It's Extremely Hard to Make Money (Part 1)

Yes, you heard it here first; it's extremely hard to make money. By make, I mean gather a sum greater than you as an individual sharing this Earth with billions of others deserves. Sure, it's simple and easy (well, not easy at times) to make a living for yourself and your young family - but woe is to he or she who ventures to gather and amass more than his or her fair share!

But there are definitely people out there who have more than their fare share, you say. Yes, there are, but those people are either incredibly smart or incredibly dedicated. You must ask yourself if you are either of these; if you're not, all you've got is the slow way of amassing wealth. The slow was is both slow (takes almost half your life!) and the amount of wealth amassed isn't really that much compared to those who have the aforementioned incredible smarts or dedication. In fact, incredible dedication counts for a lot more than incredible smarts. Really.

Don't listen to anybody who tries to teach or tell you how to make money, but expects you to pay up (aside from authors who don't push any other product within the pages of their book). These people are useless "gurus" who actually don't know anything about amassing a fortune and are actually trying to make their fortunes of your back. If you buy their product - you just helped them amass more wealth. Don't be fooled.

According to Adam Smith, whenever there's an advantageous way out there of making money, it soon loses any and all of its advantages. Why? The reason is because once word gets out that "making a blog about making blogs" can get you a hundred thousand a year in income - you can bet that everyone out there is going to try to get on the bandwagon (and drive the profits down into the ground). Of course, 90% of those wannabes are going to give up really fast and go looking for the next "advantageous way of making money", but that still leaves a huge number of people competing in that particular endeavor. What ends up happening is that what was once a giant cake for one or two people has become only slices for so many... and crumbs for most.

By the time you've heard of what seems like a sure-fire way to make a fortune; you can bet every Tom, Dick and Haru has heard about it already. They've either tried it, or are trying it. Don't be bothered. The profits involved in any type of business (and even professions) are set based upon the number of available suppliers and the demand out there. At the very beginning, the profits are highest because the supply is low... and at the end, people are killing each other just trying to survive. You'll buy breakfast from Bob's Breakfast Basket for $10 when he's the only one around. But what about next month when Brenda's Breakfast Barn starts selling the exact same breakfast for $8? You bet everyone's going to go to Brenda's; and you can bet Bob is going to start lowering his price. It's a price-war! Good for the consumer, bad for business.

With professions; such as doctors, engineers, lawyers, etc., it's more of the same. It might seem like a good idea to become a lawyer, because lawyer's make big bucks, right? You might be surprised to find out that the majority don't! The majority are doing crappy menial tasks like writing contracts for people - they aren't defending O.J. Simpson. The reason for this is the same law of supply-and-demand. Too many lawyers out there; too little demand. Even doctors face the same deal. When there are too many doctors in a certain area, or too many graduating doctors (ironically caused by a shortage just a few years before when young minds decided to become doctors to fill the need); they either have to leave the area to find proper employment, or they have to settle with a less-than-full client roster. (Physician Glut to Shortage in Canada)

Basically, the world is set up in such a way that labor equals money and that is all the value anyone is ever supposed to have in this world. Just like animals, we're only supposed to be as well-fed as we can hunt or gather. Humans have broke those rules (amongst many others; such as how to treat the environment), and so it is that for some extraordinary people, it's not just their own labor that equals money. It's still labor that equals money - but they get many people laboring towards their fortune-amassing-endeavors.

There are secrets to making money, yes - not just one secret, but many secrets. And don't think for a second that someone is going to sell those secrets to you. Nobody will trade their secrets for a couple of dollars or even the price of a seminar. Nobody. People who've made it obviously want to protect their information - wouldn't you? In my next post, I'll tell you how to spot a "secret" when you see it (and there are different secrets for different people).

Money is Like Water, My Friend

Bruce Lee once said, "Empty your mind, be formless, shapeless — like water. Now you put water in a cup, it becomes the cup; You put water into a bottle it becomes the bottle; You put it in a teapot it becomes the teapot. Water can flow or it can crash. Be water, my friend." Although Lee was talking about martial arts, this view of things can be aptly applied to the world of money and economics. It seems that money has followed Lee's advice; it becomes whatever it's put into, it flows and it crashes. Put it into the stock market, it becomes the stock market. Put it into real estate, it becomes real estate. Put it into commodities, it becomes commodities. Put it into your teenage daughter's hands, it becomes clothes and jewelry!

