Chapter 6 - Spending

By Richard Valentine Reily, author of Gregory's Hero.

Since you’re on the way to the store because you didn’t buy the gas and pay the gas taxes to pick up that one or two items, let’s talk about the store. Everyone’s favorite place is filled to the walls with more of everything then is even imaginable.

My sister is a master shopper. She knows when and how to say no, she carries and uses coupons and she maximizes the stores contribution to whatever causes she finds important. She is particularly proud of the deal that allows her to double a coupon for an item that is already on sale and is on her list. Now that makes for a deal! A good trip to the store yields a coupon saving off the total purchase price in the area of 10%.

More than the savings, however, is the list. Her list is in sections! It follows the layout of the store and mostly she is able to march down the list without backtracking in the store or on the list. Nothing not on the list gets in the cart.

Even her kids who accompany her are in awe of the process and rarely suggest she pick up anything without it being on the list. Her shopping is past efficient, it is pure discipline. The result? My sister swears that nothing in her house is ever thrown out. They use it all. There is no overspending going on there.

How do you go to the store? How many times a week do you shop? How many different people in your family shop? I’ll bet you don’t even know!

Remember a few chapters back when the car deal was going on? Then I told you about buying a car can every few years and the dealer selling cars all day long. Like you can’t win at the car dealer you can’t win against Madison Avenue marketers who have earned and spent fortunes determining how to make you buy their goods.

You don’t have a chance in the aisles of the supermarkets of America! Unless you come to the battle – oops I mean the store – armed with a plan, a list, and the resolute discipline to enforce it without exception you are a lame duck destined to arrive home with bags full of stuff you have no idea why you purchased or what you will do with it now that you own it.

Do you remember that irritably polite and well mannered boy with the neat clothes who always stopped the ice cream truck in the same spot?

When he was very young he rode in the folding seat of the grocery cart as Mom pushed it, and him, up and down the aisles of the local supermarket. Like most kids in shopping carts the bright colors and vivid images on packages caught his eye and he want each and every one of them. His mother, however, knew that the marketing was doing its job and he really didn't want any of it, he only thought he did. She firmly, consistently and lovingly said no to each request and went on about her business.

As he got older it was no longer cool to ride along in the shopping cart and he strolled along the aisles touching each pretty box and asking for about one in ten. Mom still firmly, consistently and lovingly said no to each request and went on about her business as he followed happily along. If he had had the capability to reason out his requests even he would have known he had no use, nor interest in feminine products, laundry detergent and canned peas. Many of the things you pick up in stores you do not need either. About twenty percent of all food purchases are thrown away. Don’t buy it and keep the money for yourself.

Just for discussion sake let’s assume that you have the list, and the discipline to make the foray into the supermarket. What’s on the list? What’s not on the list?

Here are some simple rules for on and off the list. On the list are foods that return true nutritional value; real food like fresh fruits and vegetables, unprocessed foods, grains and nuts. Not on the list; anything in a four color box, package, can or bottle. That’s right, and simple.

Never buy anything in a four color container. If the container has to be that attractive to get your attention just remember the Madison Avenue hawkers. If the food is good and of good value the market will already know it without resorting to a four color box. By the way, guess who paid for the four color box? Wasn’t the food processor; sorry to say it’s you. When you are all done with it you will pitch it into the recycle bin, or the trash and that’s the end of your hard earned spending.


Buy those things that are closest to the root, the least unprocessed. They have the highest food value for your spending. Buy the item in a bag instead of a box; it costs less because you don’t have to buy the box. When the two choices are in a box, buy the one in the least colorful box; it is probably less processed, less has been spent on promotion and less has been spent on the packaging. All you really want is the product.

Avoid meats, soft drinks, snack foods and deli items. They tend to be overly processed, of low nutritional value and high cost. In many cases they are simply poisons and though they may have a low perceived price as compared to similar items around them, they deliver little nutrition and are therefore of little value.

Enough of the supermarket already! If you keep up with me you will be slim, fit and rich. Who needs that? You, I hope!

Let’s drop by the mall on the way home; on second thought, let’s not. You don’t really need anything do you? After all the closets are stuffed tight, the shelves are full and you park the car in the driveway because the garage is a storeroom.

