“First earn a lot of money, get rich, then become a philosopher,” said Indian film actor Shahrukh Khan. Philosophy is all about understanding what you don’t need in life. Why not start from the end, and understand the philosophy of money first to know if you need to invest your life in earning money or not?
Table of Contents
A. Currency
Currency is a measurement unit of the value of goods and services that we need in life.
For example, if one is a farmer and has produced 100 kg of rice, he can not survive based on the 100 kg of rice alone. He would need oil, milk, vegetables, cooking energy, etc to manage his and his family’s life. It is very difficult to maintain a list of how much milk is equivalent to 1 kg of rice, how much petrol is equivalent to 1 kg of rice, and so on. However, if we can determine the value of 1 Kg of rice in terms of a currency, then one can get a currency by selling his goods and services and then can use that currency to buy other goods and services.
The way meter is the unit of measurement of length, and kilogram is a unit of measurement of weight in the metric system, the same way currency is the measurement of the value of physical goods and services.
B. Capital and Cash
The total value of goods that you own and can trade at this moment represented in the quantity of the currency is called capital.
For example, there are different currencies that are used in different countries such as the Dollar($) in the USA, Rupees(₹) in India, and so on.
Let us say that you have a total of 100 1 kg Dawat Basmati rice bags, where each kg value is ₹225, then your net capital is ₹22,500.
However, even though your Capital is ₹22,500, this is a mere representation of the potential value. That value will be realized only when you are able to sell this good.
Cash is the unit quantity in currency in a physical form that represents the materialized value of capital, after selling goods.
Because when you sell your 100 kg rice, you expect to have something that tells everyone that you actually have ₹22,500 materialized value, so that you can offer part of that materialized value to buy other necessities, a form of government bond is necessary. That is the cash. Cash is often printed by the government as currency notes.
Now in India, when you sell 100 bags of 1kg Dawat Basmati rice, you will have 225 such ₹100 notes. Each note is a government bond that promises that you really have the note’s equivalent value.
The important part for you to understand here is that even though you sold a real good of 100 kg Basmati rice, what you get in return is not the actual value, but a promise.
Net Value of your goods in Capital is a potential value, whereas the net value of your goods after selling them, in cash is a promised value.
What is most important for you to understand here is that neither Capital has a real value, nor Cash has a real value, one is potential and the other is a promise.
The question then is where is the real value?
The real value is in the market, where potential value and promised values are exchanged through buy and sell, based on supply and demand.
C. Market
Any place(physical or virtual), where goods and services can be bought or sold(or exchanged against capital), or currencies can be exchanged is called a market.
Consider the market as a place where different shops like clothes shops, grocery shops, and medicines shops are present. When you go to a market, you can sell what you have produced, and purchase your necessities.
Currency Exchange
Life in different countries is different. The cost of living in a place depends upon the availability of essential goods and services. The same Dawat Basmati Rice bag of one Kg is priced at $34 in the USA. Because $ is the currency in which global trade mostly happens, your net capital of 100 Kg Dawat Basmati Rice is $3,400.
“Capital amount of currency” represents the total value of the goods and services you have. Capital enables you to trade and exchange your goods and services for other goods and services through capital exchange.
In the same way currency exchange enables you to convert one currency into another currency and trade globally.
1 US Dollar is equivalent to ₹83 on today’s date. Therefore your net capital in Indian currency is not ₹22,500, but rather 100 x 83 x 34= ₹2,83,494.
It is like, the British measurement of height is in Feet and Inches and the American measurement is in Centimeters. So, someone having a height of 5’6” in Britain would be perceived to be having a height of 167 cm in the USA. However, measurement units remain the same all the time. Any day, any second, for anyone, and for anything, height in feet and inches can be converted to centimeters by multiplying it by 30.48. This will never change.
However, because global supply and demand varies in real-time every day, the currency rates fluctuate. Each of the currencies themselves has a value that goes higher or lower. In that way, if you hold Capital in one currency whose value is increasing, and then decide to convert the capital into your country’s currency at a later time, then your net capital will increase due to an increase in the value of the currency itself.
Market Dynamics in Capital and Currency
For instance, in 1990, the price of one dollar was seventeen Indian Rupees. Therefore, if you had $1000 with you, your net capital in Indian currency would have been ₹17,000. However, if you had held onto the $1000, and sold it today for Indian Rupees, you will get ₹85,000.
Between the years 1990 to 2023, the average return on Indian fixed deposits was 6.5%. So, if you did not hold onto the dollar, but rather converted your $1000 into Indian currency in 1990, and kept your ₹17,000 as a fixed deposit in Indian banks, then with 6.5% annual interest compounded, today your total capital in Indian rupees would be ₹1,05,000. So, even though the price of the dollar has gone higher, the Indian market has given more returns.