Throughout the history of the Earth there has been a constant amount of water around. There is the same amount of water on Earth today as there was a billion years ago. Water may seem to disappear at times, but it doesn't - it merely changes form. It is in the sea now, only to change form and disappear into the air. It is in the form of clouds now, only to fall as snow and eventually turn into an ice shelf. Water never disappears; it only changes form and goes elsewhere on this planet.

The exact same thing can be said about money. Money never actually disappears - it just moves into different sectors of the economy. This may seem hard to believe, because I'm sure you have seen days when the overall stock markets plummet in value - but it's true, money just moves. Money doesn't just "disappear" or "appear" out of thin air - it always comes from somewhere and goes to somewhere.

Let's take a macro (large) look at the economy first and see what's going on when stock markets/real estate/commodities plummet in price. As I'm sure you've heard, stock prices all over the world have been declining over the past few months. This doesn't mean that institutions (like banks, investment firms, mutual fund firms) and individuals have lost their shirts into thin air. What actually has happened is that the fall in prices of stock has been counterbalanced by a rise in price of commodities. If you watch the price of the S&P 500 and the price of gold, you'll neatly discover that when the S&P goes up, gold tends to go down - and the opposite is also true. The reason this happens is that as investors get scared out of the stock market by general "bad news", they move their money into other types of investments (commodities such as gold and oil being the big thing right now).

Thus, when there was a huge housing boom in the USA, stock markets were doing okay, but they weren't doing exceptionally well. But then, when the housing market collapsed (due to many factors), the money moved into stocks. Thus, the stock market started to roar... until investors decided it was time to get out and move their money into commodities. Today, that is the case we are seeing all over the world; a multitude of investors have moved their money into "safe" bets, such as gold and other commodities.

On a micro (small) scale, money works the same way. Money doesn't just disappear - it exchanges hands! Let's say you go to Wals-Mart and purchase a Rintendo Wee... money goes from your pocket into the pocket of Wals-Mart. But, it doesn't just stop there, because Wals-Mart has to pay their suppliers, their staff, their rent, etc. The money just keeps getting divided until the total price you paid for your Wee is in the hands of hundreds of individuals. Those individuals in turn will also purchase things (food, clothing, entertainment, etc.) and thus money goes around and around.

What if an entrepreneur creates a crappy product that nobody likes, however? Doesn't the value of that product just disappear because nobody wants it? Well, for that entrepreneur, his or her money just disappeared into the form of a pile of junk that nobody wants. However, people got paid to design it, make it and provide the raw materials; those people now have that money. Your loss is someone else's gain; and someone else's loss is your gain! Not that buying lunch to eat is a "loss", but it is a loss of money.

The last issue to address here is when companies (or that entrepreneur) "write-off" assets that they thought were worth millions, but turned out to be junk. Doesn't that money just disappear? Well, in actuality, the money was never there in the first place - they just thought it was worth more than it was actually worth. If Koka-Kola sold a bottling plant that cost $100,000 (to make) to Bebsi for $200,000, that difference of $100,000 just went into Koka-Kola's pocket. Now, if Bebsi enters that bottling plant as worth $200,000 in their accounting books, but one days finds out that it's really worth nothing, they write it off and the value is now $0. But, the $200,000 is not lost! $100,000 is with Koka-Kola, and the other $100,000 is in the hands of all the people who helped create the factory from ground-up.

There's No Such Thing as Poverty

It sounds crazy, but it's true: there's no such thing as poverty. There's also no such thing as cold; cold is merely the absence of heat. It's the same thing with poverty; poverty is merely the absence of wealth. This doesn't mean that poverty isn't a horrible thing or something that shouldn't be dealt with - it just means that poverty, and cold, are the defaults. Once something tries to fill up the space that they "occupy", it's not a hard thing since they're not really there anyway.

Let's look at it this way. If you have a cold room and want to make it warm, you add head. If you have a hot room and want to make it cold, you must take away the heat. You can't add cold! It's the same thing with poverty and wealth. If someone is in poverty, you can give them wealth and the poverty will seemingly have disappeared. If someone is wealthy, on the other hand, you can't "give" them poverty - you can only take away the money.

Poverty, just like cold is the default. In part, this means that you can't just sit there doing nothing and not expect to sink into poverty. The Earth is not an icy ball, because the sun is giving off energy - without the sun, the Earth would not be warm at all. What this means to you is that even though you may have felt very comfortable growing up, it was in fact your parents who provided that comfort to you; they were your sun. As an adult, however, it is up to you to find a means to bring in wealth (your parents may be willing to support you forever - but do you really want that?). Each and every person has his or her own way of bringing wealth to their personal lives.