What you really need is a yard sale, but we’ll get to that later. Stay out of the mall. It is the magic emporium that easily casts a spell upon you to buy stuff you don’t need, and probably won’t even want in a very short time.

If you shop for relaxation, take a walk, stretch out your muscles, read a good book. You will get a higher level of long lasting good feelings without the bill at the end of the month or the bounced checks at the bank.

Chapter 5 - Taxes

By Richard Valentine Reily, author of Gregory's Hero.

Interest expenses are such a large part of most people’s spending that it merits a section of its own. There’s lots of other hidden spending which also must be identified before it can be controlled.

Another large part of most people’s spending is taxes. Taxes withheld from your paycheck are fixed spending. They are not in your control past limiting the amount that you earn or sheltering portions of your income which we will talk about later.

You pay taxes all day long every time you spend. You pay sales taxes, use taxes, value added taxes, shipping taxes, resale taxes, payroll taxes, social security taxes, Medicare taxes, state and federal unemployment taxes, income taxes, intangible taxes, property taxes, utility taxes, telephone taxes, registration fees, license fees and on and on.

Most takes are discretionary. No, you don’t get a choice to pay them or not; well there is the jail thing, but I’ll still consider that a bad alternative to simply paying your taxes. The discretion comes when you decide to spend or not.

Most taxes other than payroll taxes are tied to consumption. If you do not consume, you do not pay the tax. When you spend, you pay an additional amount on most transactions for taxes many of which are cleverly hidden within the price of the good or service you are buying. Take a look at a telephone or electric bill and try to understand the litany of fees listed there. Don’t bother, they are all taxes in disguise. When you spend less you pay less tax. Those taxes are discretionary.

A note about big taxes, like property taxes; these taxes usually are payable on a schedule with a due date some months later. If you pay the tax on time it is the actual rate. If you pay it late there is usually a late penalty that will cause you to spend additional money on tax that was unnecessary.

Conversely if you pay in advance, as usually scheduled on your tax bill you can often reduce the amount you pay in tax sometimes up to 10%. This is almost always a good bargain for the tax payer. Use it and keep the balance of the tax bill in your own pocket. Many states offer exemptions from all or portions of property taxes and limitations on the rate of increase of your property taxes. The opportunities for exemptions are too numerous for our purposes here and you are best served to check with your county for exemptions available to you. I have yet to see a taxing entity that will readily and willingly refund you money you paid in error and that you are unaware of!

Did you know that in many areas the property tax rate on new homes is set based on the closing price? That’s right. All those exorbitant amounts that developers charge for wider driveways, screen porches, upgraded kitchens, tile floors, sound systems, crown moulding and so on set you up for a life time of higher property tax rates.

You can avoid many dollars in property taxes over the life of your ownership by allowing the developer to do less and then having those upgrades done after you take possession. I hope you will also consider having those improvements done with money from your cash flow, not borrowing, when you finally get around to doing them. Your property taxes will be lower for the life of your ownership and you mortgage will also be lower costing you less interest.

Telephone companies are notorious for myriad of taxes and unintelligible fees that take half a page to list. These taxes and fees and all associated with services you ordered. Do you still use them? Did you ever use them? Go down that phone bill and question each line. As you do this analysis remember that technology is rapidly changing and services that used to come from only one supplier may now be available through other or multiple suppliers who you might find to be in competition for your spending. When you reduce your overall purchases you also reduce you tax and fee expense proportionally.

I was very excited when the local telephone company brought DSL service to my community. After years of dial up I was ready for always on fast access. The telephone company figured out that they could make a package of lots of useless services for just a little bit more than DSL and basic phone service and net the difference.

Then cable high speed came to my community. The cable company delivered high speed and every cable channel for two thirds of the cost of my telephone bill. Even with basic phone service added in, I now have all the premium cable channels in addition to basic phone service and high speed access for less one third less than the telephone company charged for its service package. Simply because it was appropriate when installed does not mean it remains the best value for your hard earned spending money.

Utilities operate in much the same way as telephone companies. What is a network transfer static recovery fee anyhow? It may have to be paid, but if it is a percent of some usage volume you can pay less when you use less. And using less fits into the overall effort to reduce spending through changing habits.

