Money

What is the purpose of money?

what is the purpose of money

Maybe you made a New Year’s resolution where you want to start saving money for the person. But by next year, you haven’t saved a penny. Or are you frustrated by your own shopping habits?

We think we all are rational who make informed and amazing decisions about everything in our lives. But when it comes to money, this isn’t true. Many learn as kids what it means to become financially socialized by getting info about what money means and how to use it. By the time we grow up, money is layered with our own complex associations and emotions.

Money is linked to comfort, freedom, and security. It can make us feel excited or filled with shame. No wonder we can’t make rational decisions because money pushes all our buttons.

Explore your own irrational thinking about money and how to become empowered to make better decisions about how and on what you spent money.

What is the purpose of money?

burning money

Imagine you see a million dollars go up in flames, and the pile of dollar notes burns away. How would you feel? Probably a mix of horror and anger, right?

It is what a British art duo, the K Foundation, did in 1994; they lit one million pounds on fire. The motivation behind the action was to perform a conceptual art piece.

You probably think, why could someone burn down such a large sum of money that could have been used to buy food for the hungry and houses for the homeless. Why could they be so selfish?

A member of the art duo, Bill Drummond, stated that they hadn’t actually destroyed anything real. They only burned a big pile of paper, not apples and bread.

In a way, Drummond was right paper money itself is valueless, at least if you would live on a deserted island where there is nothing to buy. But we don’t live on such an island, so in reality, the million pounds can be exchanged for a large range of things. For example, you could buy a truckload of apples or even create a huge apple planet that could feed a group of people for generations to come

If the K Foundation “only” destroyed a yacht or diamond ring valued at a million pounds, they would have received less of a backlash. But instead, they destroyed something that was a black check for many people’s dreams and aspirations. So it is understandable that they had to face a huge amount of controversy.

The backlash the art duo received has a simple truth almost everybody connects money with meaning. You imagine what you could with it and how it could make your lives easier, happier, and more powerful. We envy others who have more of it, and we grieve about the times we lost it.

Money affects our lives so much that many want to enter a currency-free utopia. Imagine a world where you never have to worry about mortgages or how to buy food.

But maybe money itself isn’t the problem rather, how we allow it to affect our choices and psychological states.

What children know about money

We start to learn about money at a very young age as we see the behavior and responses of our parents.

Studies show that children have fixed ideas about how money affects social status. In one study, children 5 years and older were shown two photographs and asked to imagine what they feel about people that may live in the home. One photo was a round-down shabby house and the other a well-maintained polished home.

Middle-class children were quick to judge the inhabitants of the round-down house were lazy and mean. They already absorbed the message of what it means to have or to don’t have money.

Such studies show that young children get knowledge about money and its importance by observing the adults.

To give them a good basis on how to deal with money. People need to be more open and honest with children. Often many kids reach adulthood with no idea what their parents earn or have saved. But it can give them an idea of the household finances and how money works.

So when parents share the household finances while children and how taxing works, it can help them learn how money works in the real world. Even more important is what we say is what we do. Children adjust to the behaviors of their parents. If we go on a shopping spree or are anxious about the money, they will soak it up. The best way to give financial competence to children is to get our own affairs in order.

How people see money

Do you remember when you first became in touch with money? Perhaps it was your grandparent that gave your a bill for your birthday. Or you started to count the change you find in your piggy bank.

Young children value money as an object in itself. It is shiny, has a satisfying weight, and is decorated with heads and buildings. Paper notes chinkle, have exotic colors, and can be put in the wallet.

When we grow up, this fascination with money as an object remains. While we might think we mastered the ideas about saving and credit, we are still attached to actual bills and coins.

Money object has still great symbolic importance. It is partly the reason why people got upset when the K Foundation burned the stack of bills. In countries like the United States and Australia, it’s even illegal to destroy money.

euro

People often see money as a symbol of both nationalism and economic clout. It explains why many European countries weren’t happy with the introduction of the Euro in 2002. Suddenly the notes and coins that the citizens were familiar with were replaced by a completely unfamiliar currency. But people wanted to continue using the money that their parents and grandparents used.

This currency change introduced practical problems. The switch of money made it feel less real like Monopoly money. So people underestimate what things really cost. In Italy, for example, with the introduction of the Euro, the population often assumed things had become cheaper. It was because the euro prices were in single-digits, not like the Italian Lira that was measured in thousands.