Without any means to create even a little bit of wealth for oneself, poverty inevitably sets in. There is a big difference between the picture of poverty in developed countries and the idea of poverty in really poor countries, however. Just as for those who live in countries that snow may feel 14 degrees Celsius can be quite warm; those who live in really poor countries think of poverty as near-starving condition. However, for those that live in really hot countries, 14 degrees Celsius is absolutely frigid (!); and those who live in developed countries think of poverty as not being able to purchase a new car or buy the latest toys for the kids!

In the end, poverty is what's left when a person's wealth is taken away. That doesn't mean you should accept it as your fate or even accept it as the fate of others in this world. There are many things you can do to prevent yourself from even the possibility of your money sliding away (not sliding into poverty, but wealth sliding away) - as a lot of wealth did to a lot of people during The Great Depression. There are also many things that you can do to move yourself farther and farther away from the coldness of poverty. And lastly, there are tons of things you can do to help those who are desperately poor and cannot rise out of their condition without outside assistance.

Where Does All That Money Go?

Have you ever heard someone say, "Nike's shoes only cost 15 cents to make and they sell them to us for $150!"? True, the shoes cost only 15 cents to make, but there are so many other costs associated with that particular shoe. (As an aside, the cost of making any given shoe is actually a little more - maybe a few dollars in materials and labor.) There are so many other costs to consider when wanting to understand where your money goes when you buy a name-brand shoe.

The first and foremost apparent cost that you have to pay when buy a Nike shoe is the cost of advertising. In order for the company to get you to even want the shoe in the first place - it has to spend a bundle of money on advertising and celebrity endorsements. Who pays for all that? The shoe buyer does, of course. There is also the huge cost of running stores; rent, interior design, insurance and employees must all be paid for. The shoes must also be shipped all the way from where they're manufactured, to where they'll be sold - that's a lot of oil! There are also company administrative costs and taxes to pay. I think I've covered all the direct costs associated with the shoes; we can now talk about indirect costs.

Considering all the costs associated with any given name-brand shoe as listed above; there are a multitude of indirect costs. Each of those industries that the shoe uses has to support a whole host of other costs. Let's take the shipping of the shoes from a warehouse to your local mall store. It may seem like a simple thing to get the shoe from point A to point B, but it's not. "Shoe Company" must take what you pay for the shoe and use part of it to pay for transportation. What that means is that part of the price of the shoe is being used to pay for; gasoline, truck maintenance, truck financing/leasing, automobile/shipping insurance, wages for the driver and the loading personnel, etc. And all that is just to support the shipping the shoe must utilize. Of course, there are millions of shoes going all around the world at the same time, so each penny and dollar adds up. This was just to give you an idea of the complexity in understanding where money goes and where it flows.

More simply, let's look at the way that Adam Smith defines where money goes once it is exchanged for a good. What is your money used for when you buy something? Smith breaks it down into three general areas (which can then be broken down further); labor, profit, and rent. We'll take a look at each of these categories in a little more detail.

Labour: When you buy anything, a portion of the proceeds must go towards labor. Otherwise, how could you have gotten the item in the first place (a chimpanzee couldn't have made it possible)? Firstly, the labor that it took to bring the raw materials your widget is made of needs to be paid. Then, the labor that it took to manufacture your widget from the raw materials needs to be accounted for. Next, there is labor in the shipping of it from place of manufacture to place of retail. Lastly, you must also pay those people who serve you the product and/or explain it to you. (Other types of labor are included as well; such as marketing labor, administrative labor, etc.)

Profit: A lot of people overlook profit as an area that needs to be paid for - they expect that you can just buy things from people at their cost. This is unreasonable, as it is the entrepreneur's - the undertaker of the business that brought you the product - only reason to have made the widget available to you in the first place. Not only is profit the only reason an entrepreneur tries to sell you a product (aside from charity), it is proper reward for the risks that the entrepreneur takes. If a certain product has come to market - you can be sure that someone fronted their own money, time, sweat and anxiety to make it available to the public. If that product fails, the entrepreneur loses his or her pants. If that product succeeds - profit is the entrepreneur's just rewards.

Rent: Rent used to be one of the biggest things upon which entrepreneurs would spend their financial capital. This is still true in many cases, but it is changing as we speak. If we look at a traditional example, say, a clothing store - you would discover that the expense of renting that physical building in which to house the clothing for sale could eat up as much as 30% of all expenses! If that's not a heavy burden, I don't know what is. Furthermore, Adam Smith says that as the business does better and better, landlords come to expect more in the way of rent. Isn't that crazy? Landlords expect not a fixed amount of rent, but a percentage of profits!