Do you really need to stand in the running shower for thirty minutes? Perhaps a twenty minute stretching session and a five minute shower would accomplish the same warming and relaxing. Does the washer really need hot water when warm or cold will do? Can those towels air dry while you are at work and allow you to leave the dryer off? Can those few dishes be hand washed and put away leaving the dishwasher to simply look nice under the counter without incurring additional operating expense?

It is known that any give household can easily reduce its energy consumption by 20% without noticeable changes in energy usage habits. Think about what is in the refrigerator before opening the door; get what you want and immediately close it. Turn the water heater down a few degrees. Turn off electrical products when not in use. Along with paying for less power, you also pay for less taxes and fees.

Do you know how much tax is in a gallon of gasoline? Upwards of 50 cents per gallon, and climbing. Want to spend less on gas tax? Buy less gas. It’s easy too. Grab the sneakers and take a stroll to the store for that one or two things you decided you can’t live without. Not only do you save the gas tax, you save the cost of gas, you get some exercise and might even run into a neighbor you had never met. But don’t forget what you went to get after ten minutes chatting up the gossip with your new friend.

Income taxes, disguised as payroll taxes for most, can be one of your highest taxes, though for many people FICA (Social Security) taxes can outstrip your Federal Income Tax rates and there is no refund of FICA taxes. Another significant hidden spending is in the exemption level you setup with your employer when you completed or changed you last W-2 form.

Determining if your withholding level is right is frighteningly simple. Answer this question: Did you get an income tax refund last year? If you answered yes, you are having too much withheld from your paycheck. Divide the amount of your refund by the number to times you get paid each year, weekly 52, biweekly 26, twice monthly 24, monthly 12, and you will see the amount you could have added to your savings each paycheck.

Are you willing to give me an interest free loan for a year or longer? No. Well why not? If you get an income tax refund you have lent the government your money free of charge until such time as the Internal Revenue Service is kind enough to refund it to you.

There are rare cases of anyone lending you interest free money – I term interest one of most people’s largest spending items – so use your own money and pay down those debts that cost you interest instead of allowing the government to have your money interest free. It’s very easy; just contact your payroll department at work and request a new W4 form; complete it with a higher exemption level than previously, and return it to them for processing. You will immediately see more take home pay in your paycheck.

A word of caution here: use the new money to pay down debt, not for more spending. Spending begets more spending and it is a vicious cycle. If you are still caught in the spending cycle I recommend that you not increase your exemptions until you have demonstrated to yourself that you can control spending. Better an interest free loan to the government than more to spend and more in debt. When you own debt, more spending creates more debt. Stop spending!

Chapter 4 - Spending

By Richard Valentine Reily, author of Gregory's Hero.


Identifying your spending is the first step to controlling it. You basically have two forms of spending, discretionary and fixed.

Interest expense to a great degree is fixed spending, especially where related to car loans and mortgages though interest on credit card debt is much more in your control. Even so, small changes in your interest payments can have large impacts on spending since interest tends to be a big expense as a portion of your fixed spending.

Let’s take interest spending and look at the major debts that incur interest and ways to reduce that spending.

Mortgage debt, and consequently mortgage interest, is not necessarily a bad thing. You have invested some portion of the purchase price of your home and borrowed the balance from a lender. In return you pay the lender interest on the loan.

The amount you owe is fixed even as the value of the investment itself, your home, can change. If you put $10,000 down on your $200,000 house, you invested 5% of the purchase price. As the house appreciates you realize 100% of the appreciation even though you invested only 5%, because you promised to pay the lender a fixed interest rate for the use of their money.

If you sell the house for $300,000 you have realized a $100,000 gain on a $10,000 investment. Not bad! Even when you consider the interest you paid to the lender for the use of their money. And for some icing on the cake of housing, in almost all cases the cost of the interest on the mortgage is deductible from your federal income tax which reduces your cost even further in spending that would have gone as additional tax. Mortgage debt and interest can work in your favor.

Car loans are a different story. I had a friend who was a car salesman. This guy looked and acted the part. Well, he didn’t have a checkered or plaid jacket, he dressed sharp actually, but if you can tell a horse is an animal, you can tell this guy is a car salesman. Let’s just leave it at that.

Anyhow, one evening he’s telling me about being on the floor at the dealership. You’ve seen them; standing around the perimeter like vultures awaiting you descending from your car so they can swoop in and empty your wallet. Even wonder why you feel that way whenever you arrive at a car dealership? Because your feeling is right; that is exactly what they are poised and planning to do.