Banknotes and coins are captivating and political symbols. But what happens if we move to credit and virtual money systems? How does it affect our thinking about money?

Being too optimistic about saving money

Since the day we got our piggy banks as kids, most of us knew the importance of saving money. As we grow older, those messages warned us about what will happen to us if we don’t start saving for retirement today. But if this is the case, why do so many struggle with saving money despite having good intentions.

The rise of credit cards catastrophically limits our ability to save. People value credit and cash differently. Theoretically, the money we spend is exactly the same as when we buy on credit; it feels less real.

Not only the concept of cash and credit is irrational we also have ideas about future spending, which often don’t become a reality.

For instance, we often imagine that we start earning more money in the future. Therefore we are able to save more money. This irrational optimism means we are constantly putting off saving until a hypothetical tomorrow when we can earn big and have enough financing discipline.

But the truth is that this behavior is very hard to change. The best indication you have is how you handle money in the future is how you are dealing with it right now.

However, it doesn’t mean you should give up and stop trying to save money altogether. When we are real about our behavior, it gives us the opportunity to find practical strategies that actually can work. For example, save money in an account that penalizes you for withdrawing it too early. Or commit to saving a percentage of your income even when your pay rises.

In the long term, you will end up greatly increasing your savings.

Why we spend money differently

glass of wine

Imagine you are in the supermarket looking for supplies. A bottle of wine catches your eye, and then you see the price tag; it cost 20 dollars it feels way too expensive. A week later, you are on holiday about to order a glass of the same wine for 10 dollars. But you barely notice that price; in fact, you might even want a refill.

Most of us make similar inconsistent decisions about how to spend money. The concept of monetary exchange means that a dollar is worth the same amount in all circumstances. But it doesn’t take into account the inner working of human psychology.

All of us have so-called “mental accounts” in our heads where we divide up our money into different categories. Often people have an “everyday expenses” account one for groceries, a travel account, and so on. Mental accounting explains why the same person that wants to save pennies in the supermarket spends a small fortune on a glass of wine.

So one purchase comes out of the groceries account while the other is taken from the travel account. The latter has a much looser string when it comes to spending money.

In addition to mental accounting, we are also drawn to relative thinking. It involves giving a different value to money in relation to the total amount we are about to spend.

Imagine you are on holiday and want to rent a bike. You either rent one for 25 dollars nearby located rental place or go to a 15-minute walk to find one for 10 dollars. Most would go for the latter, saves you money that you can spend on a good lunch.

So if you imagine, you had the same option to buy a car that is 15 dollars cheaper, but the total price is much higher. It is not surprising that most wouldn’t care to get a discount from another car dealer. After all, what is 15dollars when you are already spending so much? In relative terms, not much at all.

From this example, you can also see the work of mental accounting. So car purchase comes out of a much larger account than the rent of the bike. With 15 dollars, you could still buy a delicious meal, but relative thinking means it is suddenly not worth the effort.

Expensive doesn’t always mean high quality

Rudy Kurniawan made a fortune by selling rare vintage wines to rich millionaires and influential people. He was selling cheap red wine with fancy looking labels. It was surprising how long he gets away with it. Even wine connoisseurs were completely fooled by his bluff despite their refined taste buds.

The reason that it worked is that humans have powerful confirmation biases. It means we see, hear or taste whatever we expect or encounter. So when Kurniawan sommeliers were told to taste an exquisite 50-year-old pinot noir worth thousands of dollars, their taste buds were primed to taste something delicious, and sure they did.

Even so, they were actually drinking cheap supermarket wine. But the idea that it was pricey made their actual experience of drinking more pleasurable. This shows how powerful confirmation bias is.

It even affects something fundamental like pain relief. Studies found that expensive band-name painkillers are rated much more effective than their generic counterparts. But even if the composition of the pills is exactly the same, the expense combined with the brand reputations made people believe that the drug is more effective. Thanks to this belief, it`s more effective.

Confirmation bias doesn’t necessarily mean you need to go out and buy the cheapest brand. If a painkiller works then, it works whether it’s caused by ingredients or by your beliefs. But it is important to have a healthy awareness of confirmation bias, and it may help you make better decisions. And if not, it will help you stay clear of wine fraudsters.

