A question which has been haunting me for a while now. I had an argument with a relative who wanted me to spend a large amount of money on my wedding. All he had to say was “Why do we earn money? Only to spend on occasions like these”.
Why do we earn money?
Ask a man walking on the road and he would say “To Sleep Well at Night”. This, by all means, is the right answer. But, is there more to it?
What is money? It is just a commodity. A commodity to facilitate trade and enable a person to get what he wants. It is just a commodity.
Money – For Survival
We will all die in the long-term. But today, when we are alive, we do need money to survive. We want to provide for food and shelter for our own selves and our families.
We do that either by getting a job or through other means like stealing. But for moral and legal reasons, stealing is not right. So most of resort to the first option.
You may say that rich people don’t need money for survival. They have enough to survive for generations. You are right. But, like Munger says “Only 1/5 of the population can be in the top 20%”. Rest of the population is poor. Very poor.
According to a survey by Credit-Suisse in 2013, it was estimated that 3.2 billion individuals – more than two thirds of adults in the world – have wealth below 10,000 USD. One billion adults fell within the range of $10k – $100k.
A large part of the world is poor, and unlucky. When you are born poor, you are born unlucky. If you are born to a poor family, you are unlucky. If you are born in a third world country, you are unlucky. If you are born in an illiterate family, you are unlucky.
There are a few who change their fortunes either by getting lucky or working very hard, smartly. Otherwise, most are unlucky.
To begin with, we can very well say that most of us earn money for survival. To live a life where we spend half of it sleeping and the other half running behind something which has no value in itself.
Money – For Fulfilling Desires
Once we are past the amount of money we need for survival, excess money fuels desires in us. The desire for something beyond survival.
All of you must have heard of the Diderot Effect. If not, here is a short summary.
“Denis Diderot was a french philosopher and the co-founder and writer of the Encyclopedia. He was a poor man for most part of his life. His fortunes turned suddenly when he was offered money by the empress of Russia for his library. He was also offered an upfront payment for the maintenance of the library.
Diderot, to reward himself, bought a scarlet robe with the newly acquired riches. But the scarlet robe felt out of place in his otherwise shabby accommodation. So in order to complement his scarlet robe, he started replacing things in his house with more luxurious and expensive items. He bought a better chair to complement his robe, then a better table to complement the chair and so on and so forth. The purchases never stopped until he was out of money to fund his new standard of living.
These reactive purchases have become known as the Diderot Effect”.
We make purchases to complement our older purchases.
- We buy a car. We buy accessories like seat covers, mats, perfumes, alloy wheels to complement our new car.
- We buy an iPhone. To protect the iPhone, we buy expensive screen-guards and covers.
- We buy an expensive dress. To complement the dress, we buy shoes, jewelry etc.
- We buy a gym membership. Then we buy separate shoes, clothes and other fitness gear. We may not end up going to the gym. But we certainly end up making the purchases.
Money at disposal fuels enough desire to bankrupt you. The desire to look better than everyone else, the desire to win the status game, the desire for power. There is no end. Until you end up dead.
Hence, money is a key ingredient and a need to fulfill our desires. We sell precious hours of our life for bills which do not have any meaning.
Money – To Create Wealth
What is money? A medium to get things we want.
What is wealth? Wealth is anything that pays you while you are sleeping. Or qualitatively speaking, wealth could be your family, your happiness, your ability to walk and talk, your ability to read and write.
You will get a different definition of wealth from different individuals. Lets take time to see how the successful people have defined wealth.
My definition of wealth is much more businesses and assets that can earn while you sleep. Wealth buys your freedom. Money is how we transfer wealth. Money is social credits. It is the ability to have credits and debits of other people’s time My definition of wealth is much more businesses and assets that can earn while you sleep. Wealth buys your freedom. – Naval Ravikant
The definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living. It’s that simple. It’s not about what you can buy. It’s about your ability to sustain your existence without working. Wealth is measured in time, not dollars. – Robert Kiyosaki
“Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact; ants have wealth. Money is a comparatively recent invention. Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn’t need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn’t matter how much money you had. ” – Paul Graham
In the above three, the approach to money and wealth by Paul Graham is best in my view.
Now, how do you create wealth? There are various ways to do that. You could –
- Invest in stocks, real estate, bonds
- Start a Company and get rich
- Lend your money
- Invest in startups
Wealth is essentially created by making money work for you. Making money do the hard work for you when you are sleeping. In any case, you need money to make more money. You bring money on the table by earning it.
Very well then, we have found the third reason to earn money. That is to create wealth.
Another intriguing questions needs to be answered here. Why do we need wealth?While there have been multiple books written on the subject of wealth, let us explore why we actually need wealth.
Wealth – Why do we Need It?
For me, I can buy my time with wealth. Money cannot buy me enough time like wealth can. A day job paying enough to support a family can only buy essentials to survive, not time. In order for you to buy time, you need wealth. That comes from having assets which create money to buy time for you. What do you do with the time you buy with your wealth? Well, firstly, you spend a lot more time with your family. Which means, i need to earn money to create wealth which will eventually buy time to spend with the family.
Wealth is essentially a leverage. A leverage which buys time for you to make better use of your existence. Time is the real asset.
What else can we do with the purchased time? We can read, upgrade our skills, travel, buy more assets, spend on experiences, spend on charity. You name it and you have it.
Wealth is a privilege. You sleep peacefully when you know that you have enough to survive for the entire lifetime.
Wealth can buy financial independence. Wealth can free you from the trap of money.
If you are evil, wealth can buy power. You can make people do things with money. You can buy favors. You can influence.
With wealth, you can survive for generations and fulfill all your desires.