
Let’s say you get $20 of that government billion, just like a lot of other people. Now you go a local mom & pop burger shop and buy a nice meal with it. You pay $2 in sales tax. The Mom & Pop use the remaining $18 to pay part of the salary of their waiter (they now owe $1.8 in income tax). The waiter, after work, goes to a local club, and listens to the music play. He pays an entrance fee of $18, $1.8 of which goes to sales tax. The club now has an $16.2 that they’ll use for their expenses ($1.6 owed in income tax). They spend that money on some new cables, and a local electrician makes them.
By this point, you can probably see the pattern. Each transaction of that government billion, if it goes into normal economy, will generate tax revenue of almost $2 for every dollar spent. Then come the government, next time they can spend $2 billion again at the same process at no loss.
Now consider an alternative. Let’s say there’s a Billion in a government bill. That money goes into something that sounds ‘normal’, lets say something that goes to business executives, claiming its for some subsidy to prop up some big industry. A rich and self-centered business executive who’s good at playing shell games with money. He gets his chunk of $1 million and puts it in an offshore bank account and… it’s gone. That’s it. Gone, sitting in some other country not doing anything for anyone other than giving that executive some extra dosh when they decide to cash out of our economy. It’s stopped doing anything for the time being, the money has gone stagnant.
Normal economy runs in a cycle.
Mistake #5: Missing the point of savings
Savings is not a way to make money. Compound interest will not make you millions unless you already have billions. It just doesn’t pay. The point of savings is to provide a buffer.
For the disasters you may experience that are beyond your normal income, that’s why you want a financial buffer. It’s not to save up for retirement, it’s to save up for a one-time hip replacement co-pay or pay for when your roof collapses due to a new mold in the area.
If you’re wanting long term solutions (such as retiring), you need, instead of savings, something that generates value. The best example is owning your own small business that brings in enough that you can hire a manager to run it on your behalf. Other examples include rental properties, stocks & index funds (both of which are accessible to the average Joe with things like the robinhood app available on most smartphones: hint, index funds are safer and require less attention, but don’t pay you back as much short term. Stocks you basically have to babysit). General rule of thumb I’ve seen is make sure you have 3 months worth of income in savings, and this covers the vast majority of issues that may pop up.
However, a point worth remembering: you can save that money in goods instead of cash if you have an easy way to exchange them out. Something that increases in value is good (such as collectible cards or comic books or art pieces.) Just be aware that at some point, if you’re using it for your deeper-pocket savings, you might have to cash out at some point, so don’t get too attached to it, even if you enjoy it.
Mistake #6: Thinking money instead of value.
All the previous points kind of combine to this — money, by itself, is useless. It’s the things you get with it that that make it worth anything. A $200k house is worth more than a flat $200k because you can actually use it. Really, other than the easy of moving around (which is really only necessary for daily spending and an emergency fund), it’s better to put that money into something that actually improves the quality of your life and the lives of those around you and that keeps value. Figure out which of your hobbies can be profitable, and chase them. Get those painting supplies and make paintings and sell them in a side hustle. Switching out your incandescent light bulbs for LED to reduce your electric bill. Take up gardening and get all the supplies and reduce your grocery spending. Buy a nice computer and upload videos of you playing videogames. The list of things you can do is endless. And most of them will make/save you more money in the long run than just hoarding the money.
Mistake #7: Always climbing without thinking about where you’re climbing to.
Many people make the mistake of always wanting more money than what they have. They want the next raise, they want to get a quick buck, their focus on more money.
Here’s an important point. Money has diminishing returns. If you’re scraping by paycheck to paycheck, you’re going to make sure every dollar counts. You may be eating noodles and daily vitamins to survive. Now if you’re getting a $150 fancy restaurant every meal, it’s more enjoyable, but in the end, you’re still just getting calories and nutrition. And if you are getting $150 each meal, it starts to feel ‘normal’, and then if you want to be fancy you start flying out of country to eat a internationally recognized restaurants, etc. It keeps escalating. “Fancy” becomes “Normal”, and “Normal” becomes “sub-par”, and to get to your new “Fancy” requires more work. It will always escalate. Wealth, income, etc. have no obvious completion point. There’s no point at which you’ve “arrived”. Even becoming the richest person in the world is hard to maintain, and there’s still things you can’t do. (Bill Gates never walked on the moon, Bezos couldn’t get past the primaries for President, etc.).
Since there’s no cap, there’s a point climbing the ladder of wealth eventually becomes pointless, and is little more than the experience of a crack addict always needing a stronger fix.
This is why it’s important to set your own goal. At what point have you “made it”? You want to decide that before you ever get there. And when you do, that’s when you can switch gears, let off the gas, and focus on contently enjoying life. Maybe you just want to make sure you and your family can grocery shop without looking at the price tag. Maybe you want to own your own yacht and spend your life sailing the carribbean? (Note a vital point. Many wealthy people will own a yacht a ‘status symbol’. Don’t get tricked into it. Status symbols are never have value worth their cost. If you want to someday get a yacht, you should be because you have a desire to actually use it.)
Time is a more limited resource than money. Humans generally have only 70 years worth of time to enjoy, it’s a constantly disappearing resource. Spending your time chasing every greater wealth is eventually going to waste time that has much higher value. So decide what you want early, and aim for that. And when you do, often you’ll find non-money based ways to help you get there even faster.
Mistake #8: All the previous mistakes applied to the macro.
Macroecnomics is looking at the big picture. Not just how money affects you, but affects everyone.
At the big picture (which governments work at), money doesn’t come and go, it flows in a cycle. Government spending (especially broad spending that goes in everyone’s hands) isn’t some personal checkbook that needs balanced, it’s a water pump like you might find in a fountain. It pulls money in from the system via taxes and pumps it out via spending both of which are usually the same reservoir (the economy the government overseas). A broken fountains sits with stagnant water, not pumping. An impressive high powered fountain moves as much money as possible. If it runs of water in the basin (the people’s money), there’s a problem. If stops putting out water, it goes stagnant.
A government has to tax and spend to keep things flowing, and preferably, flowing quickly. Smart spending on things that help everyone then increases value for everyone while also filling the same reservoir that it will continue to pull taxes from.
Further, the point of the economy isn’t the money. It’s the value. If the quality of life of people is going down, the economy is getting worse, regardless of what the dollar numbers say. Likewise, if the quality of life is going up, the economy is getting better, regardless of what the dollar numbers say.
