What does reading this article cost?
Hello! I build IT teams and design IT Systems for startups and nonprofits. I consistently encounter the same problems, so I set out to create a series of guides to help others navigate the IT Ecosystem. You can learn more about my philosphies via my website dave-bour.com or via my weekly newsletter.
By necessity, we’re all alchemists — our lives are a series of transmutation. Food into body (you are what you eat), potential energy into action, paper mache and all kinds of arts and crafts.
A large part of life — working — is the act of converting time into money or value. It’s so interesting!! Time is intangible and you’re literally able to convert it to a tangible item out of thin air. Amazing.
You’re a bigger version of yourself from childhood and really, that’s it. But somehow, you have numbers in a bank account or money under a mattress or a gif of a free throw (NFT), how did you get that?? What did you trade to get that??
As you wisen up to How Life Works, you’ll think about how to continue accumulating Jordan Free Throw GIFs without spending your Time. In order to do this, it’s important to re-conceptualize Value.
Do you believe that investing only occurs in the stock market? Is reading this article an investment of Your Time? What does it cost to read this article?
WHAT IS VALUE?
There’s four things worth understanding about value.
- Value is the assignment of worth. At Duane Reade, a tube of chapstick can be yours in exchange for $3 US Dollars. There are real costs associated with the manufacturing of a tube of chapstick, but to you and I, $3.00 is the value we’re willing to invest in the finished product.
- Value and worth can be subjective, or objective, or both. People who wear contact lenses value saltwater higher than those who do not wear contact lenses. Yet, we all tend to agree on the value of an umbrella.
- Value varies and fluctuates. Normalized for space, NYC rent costs more than Blacksburg, VA rent (location). An umbrella is more valuable when it is raining than when it is sunny (circumstance).
- There is real-value and potential-value, but potential-value is better understood as time-value.
In an economy, humans possess potential-value and things like oil, gas, cattle, Hydrogen, gold, and cotton all possess real-value; collectively we refer to them as commodities.
A commodity is a raw material used to make something, like cattle -> hamburgers and oil -> heat. The things you use to convert raw materials into useful functions and hold value are called assets. Your home (lumber -> shelter), car (steel -> transportation), and coffee machine (coffee (raw) -> coffee (processed)) are all assets. Both assets and commodities are stores of value; you can convert value stored in Your Time (potential-value) to USD (real-subjective-value) to a hamburger, a house, or cotton (real-objective-value).
All of us potential-value-ers convert our potential-value into real-value by completing work. When you complete work for someone else (like doing someone’s tax returns or making them coffee) or source work on your own to create a product (like farming), you’ll often exchange it for currency value-stores. As a store of value, currency benefits from being relatively stable ($1 today can buy the same amount of goods tomorrow) and portable (I can take currency around the world to convert to other value stores). However, it can change over time and with significant value-impacting events, such as inflation. Inflation occurs when currency loses some of its value to be converted into useful things such as food and energy.
To demonstrate, I can go to work and convert 30 minutes of my time into $1 USD and walk into a McDonalds and convert $1 USD to a hamburger, but if there is an outbreak of mad cow disease overnight, then tomorrow I may have to forfeit $2 USD to convert USD into the same amount of hamburger. In short, I must exchange more of my currency value-store to receive the same amount of hamburger value-store.
In this example, anyone who has been storing value in the form of USD currency (money in a savings account), has lost value overnight; whereas a rancher’s cattle value-store will increase in value.
As a commodity, cows have real objective value as sources of food for humans. But you don’t have to buy a cow to place some of your value in a cattle value-store. In an open market, you can buy ownership in the form of contracts that ancitipate the future value of commodities, such as cows or oranges, or precious metals like aluminum, or lumber or oil. A soybean futures contract is a value-store, just like currency or hamburgers.
In the example above, inflation is a localized event but it is actually an economic event that impacts many commodities at once, and it’s actually happening most of the time, but at a rate that is largely unnoticable in your day to day. When the rate increases to a noticeable amount, say, greater than 2% (overnight, the cost of hamburger, gas, lumber, groceries all rises by greater than 2% each), then all of us could be considered > 2% poorer as we can no longer convert our USD value stores nor cattle value stores into as many of the assets created from commodities, such as computers, clothes, and cars.
While inflation can be understood as reducing the conversion rate of currency to goods, deflation is the opposite — you can receive a higher value of goods for lower amounts of currency. In the several decades, technology has been a primary pillar of deflation. If 10% of the cost of a product is attributable to human labor, but the company replaces the human with a machine costing 5% of the product and they pass that savings to the consumer, then you receive 5% more value for the same amount of currency.
HOW DO I ACCUMULATE VALUE?
To increase our real value stores over time (AKA accumulate value), we can:
- consistently convert potential value into real value through work, and/or
- convert/exchange low-value value stores for ever-increasing high-value value stores (through investing in the stock market).
The best strategy is often a combination of working and converting; but while anyone will teach you how to work, few will teach you how to convert low-value value stores to high-value value stores.
