Money is a Tool

Money is a tool. It only has value if we use it. If we use it well, we will accomplish our goals. If we misuse it, we can cause a lot damage that will require a lot of time and effort to fix.

Our childhood observations of how our parents handled their finances, combined with whatever formal or informal education we may have received, form the foundation of our relationship with money. Growing up in an environment of scarcity leads to a different attitude toward money than growing up in an environment of abundance.

Scarcity or abundance, or something in-between, gives us an early direction for money management. What we don’t realize as children however, is that scarcity or abundance may have only been a perception. While our family’s financial condition may have been just as it appeared, we learn as adults that our perceptions do not always reflect reality.

Those who manage their money well and are financially secure often live very modestly. Conversely, those with the biggest houses, the newest cars and the most expensive clothes may very well be living payday to payday and have relatively little accumulated wealth.

This contradiction between appearances and reality is something we should keep in mind when we give in to our natural tendency to compare ourselves to others based on apparent wealth. We tend to allow our financial condition to become intertwined with our notion of self-worth. We value our lives in terms of how many material possessions we own or how much cash we have in the bank.

The link between self-worth and material possessions can lead us to regard the accumulation of wealth as a goal in itself. We work harder and harder to stockpile more money and more possessions, and we often throw our lives out of balance to do so, jeopardizing other important areas like our health and our relationships.

To properly manage money throughout our lifetimes we need to recognize it for what it is. Money is a tool. Money is something that human society created, long before recorded history, to facilitate exchange. Money simplifies our lives. It allows us to sit in one part of the world and purchase the latest widget without having to deliver two goats and a camel to another part of the world. Money has value because of the opportunities it gives us to make our lives more secure, more meaningful, or more enjoyable.

As for the money-making life, it is something quite contrary to nature; and wealth evidently is not the good of which we are in search, for it is merely useful as a means to something else.

Aristotle, Nichomachean Ethics

Of course, we need to dedicate some portion of our lives, and make some sacrifices, to provide security for ourselves and our loved ones. The classic model was depicted by the psychologist Abraham Maslow in his hierarchy of needs:

While we certainly need to focus on accumulating money to provide for the survival and security needs in the lower levels of our personal hierarchy, it doesn’t take much more in the way of financial resources to achieve our goals in the upper levels. In fact, everything we do to stockpile more money after we have set and achieved our goals for survival, safety and security is just for sport. Unless, of course, our goal is to dedicate our lives to earning as much money as possible so others can spend it after we’re gone.

Once upon a time, money actually had intrinsic worth as it was comprised of precious metal or other natural objects with objectively determined values. As society evolved and currency developed, paper money itself was backed by something of value. Until 1976, paper money in the United States was backed by gold. Nowadays, money is valuable only to the extent that others will accept it as a medium of exchange.

Not only is money no longer backed by something of value, it is becoming increasingly less tangible. We go to work every day and in return our employer or our customers deposit money into our bank accounts. The utility company emails us an electronic bill and then automatically deducts its payment directly from that bank account. We need only click a box on a computer screen when we purchase something and money is removed from that same bank account in return for the item. The rise of crypto-currencies separates money and value even more.

The digitization of money and the decline of the use of currency makes money seem less real, which has both bad and good effects. In the days when hard cash was used for nearly all exchanges, when we had to touch it and count it, we seemed to have more control. We could see our money coming in and going out. If we spent too much we could feel it dwindling in our pockets. The act of physically writing a check reminds us much more of what we’re doing than pulling a card from our wallet or clicking that box on the computer screen.

On the other hand, the more that money becomes detached from intrinsic value, the more it reminds us that all we have are promises from others to give us things in return for our money. The digits coming in and going out of our bank accounts have no inherent value other than the willingness of others to accept them in exchange for what we want. And it is certainly true that the more we sacrifice and give up to make more money, the more we are trading real things for promises.

Whether it exists as something tangible or something electronic, the nature of money remains the same. It is a medium of exchange. It is a tool. And a tool is worthless in and of itself. It only has value if we use it. If we use it well, we will accomplish our goals. If we misuse it, we can cause a lot of damage that will require a lot of time and effort to fix.