What is Money? A Common Sense Explanation

Most people do not understand money properly. Money is an abstraction for the agreed upon store of value, unit of account, and medium of exchange between two or more parties (Source). I won’t get into the difference between fiat and commodity currency but know that our current US dollar is a fiat currency and is basically backed by our belief that the US government will pay its bills.

It’s built on trust.

In the past, when you wanted to get something from someone else, you would either trade labor or goods for the item. So today, instead of carrying around bags of wheat or three chickens to pay for your gas, you just pull out a few bills and keep it moving.

You may also pull out your credit card to pay for that food which is another form of money. Credit an abstraction on top of an abstraction (cue the movie Inception) but it really is all the same concept. Credit is a form of money backed by the belief that the person, the individual entity, will pay their bills. You are basically spending the money from your future self to get something today.

Still following?

So with these basic concepts in mind, how might we think of money? It’s a store of value, but is it valuable in and of itself? It is an abstraction but it can get you real things with it in the real world. You go to work every day and in return you get money.

So how can we define money in a way that makes it easier to understand and also easier to make better decisions with it?

The best definition of money that I’ve come across for this purpose is from Vicki Robin in her book, Your Money or Your Life. She defines money as your life energy.

Whoa.

That sounds super trippy. Mystical even. Also, that can’t be right, right?

Economists define money as any good that is widely accepted as final payment for goods and services. But, life energy?

Yeah. Life energy.

Think of money as your life energy and your relationship with it will never be the same.

A common-sense way to look at money is that it comes from the labor that you or someone else puts into creating a thing or providing a service. People pour hours of their life into something and you buy it with money. Someone spent time, life energy, gathering the raw resources, then refining them, then turning it into something of value, and then getting it to you.

You went to work for eight hours, or more, and you got paid money for the time spent on the job. You turned your life energy – your time, your labor, your creativity, your ingenuity, your productivity – into money. When you spend the money you earned or even the money from someone else, you are converting that life energy into a good or service. Money just happens to be a very convenient way to carry life energy around.

The saying, “Time is money,” makes so much more sense now, I bet.

So how are you spending your life energy today? What do you have to show for it? Could you be using it more effectively?

To me, this is why investing and buying assets are important. I want to be a good steward of my life energy and the life energy of others.

Money = Life Energy.