The life we live is the sum of the decisions we make. The results you have today is a direct consequence of the collective decisions you have made. Yes, there are many things we have no control over in our lives. However, we always have control over the decision to respond and how to. These decisions make us either successful or otherwise. There is no general thumb of rule for what constitutes success. It can be a lot of things for a lot of people. However, this series “the money formula” is for those who have decided to build personal wealth.
Most people want to be rich, in fact, almost everyone. What does it take to be rich? We hardly ever ask. Like every game, you need to understand the rules to play. But to win, you need more than just understand the rules, you have to master them. This piece is meant to use a highly simplistic economy to illustrate the world of money. The aim is to help you understand the rules, master them and be guided to make correct decisions for your next steps towards wealth.
The premise: In this hypothetical economy, to make money, you have to push a wheelbarrow for a certain number of hours.
I am going to apply this premise to distinguish the various players in the real-life economy. Who are they and how do they interact with each other. This should help you in making the big decision concerning your own wealth formula. I will encourage you to pay keen attention from this point on with the premise in mind. The players are; the salaried worker, the businessman, the entrepreneur, the bank and the government.
In this episode, I will introduce each of the players in the economy. The detailed interrelationships will come in the other episodes. I want to present it in small chunks for purposes of thorough understanding.
The salaried worker
They push the wheelbarrow daily to make money. Their wealth formula is simple. To make more money, they have to push the wheelbarrow for an increased number of hours. If you are earning GH₵10/hour and you were previously pushing for 8hrs/day to increase your income by 50% you will have to push for 12hrs/day.
As your financial needs grow, you will find yourself working longer and longer. But there is a fundamental problem here. You have limited time in a day which means your income level is also limited.
After reaching GH₵180/day, which means working for 16 hours straight you cant reasonably work any longer. This means that you have reached the limit of your income growth. Any further increase in your needs puts stress on your finances.
In exchange for this limitation, you have a certain level of income security and freedom from work. Once you are not pushing the barrow, you don’t necessarily have to think about work till when you start again.
The businessman buys multiple wheelbarrows and convinces the salaried worker to push the wheelbarrow for him. He pays the salaried worker for every hour of work based on the value created. If the real value for an hour pushed is GH₵50, the businessman pays the worker GH₵10 which is 20% of the actual value created and he keeps the rest.
Although he may not have to push a barrow himself, the businessman bears the risk involved with his business. If a wheelbarrow spoils, he has to repair it. He may also bear some responsibility for accidents and the health insurance of his workers. He does not enjoy many work-free hours as he has to continuously tender to the needs of his business to ensure smooth operation. If the business runs into debt, he has to face it and so on and so forth.
In exchange for this, when he wants to increase his income he can add more wheelbarrows. He can buy the time of the salaried worker for himself. If he has 10 workers working for 10 hours each per day, it means he has 100 hours a day excluding his own time. If a worker earns GH₵100/day he will earn GH₵400/day on the worker. If he has 10 barrows working for him at the same rate he is earning GH₵ 4000 that day.
He can also hire or fire the salaried workers at will depending on his business needs and requirements. His decisions can literally determine the income security of the salaried worker.
These are the game-changers. They are those who make the wheelbarrows. The entrepreneur watches the salaried workers as they go about their work to see their challenges and then gets to work trying to solve the challenges at a fee.
He can make smoother barrows, gloves for the workers, machine operated barrows and so on and so forth. He can also look at the businessman as he struggles to manage his workers and business and design tools for him to use at a recurring fee. The entrepreneur is literally responsible for changing the rules of the game. When he produces new smoother barrows and you stick to the old ones, your salaried workers will leave you for your competition and your business collapses.
The entrepreneur in most parts also runs a business hence he faces almost the same kind of risks as the businessman. Only in his case, most of the solutions he tries to provide may be resisted by the market. He may spend time and money building a tool that the workers and the businessmen will reject. The risk here is higher for the entrepreneur.
On the opposing side, he makes his money from both the salaried workers and the businessmen and his chances of scaling are much higher. He is not so limited by geographical location as he can employ many businessmen as middlemen for distributing his new tools. It is difficult to put a cap on how much money the entrepreneur will be making in this economy. If he spends GH₵500 in producing one barrow, he can sell it for GH₵ 1000. The businessmen buy his barrow and whether it makes money for the businessman or not, he has made his fortune.
Here comes the group of white liars. They are here to provide security for your money. All the players keep their money with the bank. The promise is that they keep your money safe for you till when you need it.
The bank does not push the wheelbarrow, it doesn’t buy the wheelbarrows for workers neither does it make them. In reality, it care less about the wheelbarrow at all.
If that is the case, how do they make money? The bank will take your money (usually the salaried worker’s money). They will create an account for you and allow you to make a deposit. Anytime you check your balance, you are shown a figure.
For example, if you deposit GH₵1,000 in your account. Any time you check you will see this figure. But what you don’t realise is that it is just a number. The bank is not actually in the business of keeping money safe. They are in the business of renting out money.
They rent your money out to mostly the businessman to buy his wheelbarrows to employ more salaried workers and earn more. In return, they pay back the money with some fee called interest. The wise businessman knows that he will make multiples of this rented money before returning it.
The bank collects this fee as its own money and when you come for your money, they can give it to you. But in reality, it is not really your money they are giving back to you but other people’s money. That is why if 50% of account holders go for their money at the same time, the bank cannot pay them. Meanwhile, 100% of account holders can check their account balance at the same time quite easily. The bank feeds on public trust.
However, not many people can play as a bank. Due to its nature, it is a highly restricted area to enter.
The government make rules to control how businessmen do their business. They sometimes restrict the number of hours the salaried man can work in a day and also set the minimum wage for the salaried worker. The government role is to ensure fairness in the economy in order to create an environment where all the players can coexist and interact with each other.
How does the government make money? In exchange for its role, all the players are required to pay part of their income to the government in form of taxes. The government can also play the role of the businessman by buying more wheelbarrows and employing more salaried workers.
It encompasses all the various players in the economy and because of this important role, the government isn’t just anybody. It is everybody in the economy. Everyone has a say(or supposed to) in who and what the government is.
Those are the players
Obviously, the real economy is much more complex than the one in our premise but the principles involved are almost the same and applicable in a real context. There are subgroups and different kinds of players who are often just one form of the above five players or the other. As we delve deeper into each player we will see how they interconnect and work together.
At the end of the day, you should be able to understand how to play the game irrespective of whichever player you are in other to attain your desire level of financial success. The concepts in personal finance such as investing and other options will be introduced along the way. Connect with me on Facebook for a free consultation. And subscribe so you don’t miss the other parts of the series. You can also follow my previous series “Happy to be poor“