You are involved in a car transaction once in a blue moon. They do it all day long every day. You can’t win. Oh, I promised you a story; my friend who is a car salesman.

He’s telling me over a beer how this vulture thing works. Whoever is nearest to the landing quarry gets him. He tells of being on his way in a direct line to meet someone getting out of their car when another salesman pops up from between two used cars nearby and cuts him off in route.

My friend is smart though. He waits, and watches and lets the others chase off and fight over the everyday up; the guy in the four year old minivan with a wife and two kids who fall out of the back screaming before they hit the pavement.

What is he waiting and watching for? The real clunker (that’s a not very nice car); it’s blowing smoke and he can hear it coming down the street two blocks away. When it is finally silenced in the parking lot and the smoke has dissipated enough to get close without getting gassed he greets the poor – that’s right not too much money – guy struggling out a squeaking door followed by his overweight wife falling out the other side. A quick appraisal of the car reveals that it is of reasonable age and not a bad model in its day but now a worthless clunker because it has been overused and under maintained.

This is my friend’s favorite customer. This is the guy who is going to drive away from that dealership in a well marked up used car, perhaps of questionable quality, but of high perceived value. He is going to have his old car paid off by the dealer. The upside down amount is going to be rolled into the new purchase. He is going to buy an extended warranty, an on-going prepaid service agreement, credit life insurance, and his first year of liability auto insurance and pay the highest interest rate available on not just the car but also on all the service and insurance products.

He is going to drive away from that dealership with a payment higher than a brand new car of far greater value and be instantly buried in the new car far worse than he was in the loud smoking clunker he rolled into the dealership in. My friend is a happy camper because he gets a commission of each part of the rolled up deal. He sold a car, insurance on the financing, insurance on the car, an extended warranty and financing on all of the above at a high interest rate.

The deal sounds good. Service and repairs are prepaid. Insurance is paid for the whole year. The car is paid off on death. Everything handled in one place. What a deal! That’s for sure. What a deal for the dealer.

Here is how the deal should work.

There are three deals going on here. You are buying a car. You are selling a car. You are financing a car. You are best served and get highest value for lowest cost when the deals are handled separately.

Sell your existing car to someone else. If you think it is difficult, let the dealer put a value on your car, then simply ask around those people you know. Someone is bound to give you more than that amount because the car will be worth it. If you insist on trading it in, go to the dealership armed with a reasonable value for the car and stick to it. Know that you can always go away and sell it yourself.

Now credit life insurance on the car is an interesting concept. You pay premiums for insurance that pays off the care on your death. Who benefits? The bank that lent the money; let them pay the premium!

Go to a lender before you go to a dealer. Get a pre-approval that you qualify for an auto loan. The lender will tell you how much they are willing to lend based on your credit qualifications. Maybe you want more, but the lender is in the business and knows the odds of you being able to pay the money back. Listen to them and limit yourself to a car transaction that fits with their pre-approval.

Leave the bank with a sight draft in your hand. A sight draft is a check from the bank with a limited maximum value. It is a check for your purposes. When you buy a car, the dealer includes a title with the check and it is processed like a check to pay the dealer. With a pre-approval you are less likely to fall into the financing traps set by the dealer to make you spend more of your money.

Know what car you want before you arrive at the dealer. With the advent of the Internet there are almost unlimited resources to determine who has the car you want and what the real value of that car is. A dealer has one prime objective – take your money from you. Do your homework and arrive an informed buyer ready to take your business elsewhere if the deal is not right. Never forget: you are the customer and the dealer must earn your business. You do not have to give it away.

Now you turn into my friend’s worst nightmare. Here you come in the old clunker with check in hand ready to pay exactly one number for that car right over there. The salesman is now an order taker and you are in charge of the transaction.

I can all but guarantee that you will not leave there having purchased any useless warranty or insurance, not over paying for the new car, having received fair value for your trade in and not been signed up for a usurious, but perfectly legal, interest rate. Chances are you will not be upside down in your car when you drive off the lot.

That all said interest on a car loan is controllable at only one point. At the beginning; once you sign the note you are locked in until the note is retired by paying it off or selling or trading the car. Once the deal is done you are locked in and your car loan interest spending is then fixed. This is a four to six year commitment. Do your homework first and keep your money in your pocket.

