Types of MoneyWed, 5th May '10, 8:15 am::

I wish I could 'blog in my sleep. Last night as I was falling asleep, I made an epiphanic observation about money, or at least it seemed so to me. I don't know one person whose life hasn't been tremendously influenced by the amount of money they have or don't have. People have too little, too much, or in case of the wise few, just the right amount of money. They work too hard, not at all, or just the right amount. They spend too much, too little, or just the right amount. How we feel about money depends on whether it's coming in, going out, owed, borrowed, found, or lost. We measure the worth of time and things in money and we measure the worth of money in time and things.

Having studied the economics of money and banking, I can describe how governments, corporations, and banking institutions are supposed to quantify and measure money, growth, and investment in theory. But in practice, what it all really comes down to is how individuals truly "feel" about money, regardless of how large the sum of money is. How we feel about money comes from our intuition and understanding of the situation. Intuition and understanding are important because there is no proven method of minimizing the risk in any financial decision. If there was a scientifically provable formula for making money without any risk, not only would the owner become the richest person in a very short time but public disclosure of such a formula would bring down every economy because nobody would invest in stock market, small companies, or even their own self when there is a certified way to make money elsewhere without any risk whatsoever. To make a lot of money, just apply the formula more often, to a larger sum of money. It would be no different from grinding in a multi-player video game.

What our entire financial future boils down to is how we feel about different kinds of money. Money you earn by working really hard is different from money you inherited. Money you pay to send your child to school is really different from the money you pay to get them out of jail. Money you have in the bank is different from the money I have in the bank. $100 means a lot to you, it means less to me, and nothing to someone else. This is the force that runs the world economy. If we all felt the same about money, then there would be no luxury goods - they'd either be staples or non-existent. If everything is a staple good then nobody would want to invest in such a competitive market. So it is a very good thing that we all feel differently about money.

The following is my attempt to classify income/earned money as I know, feel, and observe. By no means is it a comprehensive list so feel free to share your "money types".

1. Sweat-Blood money: You worked hard for this money. It didn't come to you easily. You can proclaim loudly that you got it legally, honestly, and justly. You made a tremendous effort and large sacrifices to obtain this chunk of change and you deserve every penny of it. This is often the most satisfying money to earn and save. It is tough to spend this money on frivolous expenses but very satisfying to spend on things that helps yourself and others.

2. Guilt money: You feel guilty that you got this money, regardless of whether you deserve it or not. You will accept this money because you have bills to pay but something inside of you keeps nagging you about how you shouldn't have gotten this money. But you won't return it because you need it. You may have borrowed money from a friend and now that they don't speak to you anymore, it feels like guilt money. You may have done some work you are not too proud of and made some guilt money to pay the rent. The only good thing about guilt money is that it is spent almost immediately, unlike "Give-it-back money."

3. Give-it-back money: This is the money you would give back immediately if you could go back in the past and change something. Life-insurance money falls into this. If you'd rather have someone not die, then the inheritance is give-it-back money. Also if you truly hurt someone in the process of making this money and regret it every day, it's give-it-back money. There is nothing good about give-it-back money except it is usually a large sum.

4. Bank-error money: Someone in the bureaucracy screwed up and now you find yourself marginally richer. Congrats! Keep it in the bank and earn interest on it. DO NOT SPEND IT immediately! If you got an extra paycheck because of data-entry error in the payroll system, chances are that after 6 months, nobody will notice it. Keep mum and enjoy the tiny fortune. A million dollar error will be fixed (and someone is getting fired). $250 error will be ignored. Bank-error money is like finding an extra cookie in the 6-cookie packet. It won't change your life but it will brighten your day. So smile!

5. Found money: The problem with found money is that it is also "Lost money" for someone. If it's less than $20, it is no different from "Bank-error money." The person who lost it will curse but get over themselves. But anything above $20 could quite possibly be a significant loss to an average person. Imagine a single-mother of two with bills to pay who loses $75? Try to return it if at all possible. Donate it if you can't. Keep it if you are really poor. But realize that it could turn into "Guilt money" very easily.

6. Networked money: This is the money you make because you know someone who knows someone. This is the money rich old guys make because they all know each other and can make a lot of money for each other by playing nice, at the expense of a thousand others. There is nothing inherently wrong with networked money as long as it doesn't screw others. However, the big problem with it is that it often masquerades as "Sweat-Blood money." So the guys who really made millions because they knew the right people now think they earned it by being smart, hard-working, and innovative. Hello Wall Street!

7. Me-too money: This is a very dangerous yet prevalent variant of "Networked money." Only reason you make this money is because all your peers make this money. You don't really care about this money, you don't even know how to spend this kind of money, but you earn it because you're supposed to. You have a PhD in an engineering field? You gotta make 150k by age 45. Your cousins are all making $100k as mid-level managers? So must you. This is the worst reason to make money because you're exchanging something you value, your time, for something you don't need. When you realize what you've spent a decade or two of your life chasing money, you might think it's all "Guilt money" but there's a slight difference - you needed the "Guilt money", you didn't need "Me-too money."

