Money is power, as anyone who has watched The Godfather or read an expose of the shadowy interaction between oligarchs and the establishment knows. But I think of money as stored energy.
You work, beg, borrow, steal, or otherwise obtain money.
You put it aside – store it.
Later you discharge the power and make something happen.
A plane moves, with you on it. Food appears on a plate, a partner smiles at a gift, an Amazon delivery arrives. Your run the tap and hot water comes out.
I’ve thought about money so long this way I assumed everybody did. But then I had a conversation with a friend who evidently didn’t.
“Of course you must be right – I’ve just never seen it that way,” he genuinely said in unfashionable agreement.
We kicked the analogy around for a while.
Voila – a blog post!
The electrifying power of a pension
My friend always saw money more like a slightly advanced barter system.
He works and he gets things or experiences. Money is like a handshake between these things happening.
Given roughly half of people live paycheck to paycheck, he’s not alone.
My friend is not good with money, but he’s not terrible. He won’t be gunning for The Accumulator’s mantle anytime soon, but he’s not in debt, for instance. And he pays into a pension.
Actually, I noticed the words he used: “I pay the pension every month.”
Intellectually he knows he’s putting cash aside for the future. But through his money lens, his pension is another monthly bill to be paid.
I see a pension as surplus energy stored for the future. A long-term battery backup, or perhaps given the timescales involved something akin to the US strategic petroleum reserves. Power to be discharged when my everyday supply has dwindled or been switched off.
Money is stored energy: a grid
We can flesh this analogy out. Look at our personal finances like an energy grid.
I can see the blog now: The Money Power Grid – Light up your finances.
(Apologies if it exists. I dare not Google when I’m on a roll!)
Here’s a first schematic of my money energy grid.
Immediate power generation
You work and get paid for it. An energy transfer takes place from the buyer of your car to your bank account. In these and various other ways you fire-up energy on-demand, like an oil-fueled power plant can send electricity flowing into the grid. Stop burning fuel though, and the power goes out.
Trickle generation
Other revenue streams can top-up your energy supply in the background. Like the power generated by domestic solar panels, the money that comes in from small passive streams or a buy-to-let property won’t be enough to live on, but it all adds up. Especially if we can put it away for future use.
Short-term energy storage
In a world without bank accounts, everyone would have to spend most or all their money right away. But so long as inflation isn’t rapidly diminishing the power of our money, we can allow it to accumulate in the equivalent of batteries, to be discharged as needed. This short-term storage should ideally at least maintain our spending power. Impossible in today’s low interest environment, but that’s normally how we’d look to wire the grid.
Long duration energy storage
A drawback of renewable energy systems such as solar, wind, and tidal power is we’re not good at storing the intermittent power they generate. They’re like a freelancer who finds it hard to put money aside for their future taxes. Battery technology is improving, but for now the best longer-term energy storage solutions are quite cumbersome. For example a hydroelectric dam will use an energy surplus to pump water back up to a header lake. That way it has a renewed capacity to provide the juice when required.
Our long-term money energy storage comes with catches, too. You have to lock money into a pension. Shares best protect you against inflation over the long-term, but are volatile short-term. A rental property takes more maintenance than a savings account. Even with cash accounts, you expect to get higher interest rates the longer you lock your money away.
Transmission lines
We need to get our money energy from A to B. From our employer to our bank account. From our current account to our ISA. Unfortunately energy is lost in transmission.
In the real world, jostling electrons over tens of miles of power lines creates wasteful heat. In our money grid we can maintain all our power on the short hop between a current and savings account. But elsewhere we lose energy to fees, fines, and ongoing expenses as we charge our longer-term storage. Taxes can cause a mini brownout. Maybe the drain of the notorious latte factor fits in here, too. A smart financial grid is engineered to reduce these leakages.
Energy spikes
Sometimes our money grids must handle huge inflows of energy. It’s a good problem to have, but it can be tricky. One physicists’ controlled nuclear explosion is another one’s nuclear power plant, after all. Similarly a sudden windfall – a lottery win, or an inheritance – can bolster the long-term resilience and strength of our money grid if we’re ready to capture and store the energy. But the fact so many lottery winners wind up back where they started shows many people’s grids aren’t really fit for that purpose.
Fuel tankers, coal lorries, and power sharing agreements
I’m reaching for an equivalent to debt. Perhaps it’s in the sunk cost of the raw materials of power generation? Fossil fuels we ship in for energy here and now, regardless of the long-term consequences? That’s not quite right. A better analogy might be when one grid sends surplus energy to an adjacent grid that’s not generating enough power to keep the lights on. The inflow solves things for now, but all that energy will have to be repaid…
Electric shocks
Don’t stick a screwdriver in a socket. Don’t day trade Gamestop shares.
Feel the energy
I’ve slightly tortured the money as stored energy metaphor, but I do think it’s an interesting framework.
The consulting work I’ll do this afternoon sounds to me now like the roar of a gas-fired plant powering up. Meanwhile the adverts on this website and the shares in my ISA will be ticking away, sending pulses of energy into my grid.
Overloaded from a recent asset sale, my current account looks ready to blow – I need to get that energy flowing somewhere productive. Like up in Snowdonia, where metaphorically my monthly payment to my SIPP is pumping water thousands of feet high into the mountains, where it will wait until I open the floodgates and the energy comes flowing back out.
We could also have fun turning various laws of energy into financial rules of thumb. (I did this yonks ago with the first law of thermodynamics.)
Here’s one:
E= MC2
Stored energy = Money(Compounded)
Well, it’s a start.
May your finances never blow a fuse!
Finally, we’ve been nominated for a British Bank Award, run in conjunction with Smart People Money.