There are a few reasons for this.
- Someone has to be doing the work and those who have figured out how not to, probably prefer to continue not doing so,
- It generally requires already possessing a high amount of real value, of which not many people do (maybe? Could you or I buy a Basquiat painting?),
- The methods of exchange are generally unpredictable and to attempt this, you must risk losing value, of which few people are willing to do,
- Finally, akin to gambling, the methods of exchange can be complicated and are cumbersome or time-consuming to navigate.
In fact, the methods of exchange can be so bewildersome that many are already involved in several strategies, unbeknownst to them. For example:
- Homes and land generally have a positive time-value. They become more valuable over time. Your home is a value-store that appreciates in value, more so then a currency value-store such as US Dollars in Venmo. Homeowners have convert their Time into USD into Home.
- Banks will pay you to let them hold your currency value-stores in the form of an annual percentage yield (APY, aka interest rate). If a bank offers 1% APY on $5,000 USD in a savings account, after twelve months they’ll pay you $50.
- Stocks, bonds, and other quasi-loan mechanisms will pay you to reduce the risk associated with loaning money — that you may never see it again. It’s the same concept as interest but is called a dividend and can fluctuate wildly from month to month. Furthermore, as more people decide that loaning money to Microsoft through the stock market is a good idea, the value of your existing holdings will increase and you’re paid a dividend — win/win.
Finally, we sometimes put value in value-stores known to decrease in value. Cars, clothes, and furniture are all value-stores that reliably lose value over time, also known as depreciation.
All humans possess potential value in an intangible asset we call Time. Through work, we convert it to real-value in the form of currency. Once we possess currency, which is a value-store, we spend our lives converting it to other value-stores such as hamburgers, cars, stocks, and coffee machines. The value of these value-stores will appreciate or depreciate over time and it is in our best interest to maximize value placement into stores that appreciate.
HOW DO I ALLOCATE MY VALUE-STORES IN SUCH A WAY AS TO MAXIMIZE THE ODDS OF APPRECIATION?
Not so fast!! There’s two more concepts you need to be familiar with — liquidity and net-worth. Your net worth is how much value you possess across all of your assets; such as USD in a bank account, investments, and your car. Liquidity is how easily you can convert that value into a currency value store, such as USD, on a spectrum of easy to impossible.
Using the assets above, your USD are highly liquid (easy to convert to currency) because you can walk over to the bank and make a withdrawl at anytime, whereas your car is not very liquid (difficult to convert to currency). You need to find someone to buy your car and conduct a value transfer from them. Investments can be highly liquid or not depending on the investment. Five shares of Microsoft can be sold pretty quickly on the open market but if you invested $1,000 in a CD (certificate of deposit), you cannot take that money out until the end of the period defined on the certificate, in which case, it is not liquid at all because you can’t convert it back to a currency value-store whenever you want or need. So while your net worth may be $10,000, only a portion of that may be liquid, say, $7,500.
Some appreciable value stores are accessible (savings accounts) while others are not accessible (Basquiat paintings).
The value stores outlined above represent different ways of allocating value. A general recommendation is to diversify your allocations, similar to the adage dis-recommending to place all of your eggs in one basket. It is through diversification that you achieve acceptable balance between risk of losing all your value (Microsoft can go bankrupt tomorrow, your car may crash tomorrow, your bank may go under tomorrow) and likelihood of increasing value (bank accounts are insured by the government up to $250k and pay interest, car insurance will replace your car’s value in a new car, Microsoft will pay you a dividend to put value in their value-store).
We generally refer to allocation in terms of percentages because rarely do three, four, five+ people in a group all possess the same amount of value to their name. So if I said to put 10% of your value in savings, each person’s absolute value will be different.
From that starting point, let’s look at a few ways to begin reducing the rate of time to currency value accumulation.
- Open a high-interest Savings account. Interest rates vary over time and as of this writing, are at very low. However, they are the safest and should be an anchor in your allocation strategy. I use One Finance which offers 1% APY up to $5,000 and 3% on 10% of money wired in via direct deposit.
- Open a robo-investment account, such as a with Betterment. In 1993, you had to call a human at Charles Schwab to receive value-store recommendations and transact some shares of Dow Chemicals. Luckily, that’s all been automated with machines. Betterment is an investment account, but it doesn’t require you to know anything about investing. It will automatically diversify the money you put into the account across different kinds of equities(stock in a company) and bonds (essentially a savings account with a locked-in interest rate but with slightly higher risk). You can lose everything in your Betterment account if all the world’s governments and stock markets go bankrupt, but generally, the stock-market-value-store increases at a rate of 6% each year.
- Invest in yourself through education and certifications. This will increase the base-level of potential to real value conversion; which is especially great if you have high amount of potential value in time in work-hours (you’re younger!). If your annual salary is $50,000, but through a certification costing $500 and 100 hours of your time, your salary can grow 20% to $60,000.
The remaining options are riskier and/or require an investment in learning how to use them.