8. Lottery money: Almost everyone wants this, even those who swear by "Sweat-Blood money". This money brings the promise of getting anything you want. It is the shortcut that bypasses "Networked money" and "Me-too money." In addition to actual lottery winners, major sport-stars and celebrities also earn this money. If the money you make is disproportionately higher than the effort you make, it is no different from a lottery. You could be the great musician in the world but if you make more money than the GDP of the 150th country in the world, you ran into some lottery money. The best part about lottery money is that there is no guilt, no need to give-it-back, and nobody lost anything for you to obtain this money. It is a no-strings-attached manna from heaven. What could possibly go wrong? Except... reality. Unless you have extreme self-control and are smart with finances, you will lose this money. You will buy things you don't need to impress people you don't care about. In that respect it is not much different from "Me-too money." The primary difference is the number of zeros at the end. You can put this money to very good use but most probably you'll throw your wife or daughter a huge birthday party on an exotic island. Then you will give it to the "Networked money" or "Loop-hole money" guys and lose it all.

9. Minted money: Though often confused with "Lottery money", money made via very successful and smart ventures is minted money. It is often a combination of "Sweat-Blood money" and "Networked money" though the main difference lies in the immense scale of the operations. Founders of Google, Microsoft, Apple, eBay, and PayPal minted money. They created entire markets around their products and not only grew themselves but also made everyone who worked with them rich. These people created products that filled specific needs and provided value to the users. A lot of technology startups hope to mint money in their steps, though most of them are really just hoping for "Crapshoot money." Minted money is often denounced as "Loop-hope money" and the latter often presents itself as minted money.

10. Crapshoot money: If you are a smart, creative person and saw your parents work themselves to death to make some "Sweat-Blood money", you know there has to be a better way to make it in the world. You've figured out that lottery, networked, or me-too money is for schmucks with poor statistical skills and no vision. You have skills, raw talent, and the drive to live on nothing but dreams, vision, and sheer hope. You are in this to mint money! Sorry. You're just aiming for crapshoot money. Like the YouTube guys. And Facebook, Twitter, and BroadCast.com. You have a good product, you certainly do. It's unique, interesting, and usable. You have the eyeballs, PR, and smart people. What you don't have is something that people will pay money for over and over again. You're hoping to either be bought out, sell ads, or sell data. You are betting on luck and a lot of it. There is a silver-lining to this cloud. Even if you do not completely succeed in your goals of changing the world, you could make more than enough money to buy a Château or two. There's nothing really wrong with crapshoot money. It is well-deserved, requires just as much sweat and blood as any hard-earned money. It just relies on getting tremendously lucky. And the biggest problem is that when you do succeed, you're going to deny luck was even involved. Nope, it was sweat and blood the whole way.

11. Loop-hole money: What do you do if you are exceedingly smart yet too impatient to wait a decade or two till you mint money? You find a loop-hole. You seek arbitrage opportunities. You create structured investment vehicles to invest in asset-backed securities without providing investors any transparency. You are far above the "Networked money" guys. You are the genius in the Ivory Tower who consistently grows money. You are the brain-child behind Enron. You run Goldman Sachs. You bring down commodities markets in Asian countries so you can efficiently conduct a hostile takeover. Those "Minted money" guys may be wealthier and smarter than you but your shrewdness gives them nightmares. "Networked money" guys want to be you. "Lottery money" makers think they are you. And "Sweat-Blood money" guys would loathe you if they knew you existed. Fortunately for you, they're busy blaming the "Networked money" folks.

12. No money: You don't want money or things. Money is just to provide the bare essentials of food, clothing, and shelter. You don't want a car, boat, or even a cake on your birthday. Somehow money just never caught your eye. You may or may not have passions and aspirations. As satisfied as you may be with your situation, unfortunately people think you're poor, hippie, or just plain unambitious. But it's alright. You go write that book or song. Go ahead and make that website or a widget to make cars use less fuel. You might succeed and end up with some "Crapshoot money" or you may not. Who cares? You have nothing to lose. Carpe diem, baby.

13. Old money, dirty money, blood money, FU money: You have so much money you don't even know what to do with it. You don't care how you got it. Maybe your dad is a billionaire. Maybe he sold guns to both sides in a war. Maybe you overthrew the democratically elected leader and proclaimed yourself the dictator-for-life. Maybe you took bribes, commission, or whatever dirty money you could get your hands on. After all, you worked hard for this money! The world's a dirty place and you're just a small town rube trying to make it in the big bad city. Money is money. Those holier-than-thou "Sweat-Blood money" types should just fess up and admit they don't have the drive and ambition to compete in this world. There is not much good that can come out of old or dirty money. The only good thing is that it slowly dwindles down to "Networked money" and then disappears in a generation or two.

There are many other kinds of income/earned money I can list but I'd say most everything fits into one or at most two of the slots above. There is a whole another side to money when it comes to spending it. Maybe I'll write about it some other day. In the meantime, which income/earned money type do you think you are?

 < Apr 2010Jun 2010 >