Money is a promise, and its value is managed on purpose. Prices are designed to rise a little every year, so money sitting still slowly loses buying power.
Today’s dollars are fiat money. “Fiat” is Latin for “let it be done.” A dollar is worth something because the government says it’s official money and everyone agrees to accept it. Nothing else stands behind it.
Money was gold and silver coins. The metal itself was the value.
Paper bills were an IOU for gold. In theory you could trade them in for the metal.
The last link to gold ended. US and Canadian dollars are backed by trust, laws and the economy, not metal.
In Canada, it’s the Bank of Canada. In the US, it’s the Federal Reserve. These central banks don’t try to stop prices from rising. They aim for a small, steady rise of about 2% a year. Most advanced economies, including Europe, the UK and Japan, use the same 2% target.
Why control it at all? To keep things predictable. If money gained value every year, nobody would spend, because everything would be cheaper if you waited. If money lost value fast, nobody would want to work for it, because their pay would be worth less by the time they spent it. A small, steady 2% keeps people working, spending and planning ahead.
Higher rates make borrowing expensive. Lower rates make it cheap.
Cheap borrowing means more money chasing the same stuff. Expensive borrowing cools things down.
Each year a dollar buys about 2% less. That’s intentional.
Here’s what that does to a $100 bill. Say a slice costs $5 today.
You have $1,000 you won’t need for a long time. Pick where it waits, then see what it can actually buy later.
The target is a goal, not a guarantee. In 2022, inflation topped 8% in both Canada and the US, and central banks raised interest rates fast to bring it back down.
If prices dropped every year, people would wait to buy things, businesses would sell less, and jobs would disappear. A little inflation keeps money moving.
Keep enough cash for things coming up soon and for surprises. Money you won’t need for years should be out working for you, and the rest of these lessons show how. Stocks have grown about 10% a year over the long run. Take away 2 to 3% for inflation and you get the 7% used in lesson 4.
Trade hours for pay. A job, a shift, a gig. This is where almost everyone starts, and it pays for everything else.
Make something once that keeps paying. A book, an app, a song, a patent.
Own things that make more things. A cow makes milk. A share of a company makes profits.
Most people climb these in order: time first, then ideas, then assets. Investing turns money you earned with your time into an asset, and then the asset goes to work.
One hour, one paycheck. There are only so many hours.
Make it once, sell it many times. But it doesn’t make more of itself.
Some ideas become assets: a business you own, a catalog someone would buy. That’s how new cows get made.
The milk buys more cows, and the new cows make milk too. Only assets do this.
The test: if you stop showing up tomorrow, does the money keep coming?
Lots of real money comes from combining the three. Most people start with time and use it to build ideas or buy assets.
These look like a fourth way, but they don’t make anything. A cow makes milk. A bet only pays if someone else loses or pays more later. A scam is a fake cow: it only makes milk for whoever is running it.
Gray zone: gold, collectibles and sneaker stashes can go up in price, but they don’t make milk. You only earn when you sell.
Your money makes money. Then that money makes money too.
Every year, the herd makes milk worth about 15% of the herd. Some of that has to go to upkeep: feed, the vet, fixing the barn. Farmer A spends whatever is left over. Farmer B uses it to buy more cows.
At 8% a year, 72 ÷ 8 = 9. Your money doubles about every 9 years.
| Rate per year | Rule of 72 says | Exact answer |
|---|
Compounding doesn’t care whose side it’s on. When you own the asset, it works for you. When you owe the money, it works against you.
At about 7% after inflation, 72 ÷ 7 ≈ 10. Your buying power doubles about once a decade.
At the 2% target, prices double in about 36 years. Cash under your bed ends up buying half as much. More in lesson 1.
A typical card charges about 24%. 72 ÷ 24 = 3. An unpaid $500 balance becomes $1,000 owed in about 3 years.
You buy a $1,000 phone on a credit card with standard terms: 24% a year. Same phone in every row. The only difference is how you pay it off.
A $1,000 balance at 24% doubles every 3 years. That’s the rule of 72 working against you, before late fees.
The rules: if you can’t pay a card off in full by the due date, don’t buy it on the card. Never let a balance roll over. The minimum payment is set low so the bank keeps earning interest from you for as long as possible.
Six matchups. Tap A or B, then see the math.
None of the three ways is bad, and all of them are useful. The goal is a blend of time, ideas and assets that supports the life you want.
Your job, your shifts, your craft table. This is where the money comes from in the first place.
Pay yourself first. Set aside part of every paycheck before you spend any of it.
Better tools, materials, a new design, a skill. This raises what each hour of your work is worth.
An index fund. Then leave it alone and let the milk buy more cows.
Better ideas earn more from your work. Assets make milk. Both feed back into saving, and the loop speeds up.
Start with what you earn now. Even a few years of this, while you’re young, does most of the heavy lifting.
Some debt helps you build wealth and some debt drains it. It depends on what you buy.
You borrow to get something that earns more than the loan costs. The asset pays the interest, and you keep the rest.
You borrow for things you use up or that lose value. Nothing pays the interest except your future paychecks.
Exact rates change over time and depend on the lender. The order from cheapest to most expensive stays about the same.
You sell crafts at the fair, and you sell out every time. You can only make so many by hand.
A $600 machine would let you make twice as many. You borrow the $600 at 10% a year.
It earns you $150 more profit a month. The loan is paid off in about 4 months, with about $13 of interest. After that, the extra $150 is yours every month.
Borrowing makes the ups bigger and the downs bigger. Say you buy a $500,000 home, put some money down, and borrow the rest. Then prices move for a year.
To keep it simple, this leaves out interest, taxes and the rent you’d save by owning.
Before you borrow, check three things. Will what you’re buying earn more than the loan costs? Could you still make the payments in a bad year? And do you have any high-interest debt already? Paying off a 24% credit card is like earning a guaranteed 24%, better than almost any investment.