Investing 101 Part I: The 3 Things You Can Do With Money
by Alex mason
Investing is one of the most powerful skills you can develop in life, because it helps you achieve financial freedom. Earning more income is an important skill set, and so is frugality and watching what you spend, but the value of those things are limited if you never learn how to make your money grow.
When people begin to learn about investing, a lot of times they jump into the ‘what’ and the ‘how’. Then they feel chastised when whoever is teaching them starts talking about the ‘when’ because they wish or are told they should have started investing earlier.
The ‘what’, ‘when’ and ‘how’ are all important, and I’ll spend much more time talking about each of these aspects in detail, when we get to it. But for now, just relax. We’re not there yet. In fact, we’re just getting started. I’d like to begin this Investing 101 series with focusing on the most important aspect of investing, and the most important aspect of everything. As Simon Sinek says, we should start with ‘why’.
Why invest? Why even bother putting money at risk in the stock market or anything else? But more essentially, what is the purpose of money and why should we care about it?
There Are Only Three Things You Can Do With Money
We should start by acknowledging that there are only three things we can do with money. We can:
- Spend it
- Give it away
- Invest/Save it
That’s it. Those are our only options. Once we have money in our control that’s what we can do, and there is tremendous power in this.
Spending it is the most natural option for many of us. In fact, it is a necessary option in the modern world. If we can’t make it or do it ourselves we need to get it from someone else. And the most popular way to do that is to exchange a digital representation of value (since that’s all money is) for what we want. This is how we provide shelter for our family. It is how we put food on the table. It is how we acquire education, entertainment, transportation, comfort in all its forms and every other conceivable type of utility [link to mental model page] known to humankind. If we cannot spend money, our standard of living plummets and our physical needs are at high risk for not being met. No one wants to go cold at night or fall asleep with an empty stomach.
We can also give it away. Most of the time, this is simply another way of spending money, it’s just that we allow others to do it for their benefit. Giving money is one of the many ways that we can help others.
Giving money allows us to clothe kids with coats in the winter time. It allows us to grant scholarships, feed the homeless, provide job opportunities, and endow chairs at universities. It allows us to research cures for diseases, invent new life-changing products, and keep our local park clean and free of trash. Instead of money being used solely for my benefit, it can be used for your and our benefit.
Saving money is the opposite of both spending and giving it away. After we receive money, it stays in our possession or ownership. This increases our capacity to spend or give more at a later date.
Though some people are more natural spenders or givers, some, like me, are natural savers. We like to keep money on the side, even if we don’t really know what we’re going to do with it later. I remember keeping my small, Mickey Mouse coin bank hidden under my bed as a kid, and gradually dropping change into it that I had found on the street. Eventually, I had enough coins and bills saved up that I was able to buy my own lava lamp for my room.
The tricky part about saving is that it is deferred spending. We don’t get to enjoy the benefits of the money now - we have to wait. The inescapable forward movement of life’s most precious resource - time - means that it tends to be hard to do this, especially when we have an immediate need that can be filled by spending money today.
It is important to do this though, because we may have large expenses in the future - both planned and unplanned - that we can’t pay for today. Although many people increasingly turn to credit (borrowing money from others and paying rent on it in the form of interest) to pay for things they can’t afford, credit isn’t always an option. So, having money set aside for future purchases, large and small, is a wise thing to do.
Ultimately, There Is Really Only One Thing That Can Be Done With Money
Framed another way, there is really only one thing that can be done with money, and that is to spend it.
Spending it on yourself or your family brings you things that you immediately need or want. Giving money away allows others to spend on things they need or want. And saving or investing is just a way to defer future spending. All money is eventually spent by someone, somewhere, at some point in time.
When we obtain money, I think we would be better served if we think with this frame of mind. The money you earn is eventually going to be spent - you just have to figure out the how and the when, and ask yourself why you are making that choice.
To spend and to give are the most common courses of action, but saving/investing is important because it allows more money to be spent in the future, which has tremendous value.
How much value does it really have? Is it really worth putting money aside for the future relative to the benefits of spending it or giving it away today?
The answer, I’d assert, is a resounding yes. We shall see why in Part II.