The Substance of Money – Understand the True Nature of Your Money
Substance of Money – Only when you understand what money is, you can learn to manage and love it. Desi-Slava
Disclaimer: this article is merely informational. Always consider consulting with your financial/tax advisor before making any financial decisions.
Almost all of us are concerned with the matter of money. We want to make or earn money, have money on our disposal, spend money for one thing or another. Achieving financial freedom is one of the most common dreams. And, yet, to achieve all that, we first need to understand money.
Let’s face it, how could we attract, retain and love something we don’t understand? Or even worse, how could we be financially free when everything costs money?
In this series of articles, I aim to lift the veil off the substance of money. Once you truly grasp the nature of this matter, you can become rich and truly financially free.
What Is Financial Freedom?
What actually is financial freedom? Given that everything costs money and that we need money to live, how come we all want to be financially free? Isn’t this the perfect example of reverse psychology? When we want something, the achievement of which contradicts our desires?
Here is my point of view: for me, financial freedom means emotional freedom around my finances. In other words, to be financially free means to release all emotions associated with money and handling money.
If every time you think about your salary, your stomach goes into a knot, you are emotionally entangled with money. If seeing the gas price makes your heart skip a beat, you are emotionally entangled with money. Or, if you worry how you could ever pay off your debt, you are emotionally entangled with money.
And, to be financially free, you first need to handle your emotions around the matter. To do so, you can meditate, visualize, use positive affirmations, light a scented candle, and pray.
Or, you can educate yourself, demystify the substance of money, and free yourself from all negative emotions around money. In other words, once the light is on, the monster of the dark disappears on its own 😉
Everything Has Can Have a Dollar Sign… Almost
For the purpose of understanding the substance of money, we will assign dollar value to everything in our life.
Note: assigning dollar value to everything is just an exercise, nothing more. In life, not everything is about money and not everything costs money. To understanding the matter of money, however, we have to dive deeper. And, time and experience have proven that this exercise helps big time!
Take a minute or so to look around you. Start with the devise you use to read this article. Then, examine your clothing, your jewelries (if any). How about your home? Perhaps you have a vehicle? May be you are having a cup of coffee or a glass of water?
Now, think about how you acquired all these. Did you buy these cloths? Did you spend any money on the cup of coffee (whether you bought it from the coffee shop around the corner or you made it at home)? Do you pay for the water you use (directly or through the property taxes or rent)?
Let’s go even deeper.
Do you feel happy right now? What did contribute to your happiness? Did you buy it? Did you spend any money (like paying for gas, for Internet, for coffee, etc.)?
Do you feel down? What did make you feel that way? Do you feel bad for overspending? What will you do to feel better? How much does this cost (gas, Internet, electricity, pizza, a glass of wine)?
You think health doesn’t cost money? Think again. Are you sick? Do you take any medications? How much did you pay for it? Are you healthy? How do you maintain this lifestyle? Do you eat organic food? How much does it cost?
See, everything could be assigned a dollar value. Whether you are paying right now, in this moment, or you already paid for it (directly or indirectly), or you will pay for it in the near future, money flow in and out, left and right, here and there.
Stop denying it. Accept it and then deal with it.
It helps a lot if you accept the truth. You want to be financially free, then, stop denying that everything comes with a price tag. Instead, learn more about these price tags and start managing them.
The Balance Sheet = The Substance of Money
“The balance sheet has two columns: the left one and the right one. In the left column, there is nothing right. And, in the right column, there is nothing left.”
An accounting joke from an unknown for me author.
If everything is money, then, let’s examine its value. To do so, we will label everything as either an asset, a liability or an equity, depending on the nature of its value.
Assets – Meaning and Purpose
An asset is a tangible or intangible item that we own, have the right to use and has some life in it.
For example, the t-shirt you wear (if you are not wearing a t-shirt, look at whatever you are wearing) is your own, you can wear it whenever you wish and you intend to do so in the future. This is an asset.