Does more money mean more motivation?

Common wisdom says that money can motivate people just about to do anything. After all, we get up and go you work every day. But if there was no pay involved, would you still work? Probably not.

More money doesn’t always make people work harder. In fact, for repetitive manual jobs like berry picking, it can be better to pay people by the basket rather than by an hour. Workers are often more motivated and work harder and faster when their productivity is directly linked to their paycheck.

Still, high salaries can also be counterproductive for highly trained professionals like doctors or bankers. Often the people who choose to work in these fields have an intrinsic motivation to what they do. Many find their work is meaningful, rewarding, and intellectually stimulating. Others simply love to work in a high stakes environment.

Of course, these people want to get a nice paycheck at the end of the month. But money isn’t the only aspect that motivates their efforts. In fact, trying to make them work harder by giving them a raise can backfire the reason is it replaces their natural inner motivation with an external one.

They become comfortable with being validated and reward with money. It may make them actually stop work voluntarily activities that they had done before.

However, there is an exception to the rule when it comes to bonuses when you get them as a surprise. Receiving money we aren’t excepting in appreciation of a task done well can increase our motivation. But when such bonuses become a norm, they won’t make us work harder in the future. We just see them as part of our regular compensation and become upset if we don’t receive them anymore.

Work performance isn’t the only area where money has been a potential motivator. It also gets thrown at some of the largest social problems and even test scores in schools.

Sometimes money can make all the difference in a student’s performance. For example, in Bogota, Colombia, high school students were offered a cash bonus equivalent to $300 if they graduated high school. It increased the graduation levels from 22 to 72 percent in a matter of years.

Why? Well, 300 dollars is not a small sum in Colombia. It is, in fact, enough to pay for a full college degree. So such a substantial reward becomes a powerful motivator. It also made it possible for low-income students to complete high school instead of dropping out and find work.

But people aren’t only motivated by a large sum of money. In some situations, a small monetary bonus can be a helpful incentive. For instance, in an experiment, researchers regularly gave only 2 dollars to reward cigarette or drug users for staying clean.

It had a proven effect the small reward provided more than only getting cash. It gave them symbolic encouragement and external validations that the person who is quitting is doing well.

Does money make you happier?

sad lottery

Who hasn’t fantasized about winning a life-performing lottery win? Take the example of William “Bud” Post III, who won 16 million dollars through the 1998 lottery. He seemed to be living everybody’s wildest dreams, but unfortunately, the win turned out to be a curse.

Within five years, he had declared bankruptcy, had a jail sentence, and had been married and divorced six times. Clearly, the money didn’t make Post’s life better. The example is extreme, but studies have shown that lottery winners who get a fortune don’t automatically translate into a better and happier life.

Lottery winners get used to their new lifestyle very quickly. It a process called hedonic adaption. For most people, if they would stay in a luxury hotel for the first time, the chances are high the experience would be thrilling when they experience it for the first time. But if you stay in luxury hotels every weekend, you probably view the experience as normal very quickly.

To live to the fullest, you need more than nice things and experiences. It is even more important that you notice and appreciate them. It is called the “psychology of savoring.” While money might buy you access to the hotel, it can also get in the way of being able to enjoy the experience.

This doesn’t mean money is irrelevant to your happiness. Anyone that has been anxious about how to pay rent knows this. Being continually worried about money causes your brain to produce high quantities of the stress hormone cortisol. It affects your decision-making ability, your happiness, and your physical health.

Social stigma can make things even worse. For instance, homeless people are often viewed by many people with distaste or even disgust. And the people who struggle financially often get blamed for their own misfortune and accused that they made stupid decisions like taking out a loan with very high-interest rates.

For people in similar situations giving money can really help. A Kenyan experiment showed giving 1500 dollar cash to people living in extreme poverty lowers their stress level and improves their quality of life.

While a sudden change of financial fortune can make you happier. But after your basic needs are met that happiness can change quite quickly

Money is stressful and anxious, meaning it is almost impossible to act rationally around it. You will often overestimate how much you have and will be too optimistic about how much you will save. You may have a confirmation bias and relaxed attitude to credit.

But to change your behaviors and make better decisions about how you spend money, you need to start becoming familiar with your irrational thinking. It means knowing how to spend and save your money and where to invest your earnings to grow your money.

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