- Open a retirement account. This is largely a ‘set it and forget it’ approach. It is not liquid as you cannot take money out without a severe penalty and should be considered money available after retirement.
- Open an e-Trade or self-directed investment account. This is different from a robo-advisor in that you have to decide what equities or bonds to purchase. If, through yourresearch, you anticipate a semiconductor shortage as a result of various factors relating to COVID-19 and Suez Canal mishaps, then you may wish to directly invest in raw materials that will be required to ramp up production of semiconductors — such as precious metals.
- Open a self-direct trading account like Robinhood. This is a high-touch, high-time-investment, high-risk, high-up-front-currency-value-store invesment. If you wish to purchase individual company stocks, such as Microsoft, or speculative value-stores such as Bitcoin, this is a good method that will not incur fees for trading ownership in these equities.
- Buy land or open an account with Fundrise. Fundrise invests in realty and new construction. It is low-yield, on the order of 2%, but also low-risk. Despite safety and higher yields than savings, it is not preferably due to liquidity. Money invested here is expected to stay here for 2 to 3 to 5 years. While you can take money out, there is a fee.
- Buy art or open an account with Masterworks. While I do not recommend this, it is the same as Fundrise above but uses the pool of money to buy art, such as Basquiat paintings. When that art is sold 10, 20, or however many years later, a distribution will be paid to you along the lines of your percentage of ownership in the painting, minus fees.
- Exchange your depreciating currency value-store for an appreciating currency value-store. Foreign Exchange, or forex, allows you to capitalize on changes in global power dynamics. Converting USD to another currency, such as a Euro may yield more return on your investment than keeping it as USD. You can monitor exchange rates on the internet and simply buy Euros and then hold them hoping the exchange rate improves. If Euros increase in value, then you can exchange them back for more USD.
Amongst these options, it is generally advisable to maintain a percentage in savings (a highly liquid format should you need it immediately) that can be used for emergency purposes. This should cover your expenses to survive for as many months as it takes to be without a consistent income.
The remaining amount of your net worth should be distributed amongst other options above. Generally holding onto cash as a value-store will not appreciate in value — the hamburger you can buy today is the same hamburger you can buy tomorrow, whereas when your value is invested elsewhere, you may be able to purchase 2 hamburgers without having to do anything.
WHAT ARE SOME OF THE FACTORS THAT REDUCE VALUE IN VALUE STORES (AKA THE RETURNS ON MY INVESTMENTS)?
When you place value in some value-stores such as equities (stocks! Stock is ownership in a company. Yes, that means you own .0000000000001 of Microsoft the company, when you buy 1 share) or savings accounts, an increase in value is considered income or capital gains (from the sale of assets like stocks). As you know, governments require you to forfeit a percentage of value through their tax programs such as income tax and sales-tax,whereby you pay a percentage of your salary and an item’s cost (7% of a $10,000 vehicle is $700 sales tax) respectively. The government defines ranges of income, called brackets, and assigns a percentage to anything that falls within that bracket. Theoretically, Jeff Bezos will pay a higher percentage (33%) then a professor at a university (18%) of their annual income to the government.
When your capital — value stored in currency value-stores such as USD — invested in equities (stocks!) has gained as a result of buying Microsoft at $200 for a share and then selling that share for $250 6 months later, this income ($50) will be taxed at the same rate as your income bracket. but is called a capital gains tax. If you held a stock for less than 1 year, you pay short-term capital gains tax which is higher than the long-term capital gains tax than if you held a stock for more than 1 year, in which case you pay long-term capital gains tax. At the end of the year, your broker (similar to a real estate broker who shows you an apartment and acts on your behalf to negotiate the amount of rent with the owner of the apartment), will send you a form that includes your taxable income through their platform.
Ideally, after taxes and fees, your investments still grow at a rate exceeding the rate of inflation.
If, over time, hamburgers become more expensive by 50 cents each year, but your investments are bringing in 40 cents each year, then your value is not rising at a pace fast enough to keep up with commodity and asset costs in the economy (the US Economy is a huge flea market where, today, oil is sold over at tent #15 for $30 per barrel and you can get wheat at table #2 for $2 a bushel and handbags are around the corner but, tomorrow, the cost of oil is $30.10 and wheat is $2.05).
In recent history, the government has preferred to keep inflation below 2% each year. That means the returns on your various value-stores should be greater than 2%. If you take your savings account (1%) and Betterment account (6%) and perform a cost-weighted analysis (($5000 * .01) + ($2,000 * .06) + 7000 / 7000 = x) you should easily be able to buy those hamburgers for the forseeable future.
WHAT IS THE SOURCE OF VALUE? IS IT TIME? IS IT DESIRE?
The source of value is time but the accumulation of it is driven by necessity, then desire. We can accumulate value through many pathways (inheritance, investment, bank-robbery, lottery) but work will always be your safety net. Investing in yourself — your skills, knowledge, personality, looks — will probably be the highest yielding value-store over time.