Credit card interest is another story altogether. One rule here; don’t. That’s it. Don’t.

Don’t what you ask? Don’t pay credit card interest. That is the one and only rule. There is nothing good to gain from paying credit card insurance. You might just as well flush your money down the toilet. You will get just the same value for your spending. If that seems harsh, think about it. What are you getting for your money?

With a mortgage you get a place to live and perhaps appreciation on your investment. Even with a car you buy the ability to get around, most importantly to work. But, credit card interest gets you nothing. It’s a tax on stupid.

You bought stuff you didn’t need and without planning how you would pay for it. Now you have credit card debt and interest that never seems to go down no matter how hard you try. That’s the plan. The credit card issuers plan; keeping the cash flowing from your pocket to theirs.

It’s a great plan and you and I would do it if we could; people send money every month and we don’t have to do anything. Works for me!

Remember the one rule here. Don’t. That’s it. Don’t.

Oh, I see. You already have credit card debt. lots of it. And, I’ll bet it never goes away no matter how much you pay. I knew it!

What are you going to do about that? I highly recommend paying it off. That’s right, pay it off. Actually it’s easier done than said, but since most of you won’t believe that statement I’ll go ahead and say it, but later on. Later in the book I’ll tell you how to do this without incurring further spending.

For now let’s stay focused on how spending happens and later on how it can be controlled.

Most interest is fixed, and some is discretionary.

Fixed spending is spending you have to do to survive. It’s easy to determine. Food, clothing and shelter; that’s it! Okay, go ahead, start your rationalization.

Even within that required fixed spending there are opportunities for discretion. You can live in a less expensive place. I know it’s tough to think about scaling down, but it is really good for the budget. Within your living expense, where do you not have to spend? Do you really need new furniture or can the old serve you well for a bit longer? Do you really need to run the air conditioning at sixty eight degrees all day while you are out trying to earn the money to pay for it? Do you really need that third bedroom that no one uses; could you live in a less expensive two bedroom or rent out the third room for additional income? I presume you get the point.

How about food? Do you need to pay Kraft to process you food? Some of the best foods for you are the least expensive (which is an entire separate subject). Do you really need to eat out three, four, five times each week?

And, clothing; I have to figure that mink wrap was a bit extravagant. Sure you need clothes, but along the way of building wealth do with less, items, brand awareness and fads. Keep the money.

All other spending is discretionary. That’s right, you choose to spend on those things you don’t really need them. That is the spending we will reduce.

Chapter 3 - Spending Is The Problem

By Richard Valentine Reily, author of Gregory's Hero.


Earning is seldom the problem.

Spending is almost always the problem. Most of us can live on what we earn if we make the effort to do so. Almost comes in when there are no earnings at all – and you have tapped out all your friends and relatives.

Spending is a habit just as brushing your teeth, cursing or driving fast are habits. If you have poor spending habits you know it. If you want to change those habits you can do it. Like changing any habit it takes work and commitment, though first it takes a plan.

I have a friend who is well overweight though he jokingly says he is not overweight he is under tall. There is rationalization available for every failing, and typically rationalization brings more of the behaviors you are rationalizing. There are only two ways out of overspending. Spend less, or earn more. Sorry those are the only options. Well, short of turning to crime, winning the lottery or finding out a distant uncle died rich and left you everything. Let’s leave out crime for this discussion since we are talking about bettering ourselves and that won’t happen much in jail.

Statistically none of the other options will open up for you. Also, statistically, if they did and you won the lottery or inherited from the distant rich uncle you would again be overspent, (ok broke) in about five years. And it would not matter how much you initially won or inherited. Because, earning is not the problem, spending is the problem.

Remember that irritably polite and well mannered boy with the neat clothes who always stopped the ice cream truck in the same spot? He had lessons in spending. With time he came to understand he could only consume what he had money to acquire. In addition he came to understand that he could keep some of his money for something else another day. He was not allowed to develop bad spending habits.

Unlike him, you have come to a place where you have decided that overspending is not an activity you any longer enjoy. When you make the decision to no longer do it, you are halfway home. A problem understood is half solved. A problem accepted is mostly solved.

