Where money and debt came from – MPSOS 101 [podcast]

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Have you ever considered where money came from? The basics of all things finance lays in the concept of a centralized currency with variable purchase power. The great news is that it’s a very simple subject, but it has morphed into this horrible set of non-tangible products that are being marketed to you day after day and commercial break after commercial break.

Money is Purchasing Power

Money was created as a common currency for exchange. Have you ever watched an episode of Little House On The Prairie? One hundred years before the setting of this television series US currency took the form of coins but these settlers didn’t have a lot of it. There was a general store but the owner, Nels Oleson, wasn’t looking for dollar bills – the Philadelphia mint had only been pressing them for a few years and most people were not employees that cashed their checks every Friday. Most people were self-employed, growing and producing their own goods and trading for what they didn’t have. If you had a chicken and your neighbor had a flour mill then you could enter into a civil conversation and negotiate a sale. How badly you wanted a loaf of bread depended on how badly the mills man wanted scrambled eggs for breakfast. In one episode Laura traded her horse “Bunny” to buy her Ma a stove. I have two girls in my family who would gladly give up our stove for a horse!

Before Money: Trading was unregulated and inconsistent

The pioneers had just as much purchasing power back then as we do now. However, a bartering-type system is largely unregulated and there was no consistent measure from which to price goods or services. That is why there is a natural progression for a country to create a communal valuation system like money.

Resources are much easier to obtain, produce, and distribute in today’s world. Technology has made it possible to do things more efficiently, faster, and cheaper. The vast majority of our necessities are easily met with food, clothing, shelter, and even clean water is available to us at a reasonable cost. The costs have been set by supply and demand and a common currency has leveled the playing field.

Supply and Demand

Have you ever been out-bid by someone on eBay? You didn’t want it bad enough otherwise you would have paid through the nose for it. I would venture a guess that you realized there was probably another what-cha-ma-call-it out there that you could get later and it wasn’t worth paying three times as much today. We will pay more for what we feel we need more than the green paper in our wallets. We don’t want to pay more than we believe something is worth because we value the dollars more than the stuff. Capitalism is the perfect system with all the natural checks-and-balances necessary to make this work well. Unfortunately, commerce has spurred an unnatural side effect.

Debt is an impossible number

We live in a world where zero actually has a numerical value. Long ago the Mesopotamians, Indians, Greeks and Romans found ways to represent fractions, decimals, and the absence of a positive value with nada, nil, zip, and zilch. Zero is a fine number and offers much promise as it doesn’t take much to turn it into something when anything of value is added to it. Having a net worth of zero or greater were the only possible variables until an impossible value was introduced .

Have you ever eaten a meal with negative calories? How about scored a negative amount of points in a sport? There is no air in outer space, but there is not less than zero air out there. If you couldn’t possibly have a negative height or spend a negative amount time or even have negative thought (hey, even a bad thought is a thought in the truest sense of the word) then how is it possible to have a negative value?

• A dead battery has no charge, not a negative charge
• Five below zero is only a measurement that man created and it is warmer than absolute zero
• You can lose your wallet and all of its contents but you still won’t be poorer than broke

God created the universe, the Devil invented debt

What an amazing world we live in and all the luxuries that come along with it. God has given us the ability to think and create amazing things. I just watched a video of a 3D printer that created a wrench out of powder and resin.

What wasn’t possible before is having negative money. It isn’t possible. You can’t have a minus $2.45 – until now. Debt and all the products the financial markets can create allows us to have a negative net worth. Buy a car on payments? You are in the red. Using your credit card? You are spending money you don’t own. My home mortgage? Yeah, I know. I’m working on that.

Leave it to the Devil to come up with all these enticing ideas to trap us into bondage to a credit card company for their rewards program or the lie that we will always have a car payment. Have you heard the 10 Things We Say That Keep Us Broke? Making the choice to break the cycle of debt and having the faith in the money you have saved and will save over time will buy you more than a stupid credit score ever will.

Paying for things is the silent and steady race to becoming a millionaire

If we were able to pay for things without ever using debt products then we have taken the first step towards joining the Millionaire Net Worth club. Dr. Thomas J. Stanley, author of The Millionaire Next Door, found that most of America’s wealthy said the truest way to riches was to avoid debt.

So, the first step on a journey to the eighth digit on your net worth statement is the decision to get out of debt, stay out of debt,

We need to live on less than you make and do something smart with the difference.

Do something smart with the difference: Investing

Another thing that I don’t completely understand but am 100% involved in is investing. There are a few ways to invest wisely:

• Save money for the future
• Own rental real estate
• Build a business 

Saving money, even in a piggy bank on the dresser, is an investment in your future. It can be used to pay a bill, buy something you need, or spoil your wife (the best use of money I can think of). Buying stocks or mutual funds creates income over the long term. Some stocks pay dividends, which can be reinvest  Say what you will about the market going up and down, there are good reasons to stay invested during the bad times too.

Owning rental real estate is also a wise use of your investment money. It can become a regular income source in retirement, although most would call managing the properties hard work. Start with one paid-for house and learn the ropes of being a landlord. Buy a second property when you have saved enough of the first home’s profits and it won’t be long before you are bringing in a five-figure income every month and are paying someone else to manage your empire.

Building a business is also a tremendous way to invest. What starts out as a hobby can become a self-employment venture. Grow it to where you need to hire an assistant and you now join the millions of entrepreneurs that built this country into the capital of capitalism that it is. Continue to refine it into something that can run on its own and you are now a business owner. Hire someone to run it (while paying them a good salary) and you can step out of the business while still reaping the benefits of your creation. Now go do it again!

Understanding how money works is a key financial principle

“Those who fail to learn the lessons of history are doomed to repeat them” –   George Santayana

I vow to keep teaching the principles of honorable money management. There are many more ways to learn how money works. Here is one, which also happens to be our…

Inspirational Quote of the week:

He who spends more than he earns is sowing the winds of needless self-indulgence  from which he is sure to reap the whirlwinds of trouble and humiliation