It can be seen that from 1990 till now, India’s GDP, which is the total capital value of the gross domestic product has grown on an average of 6.5% and therefore the rate of return has been close to 6.5%. However, China has grown by 10% over the last three decades.
Even though the FD rates in China have been only 1% in the last three decades if you had invested in the Chinese market, your probability of return could be higher, and you might have more than ₹1,05,000 today. However, focus on the words “you could”, that is because unlike India, where both FD, Dollar price, and Growth have followed the same trajectory and path, the Chinese currency Yun hasn’t appreciated against the dollar much, and in the last 30 years, in spite of double-digit growth, $1 has remained to be about ¥7.5.
Therefore, Capital is your total sum of value of goods and services today, subjected to market dynamics, and currency exchange rates.
D. Money
We learned that Capital is the total value of goods and services, which is obviously a large sum. Let us say that you have 100,000 Kg or 100 Quintals of Dawat Basmati rice whose net capital of $34,00,000. You may not want to sell all of it at once, but rather sell one 1 kg bad, and hold on to the rest.
Just because you have a net capital worth of goods, doesn’t mean that you want to sell it immediately and convert your potential value into a promised value of cash. You may sell 50% of the reserve, that is 50 Quintal, and obtain $170,000 cash, and hold onto the remaining $170,000 as potential, waiting for demand to increase in the market so that you can sell it for a better price.
As you can see, not entire capital is materialized as cash all the time. People love to keep a balance between future potential and current promise. Therefore the amount of capital that is not converted into cash currently, remains as a future promise.
Capital is the total value of goods before materializing by selling, and is the total future promised cash value.
Total future promised value is known as an asset which is nothing but potential future cash.
(Capital in Currency)=Cash in Currency+Asst in CurrencyAs future Capital at any given instance of time is more than the current cash, the system requires an instrument to incorporate the current and future values, the values of goods and assets. This instrument is called money.
Risk
When a car manufacturing company manufactures 100 cars, it is not able to sell them before manufacturing right? After manufacturing the cars, the cars go to the showroom(or godown). Therefore every good is produced as an asset first.
Similarly, a crop takes three months for the farmers. The farmers need to first prepare the ground, sow the seeds, irrigate the fields, see the crops growing, cut and process the crop, and take it to the market for selling, and only after the total agricultural production is sold, the farmer will have the cash equivalent.
However, farmers are to spend cash for preparing ground, seeds, fertilizers, irrigations, even before first crop production.
Now, the problem is that when the cars are manufactured, some cars may have manufacturing defects. On the other hand, by the time the cars are manufactured and sent to the showroom, the market may change and demand may drastically fall. There may be no buyers.
This is then a risk for the manufacturing company. That is because the manufacturing company would need to pay cash for the raw materials, manufacturing process, labor, and designers even before the first car is sold.
In the same way, after sowing the seeds, there may be no rainfall, reducing the crop production for the farmer, which presents them with a risk. Also, upon producing the crop, when the farmer takes the agriculture production to the market, there may be less demand and he may get far less cash than expected, which is also a risk.
Therefore, creating an asset is a risk, and unless that risk is taken into the equation, there will be very few motivations for people to take risk to produce assets that would be purchased and sold in the future.
One of the classic examples is housing. Builders are to first acquire land, prepare land, design an architecture for a housing project, take necessary regulatory approval, and get a budget, even before the first home is built. All these processes would require cash.
You may ask “But what about preorders?” Can’t the companies or producers produce only in the quantity of preorder, and produce goods based on advance cash?
There are two aspects of it, not everyone can make decisions about future goods. People buy what they see. Secondly not many are ready to pay cash advance worth of the total value of the good he/she is going to get in the future. Therefore, preorder cash remains a fraction of the total producible asset, and cash materialization of the produced asset always remains less than the total capital.
Money is an instrument that incorporates this risk that is inherent between Capital and Cash.
Therefore, Money=Capital+Cash+RiskAs Capital is the worth of the asset, and producing asset is also a risk, and as cash is a promise, and the promise is also a risk subjected to geopolitical and market changes, money essentially is inversely proportional to the total risk. Which means the more money you have, the less risk you have.
Therefore, Total Money = Total (Less Risk) you have.
The problem is, if you have no risks, that means suppose you have everything from home to food, to water that you need in life, then total money with you is zero. Only when you take more risks, and your money is able to mitigate that risk, only then you have more money.
Money is the total Risk value of Capital, as Capital production is equivalent to the risk.
If someone is flaunting how much money he/she has, know for real, that he/she is flaunting he has more risks.
A risk in simple understanding is the amount of your time, energy, emotions you are utilizing that will not give you things that you need to fulfil your life.
We need emotions, relationships, peace, sleep, spending time with ourselves, learning, creating, pleasure, health, and several other things to have a good life, beyond shelter, food, clothing, energy, and water.