Likewise, open your fridge and examine its content. The food there is your own, you can eat it and the consumption will happen in the future (whether the future is in 5 minutes, hours, days or weeks). So, the food in your fridge is an asset.
Your assets can have many purposes – to meet basic survival needs, such as food, shelter and safety, to help you promote your physical and mental health and well-being, to entertain you, and to generate more assets (such as cash, food, jewelry, etc.) in the future. In other words, you need to have some assets in order to live.
For our purpose, we will segregate the assets to three categories: monetary assets (cash, saving accounts, investments that can easily be converted into cash, etc.), cash-generating assets (retirement saving plans, long-term investments, equipment, which you use to work and generate cash, inventory, which you sell for cash, etc.), and other assets (clothing, food, home, vehicle, etc.).
We will examine the assets in more details in a separate article.
Liabilities – Meaning and Purpose
A liability is your existing obligation to do something in the future. The existing obligation always comes from a past event. And, the doing something could be paying money you owe, providing a service you were paid to do, giving assets you were paid to give.
The perfect example of a liability is your utility bills. You used the utilities already and now, you have to pay for them. The obligation comes in the terms of your contract, and the deadline to pay is always in the future (whether this future is in 5 hours, days or weeks).
Another common liability is your mortgage. You bought a home with the bank’s money. To do so, you signed a formal contract with the bank, called mortgage. This is the existing obligation. You have certain amount of years to pay the money back (in the future).
The purpose of the liability is to obtain assets or incur expenses by paying for them later. You may wish to do so because it is financially better to pay later (especially if you don’t have to pay interest). Or, you may wish to do so because you don’t have that amount of money now (in the case of purchasing a home). Don’t forget that the interest on your mortgage is also a liability.
In other words, our liabilities help us acquire assets or achieve some goals. Liabilities are good if we learn to take good care of them.
We will explore the good nature of the liabilities in a separate article.
Equity – meaning and purpose
Equity consists of two independent parts, (1) net assets and (2) net income.
Net assets is the difference between your assets and your liabilities. In other words, if you convert all your assets into cash and pay all your liabilities, how much cash you will have left (if any)? If your net assets are positive (i.e., your assets are worth more than your liabilities), you have equity. If your net assets are negative (i.e., your liabilities are worth more than your assets), you have deficit.
Net income is the difference between your income and all your expenses.
What Is Income?
Income is the cash you receive in exchange for your time, effort, skills, knowledge, products, assets, service, etc. Income can be generated from your employment (your salary, wages, etc.). It can also be generated from your assets. For example, if you invest your money in the stock market, you provide your assets (i.e., cash) to others to use. In return, they pay you dividends or interest. This is your income. If it is yours, and you don’t have to pay it back, it’s an income.
The purpose of your income is to acquire assets including monetary, cash-generating or other assets.
What Is an Expense?
Expenses are your consumables. If you have an asset that you consume, this becomes an expense. You may consume products or services without sacrificing assets right away. Nevertheless, whatever you consume becomes your expense.
Let’s say, you open the fridge and see 3 slices of pizza sitting in a box. This is your pizza, you can eat it, and you are planning to do so in the future. This is an asset. Now, you decide to eat the pizza. The moment you consume all 3 slices, they do not exist any more (no asset), and the cost of the pizza becomes your expense.
The purpose of your expenses is to satisfy a need – basic survival, health and well-being, entertaining, etc.
We will further examine equity in a separate article.
Putting it all together
In other words, just like you need assets to live, you also need income and expenses. These are your must-haves. While you don’t really need liabilities to live, they are here to help you along the way. These are your good-to-haves.
Not everything costs money!
How about time? Can you put a price-tag to time? The answer is, yes – perhaps the biggest price-tag.
But, what about love? Love doesn’t cost money. True! Love, happiness, joy, even anger, do not cost any money. But, we often spend a lot of money to show our love, enhance our happiness and experience even greater joy. Likewise, many of our money-management decisions make us angry, sad or stressed.
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