What is money?
Many textbooks will talk about how money is a “medium of exchange” and a “store of value”.
These are wonderful and important characteristics. As a medium of exchange, using money means you don’t need to barter for goods and services: you can more easily trade with people, rather than finding someone who is prepared to give you milk in exchange for the candles you’ve made (ie, it reduces the need to barter for goods and services). As something that doesn’t die, rot, or go off, money can also store value from one day to the next.
These characteristics of money help make the world-as-we-know-it go around.
But it’s also something else: money is a time travel device.
No, I’m not saying this because I’m addled from reading time travel books and watching time travel movies (although I do love me some good time travel fiction).
But when we think about it, money is a device for travelling through time. Think about it:
- When most people buy their first home, they’re not doing it with all of their own money. Purchasing the home usually involves borrowing from a bank. The bank is basically giving you an advance on your future earnings (for a cost). Yes, the money is loan is secured against the mortgage on your home. But what usually pays for the house is your future income. Another way of putting it: when the bank lends you money, they are giving you a massive advance on your future income.
- The value of a share in a listed company isn’t so much a claim on current assets and liabilities of the company, but relates primarily to your entitlement to future income (dividends) from the company. When you buy an interest in a company, you’re paying for future income.
- Likewise, if you’re lucky enough to own shares in a high-growth company that subsequently sells and results in liquidity for you, you’re basically receiving a lump sum which represents future income from the company, that is being paid to you in cash right now*.
* Capital gain usually occurs when there is an expectation of greater income/profitability from that asset into the future. Think about that in the context of property investment…
One of the most magical aspects of money is that it allows us to make decisions that aren’t entirely constrained by the here and now.
If you’re optimistic and confident about the future, you can borrow money now for consumption (preferably not, except if it’s for a house).
If you’re optimistic and confident about the future, you can borrow money today to invest – and bring the future closer, and perhaps make it better than it could have been.
(Or, instead of borrowing, you can get other time travellers excited in your vision and get them to share in the potential future rewards — in the form of an investment in your venture, a la angel or venture capital investment.)
When you save for retirement, you are also travelling in time, to an extent. The version of you that is in the present is basically travelling into the future to help out a future version of you, and helping out, by putting money aside now for future you to spend later.