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A Lesson In Money You Won’t Find In A Classroom

in Personal Finance

Financial education is underrated and rare, and even when it’s there the wrong things are too often taught. Too much emphasis is put on spreadsheets and adding/subtracting numbers to get figures that are supposed to signify something but just flat out don’t.

When it comes to money, knowledge is power. You have to have knowledge about the nature of money to be able to manage it. And the biggest misconception about money is that you have to be a math whiz or scientific genius to be good at managing it. A misunderstanding of the true nature of money is the cause of our financial problems. NOT a lack of algebra skills.  Money sitting in our wallets is always leaving, and it’s from two things. Inflation and spending. Investment is the pursuit of combatting these forces and preserving your money’s value. So it’s no wonder why investing is so essential. But these concepts are not always very understandable, so I’ve devised a suitable (albeit unrealistic) metaphor to illustrate money.

Warning: basic principles of multiplication and division ensue. The non-math-minded are warned!

Picture this: You’re on a desert island with a bucket of 50 grains of sand (it’s a small bucket.) Each grain of sand is worth $500 divided by the total number of grains of sand on the island. So let’s just say there are 500 grains of sand on the island (It’s a small island.) So each one of your 50 grains is worth $1 bringing your bucket’s total value to $50. However! The beautiful waves hitting the beach are constantly bringing in new grains of sand to the island reducing the value of each grain of sand slowly over time. So let’s say after 10 years the island now has 1000 grains of sand instead of 500. Now each grain of sand is worth 50¢ ($500 divided by 1000 grains of sand.) This means your bucket holding 50 grains of sand is now worth only $25. But on this island where sand is currency, you had to spend 20 grains over the past 10 years to sustain yourself (you don’t eat much), leaving you with 30 grains of sand. Or $15.

“A misunderstanding of the true nature of money is the cause of our financial problems. NOT a lack of algebra skills.”

Let’s take a second scenario into consideration. With your bucket of 50 grains of sand, you decide to take half of your sand out and keep it to use for living expenses, then with the remaining 25 grains in your bucket, you leave your bucket on the beach to collect sand from the waves bringing it in. This time, after 10 years, you have spent 20 grains of sand again on living expenses, and since the waves have doubled the sand on all the island, your bucket now has 50 grains of sand because you left it exposed to the elements. Now with 5 left over from the sand you kept with you,  you have a total of 55 grains of sand, instead of 30 after 10 years.

In the real world, the waves bringing in more sand are inflation. And leaving your bucket on the beach to collect sand is investment. In the society we live in, money loses more and more value over time so investment must be used to combat its fleeting value. Now granted we still didn’t end up with as much true value as we started with ($50), we still were able to preserve some of our money.

And in most cases, if you’ve preserved wealth through investment, you are winning.

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