~ 10 Minute Read
Money. The conversations about it are as intricate as they are diverse. How do I make more? How do I save? What kind of debt is “okay”? These are all common questions revolving around money. All of this can make the subject of money seem incredibly difficult and complicated. But I’m here to tell you that this is not so.
In fact, money can be broken down into two basic functions. I would argue that (almost) every purchase you make fits neatly into one of these two categories. By being mindful of these two functions of money, it will lead you to making more informed and better financial decisions. No more complexity, no more asking a bunch of seemingly different questions about money, only these two philosophies are needed to get you in the right direction when it comes to your financial life.
As with all things, when it comes to these two functions of money balance is key. If you engage in one of the two functions too often it can lead to distinct financial (and emotional) problems.
The First Function of Money
The first function is well known by the masses, and is indulged at an unsustainable pace by the majority of people. It creates debt and can lead to financial ruin for many. It also ensures that you’ll never build true wealth and live a comfortable lifestyle.
The first function of money is spending it on material goods/liabilities
If you read my article about financial myths you’ll know that I consider any item that costs you money at the end of the month a liability. That means your mortgage is a liability. You pay it every month and it takes money away from you. Do you have a car loan? liability. Credit card debt? huge liability.
Most of us like to drive new cars and enjoy the newest gadgets. But how much does that new iPhone improve your life? I would argue not only does it not improve your life, but is making you miserable.
Credit Card Debt
The unfortunate truth is that many of Americans are addicted to the first function of money and it shows when we look at the financial data. In fact, Americans recently broke the record for total credit card debt. Here is an excerpt about credit card debt from Motley Fool:
The average American’s total credit card balance of $5,551 represents 30% of their total available credit limits.
However, this doesn’t tell the whole story, as there is a big range of indebtedness, and the average includes consumers who don’t owe anything at all — and there are a lot of them. According to a separate study from ValuePenguin (which found a similar average credit card debt of $5,700 per household), only 38.1% of all American households carry any credit card debt at all. This implies that the average household that carries a balance owes a whopping $16,048.
If you are in the 38.1% of households with credit card debt I implore you to begin looking at ways to stop using the first function of money. In an attempt to keep up with others it has led you on a path of unnecessary financial stress. By stopping this cycle you can begin to pay off your debt, allowing you to take advantage of money’s second function.
Keeping Your Spending In Check
It may be a cliche’ at this point but being mindful can help you to make better purchasing decisions. Humans by our very nature are creatures of habit. Often we make purchases based on previous behavior without considering if we derive any happiness from the money we spend.
Let’s say you get a large milkshake every Friday. Even though some days you could easily do with a small, or no milkshake at all, you continue to order a large because that’s what you’ve become accustomed to. Its now a spending habit.
That may be a small example but you get the point. Before spending money ask yourself a few questions:
- How will this item improve my life?
- Is this something I can live without?
- Will I be using this item 6 months from now (if not disposable)? A year?
- Will the value of the item increase or decrease over time?
By following these simple questions you can begin to make more mindful buying decisions based on the internal value an item will have in your life.
The Second Function of Money
It is with the second function of money that the potential power of your dollars shines through. Unfortunately, it is not taught in school and because it is not emphasized in our society it does not get discussed. For those who use their money for the second function they are setting themselves up for wealth and lifestyle of financial comfort in the long-term.
The truth is that the statistics on the median American’s savings are depressing. 31% of Americans have less than $5,000 in savings. These people are one unexpected event from financial panic mode. Now admittedly, some folks simply do not make enough to save, and if you are in this camp I hope you’ll look into my free micropreneurship guide (found to right on the sidebar of this page) which can give you some proven ways you can make extra money. Also, check out my article on side-hustles.
However, if you look deeper into the data you’ll find that for many Americans making enough money is not the problem, its that they’re spending too much. A full 33% of boomers have saved $25k or less. These are people who should be at their peak earnings age and yet they wouldn’t last a year if they had to retire.
Be honest with yourself. Are you in this camp of earning enough money but spending too much? If so, you are too focused on the first function of money and have abandoned the second function. You my friend are addicted to stuff and showing off your perceived status to others. Its never too late to shore this up and start to look at ways you can begin making your money work for you.
The second function of money is to create more money
In other words, this function of money is all about investing in assets. And just as a liability is anything that costs you money at the end of the month, an asset is anything that makes you money at the end of the month.
Certainly, there are some investments or assets that will produce a greater return than others. But the first step in changing your financial future is to begin using more of you dollars on the second function and less on the first. By doing so you are creating positive money habits that will benefit you for years to come.
Some Examples of Assets
The return on your money will depend on how much you invest and how much risk you are willing to take on. Personally, I’m a risk taker as you can see from my cryptocurrency portfolio, that as of today has seen better days, ha!
Some common ways to take advantage of the second function of money:
- Investment Real Estate (long-term/short-term rentals)
- Being a Landlord
- Investment Real Estate (Requires a large amount of capital)
- Invest in Websites (I recently purchased a website, read about that process here)
- Affiliate Marketing
- Invest more conservatively with an index fund
- Go all-in and try to hit a home run with a few stocks that you think have a bright future (only do this with money you are willing to lose)
- Real Estate Investment Trusts (REITs)
- Become a small venture capitalist with WeFunder
One Last Word On The Second Function of Money
Just as most of us are addicted to the first function of money, a minority of us can become addicted to the second function. While this is not as bad as being addicted to the first function, it can still cause potential stress. The goal is not to hold on to your money as if you are holding in a fart in a crowded room. Instead, it is to make you money make more so that you can have a FEW toys that you truly enjoy.
Remember, when you die, your money stays here on earth. You don’t get to take it with you. It is okay to enjoy the fruits of your labor from time to time. Just be sure to live within your means.
Bringing It Together
The goal to writing this article is to simplify the idea of money. So many of us have difficulty in making decisions when it comes to money, but if we can see each purchase as falling into either the first or second functions of money it makes the whole process much easier to grasp.
Lastly, realize you don’t need a ton of money to take advantage of the second function of money. No matter if you have a $100 or $100,000 the important part it to get started. Let time and compound interest take care of the rest. There is no get rich quick schemes, there is only the second function of money. It’s time to put your money to work!
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