Therefore, the more money you chase or have, the more risks you have of not having the essentials of life, and the less money you have, you also have more risks of not having the essentials of life, as acquiring essentials of life itself is a risk.
Debt
Due to the simple logic that risk has to be taken before getting a reward,(a lion has to take a risk first to hunt a bison, whereas, in the hunting process, it can lose its life, before getting to rip the reward of eating the food), and because the risk is simply the cash you have to spend to make an asset, which you may not get back, that cash needs to be made available to you as debt.
That means someone has to take care of your risk, and lend you the cash, which will facilitate you to create an asset first, and then when you sell the asset, you can return the cash, with additional cash from your profit. Therefore, the entire risk is exchanged as debt.
Therefore, money is a debt bond that represents the total risk taking capability you have.
When you go to the bank and to the investors and seek an investment, they are more often or not more happy to give you the debt. Giving you money simply means passing you more risks.
The more money you have, the more risks and more debt you have.
The more risks you take, the more risks you make!
Therefore, earning money is earning risks, and spending money is reducing risks,
hence not earning, but spending more money gives you the pleasure
E. Value
So far we have been using the term value. So what does value really mean? It has to mean something physical right? Let us quantify value also,(why not when authorities can quantify a measurement unit like currency)!
In a day an average human being needs 2000 Calorie food, 6 liters of drinking water, 20 liters of regular water, 660 liters of Oxygen a day, and 4.5 m2 of area as shelter.
1 m2 Urban residential area in India (Thane, Maharashtra here) is approximately ₹ 243,090. So, the minimum required residential area is about ₹11 lakh. Let us consider an average of 70 years of life. Then daily shelter cost is ₹43 (11 Lakh divided by (365*70)).
Considering an average ₹1,000 for 6 hours of medical Oxygen supply in India, 24 hours of Oxygen is about ₹4,000.
In India, a day’s three meals would cost you around ₹1,000, and water and other energy sources would be around another ₹250.
Therefore the cost of one’s day’s life in India will be about ₹5,500. Which is ₹229 per hour, or ₹3 per minute.
The value of anything is the amount of minutes of life you need to spend to make/buy it.
Importantly, different people will have different productivity of their time, and different products will have different demand-supply dynamics attached to them. Hence, the way, goods are valued in money, that is capital+cash+risk, in the same way, the actual value is the perceived value of something(and not the real value).
For instance, 1 Carat Diamond’s price is about $2000. Diamond is a useless good when it comes to the needs of life. But a diamond’s value is worth 724 hours of your life, or 30 days of your life. Because money is the representation of the value of a good or service, which the end is the total investment from your end in terms of days of life, the value of anything is not money, but days in your life.
Hence the value of a Mercedes Benz is not really ₹70 lakh, but 1272 days of your life. You can drive a Mercedes or live an extra 3.5 years of life. The choice is yours because the value is your life!
Because Unit Value is the 1 minute of your life, and because the more you are spending requires you to earn more value, the more you are spending is a spending of your life. Therefore
the more money you earn, the less life you have.
G. Conclusion
Are you sad that your neighbor has more money than you? You are feeling bad that someone you know can spend more as they have bigger cars and bigger homes than you? Do you want to earn more money than them?
You are worried that your colleague has more salary than you, and you badly want the salary hike?
Do you want to be rich?
Now that you know that:
One who is richer has more money, one with more money has more risks, and one who has more money and risks has more debt, and the more debt one has, the more enslaved one is to return profit, but making more profit means taking more risks, and reducing risk only happens by spending more money, then isn’t it quite obvious that you can simply be rich if you focus on spending less money, which will need you to take lesser risks, and because Money∝1/Risk, the least risk you have, the more rich you are!
Biological life is all about surviving, thriving, and reproducing. All three reduce as risk to life increases. If one wants to flaunt how little one’s reproduction ability is, how little one is alive, and how little one is growing in life by flaunting money, let them.
You can simply enjoy your life by being really rich, with less spending and fewer risks.
People say that first earn a lot of money to know that money doesn’t make you happy. It is like spending more time with snakes to know how poisonous they are. Logically, you don’t have to jump off the cliff of the mountain to know that it will break your bones. Same way, when you know the mathematics that Money ∝1/Risk, whereas cash∝Risk, and that entire cash today is simply money, debt, or Risk,
All you need to do to become rich is reduce your needs and wants.
Rich is one who can spend more, capital is the potential future cash, which is the value of an asset.
Some self-proclaimed experts would also tell you that if you earn in dollars and spend in rupees, then you will become rich. Now you know how to interpret such statements. If the dollar is eighty times more than the rupee, you know earning $1 is earning what extra amount of risk over earning ₹1.
Cash makes you rich, Capital Asset makes you wealthy if the asset price is appreciated. So focus on spending less to create more appreciating assets by taking fewer risks. Be smart and wealthy, not rich and silly.