Anyway, it's thankfully (for most people) changing because of the World Wide Web. The Web has allowed people to do what never before was possible: not pay rent. To rent space on the Internet is a piddly expense compared to renting a store; it's no wonder that the Web is filled with pages that are abandoned or empty - it's just that cheap! The good news is that it's just as cheap for a real business to set up a presence on the Web. So, it's beyond a doubt that Adam Smith's division of where money goes has changed for a lot of people (it hasn't changed for all, however, because some types of business necessarily need physical property).

So the next time you exchange your money for a good or service, think about where that money goes.

How Standard of Living Works

Don't be fooled into thinking that each generation's standard of living goes up because each generation has more money (i.e. wealth). It may be the case that generation after generation has more real (as opposed to nominal) dollars than the last, yes, but when it comes to standard of living - nothing raises it like the lowering of prices. Sure, it sounds funny, but it's true! It's because of the fact that the real price of everything gets lower and lower each year that you now have many of the luxuries that your parents could never even dream of (no matter how rich they were!).

Take George Jetson for example; he has all the luxuries of a future life and his family has many things only an extremely wealthy person today would have (a vehicle that flies, a house with a view, a live-in maid, video-conferencing phone, etc.). However, I can guarantee you that George is just an ordinary person in his time, although to us it appears he has the trappings of a wealthy person. The same can be said about you if compared to your great-grandparents; you have so many things they were hard-pressed to afford and many things that they couldn't even get. You've got; a color TV (that you can take with you), a telephone without wires, a type-writer that can save your work, an auto-carriage, an auto ice-box for food, and so many other things that if you lived in your great-grandparents' time, they'd think you really wealthy (or maybe a witch of some sort).

The basic question to answer is: Why does each successive generation's standard of living improve over the last? The answer is not because each generation gets wealthier - the real answer is because things get cheaper. Let me illustrate this example to you using the Ford Model T - the first car that not just for the wealthy. In 1909, the Model T cost $1850, which was surely a lot more than the average American could afford. By 1915, however, the price had dropped to $440! How could the exact same car cost less than 24% of the original price six years later? Well, the answer has mostly to do with the fact that Ford kept building the exact same car and constantly discovered methods by which to save expense (the assembly line being the most significant). In 1914, the price of the Model T was only four months of an assembly line worker's pay; but in 1909, a Model T would've been much more than one year's worth.

Let's take a look at an example closer to present-day to reinforce the idea that it is falling prices that generally cause an increase in standard of living. You're using a computer right now, aren't you? So let's talk about computers. In 1995, an Intel Pentium-based PC (Pentium 1!!!) running at 120 MHz (1,000 MHz = 1 GHz) with 16 Mb of RAM (1,000 Mb = 1 Gb), hardly any HD space, 640x480 graphics and 14" CRT color monitor cost around $2500 (1995 dollars). Today, an incredibly more powerful computer with a flat-screen LCD monitor can be had for $500 (2008 dollars). I quoted the prices in nominal dollars, but in real dollars (factoring in inflation), the drop of price for computers becomes even more amazing: The old computer would be the equivalent of $4162 in 2008 dollars! If the price of computers and all the components that make up a computer had not fallen over time, I'm sure so many people's lives and standards of living would not have benefited from the computer.

If you're middle-class, everything you see around you - every luxury and convenience that you have - has become available to you and others in the same economic class because of the drop in price of things over time. Food has become more delicious and fabulous; clothes have become more stylish and higher in quality; electronic gadgetry has become all-pervasive; private transportation has become more luxurious; homes have become bigger and better; a majority of people's standard of living has risen!

But, how has the price of things managed to fall when there's inflation at play? Well, although people demand more pay for their work; and the products they make therefore rise in price to be able to pay the raise; and the people buying the products thus demand pay raises; and the products that those people make rise in price... and the cycle keeps going, which causes inflation... there are advances in techniques through vigorous competition that cause prices to invariably fall. Whenever there is an increase in competition to sell a certain widget, the supply increases and causes price to fall (not enough demand). Companies must then figure out ways to make their widgets at a lower price in order to sell at a lower price, beating out the competition. But, with several companies doing this all at once - constantly figuring out ways to make the widgets cheaper and cheaper, they thus drive the price lower and lower. The reason they do this is to make more money for themselves (and deny it of the competition), of course, but the beneficiaries are you and I.