Like I said before, there are two options for solving the immediate overspending problem. Spend less, or earn more. Wow, that’s simple enough. Just earn more. Hey you’re due for a raise anyhow, and furthermore you are bored most evenings and weekends since you are always broke anyhow. Get a part time job. Good idea, a raise and a part time job. Earn a lot more and the spending problem will take care of itself. Gottcha. Sorry there is only one option. Here’s why.

I hired a sales type guy years ago who not longer after he started work confided in me that he had about $30,000 in credit card debt. He also had a car loan of about $20,000 for a car that was worth at best $8,000. We’ll get into who would allow him to get involved in such a transaction later, but for now simply suffice it to say that most businesses do not have your best interest at heart and simply play on your emotions of fear or greed to satisfy their own goals. So he had this huge car loan on this junker car.

With my being a bit pushy in the money information department he and I spent lots of time talking about money. Over the course of several years he moved up in pay from the original $35,000 per year we hired him at to over $70,000 per year. Four years later, after earning over $200,000 from the company over the years, his car was repossessed and he owed $40,000 in credit card debt. Earning is never the problem, spending is always the problem. Believe this, and you will succeed.

There was another guy who came to work for us some years later who also was saddled with a load of credit card debt and was upside down in his car. He still lived at home with his parents because he could not afford to move out on his own. This was a single guy who we paid about $40,000 a year. As you might be beginning to realize, I talk about money a lot, especially when it is being misused, and his guy got a consistent earful also. Recently he said to me, to my utter surprise, that he was moving out of his parent’s house to a condominium he had just purchased with a twenty percent down payment, specifically to avoid the principal mortgage insurance I caution against. He had no credit card debt and his car was paid off. In my astonishment I blurted out something like ‘did you rob a bank?’

“No.” he replied. “I listened to you and turned my spending into savings.”

Hah! I got one! A real live convert; gonna have to get me a church!

Getting control of your spending is the only answer to building wealth. You can not earn your way out of debt because your spending will only grow even faster than your earnings and get you deeper into debt.

Getting control of spending can be tough especially because most of us don’t even know that we spend.

What? Don’t know that we spend? That’s ridiculous; of course I know when I spend.

Yeah, right.

I’d be willing to bet that you have purchased a car in your life. When you made that deal you probably traded a car and financed the new car. Sound about right? Did you make a deal? No. You made three deals. You bought a car, you sold a car and you financed a car. Each of those deals had costs attached. Do you know what they were? Do you know how much of your car payment pays for the new car? How much pays for the old car? How much pays for the financing?

Pays for the old car? That was paid off in the trade.

Was it now? Did you sell the car for more than you owed on it? Maybe not; perhaps the balance was rolled into the new car loan. Was the old car financed under the rule of 78’s? You know the rule of 78’s right? That’s were you pay the majority of the interest on the full loan early in the loan. When you traded that car in before the loan was paid off you had prepaid most or all of the interest. The rule of 78’s is a primary reason you end up upside down in your car when you went to trade it.

Back to the new car for a moment, did you look at the sales order? Did you pay unknown or unspecified fees listed as ‘dealer profit’ or ‘delivery fee’ or any other nebulous name that means you overpaid? Did you shop around to different dealers and get three different deals on the same car to compare?

What is the interest rate on your new car loan? Is it simple interest? If you will simply multiply your car payment amount by the number of payments on your loan I think you will be at least surprised and probably disgusted to find what you are really paying for the new car.

Like I said getting control of spending can be especially tough because most of us don’t even know that we spend.

Let’s begin by understanding how money is spent. Obviously if you hand someone a dollar you have spent it. Each time you swipe you credit or debit card you have spent; simply because you have not transferred a paper dollar does not remove that spending has occurred. Even if you have not intention of paying for the credit card purchase at the end of the month you have spent your wealth. Driving you car, cooling your food in the refrigerator, heating water for your shower, eating breakfast, feeding the dog, wearing clothes and going to the doctor are all forms of spending. You can spend with cash, credit or on going expenses including interest, taxes and insurance.

Chapter 2 - Money Defined

By Richard Valentine Reily, author of Gregory's Hero.


What exactly is money anyhow? Can you define it? Think about that for a moment. Ask anyone; they all have a definition. Money is what you get paid for going to work. Money is what you get when you sell something. Money is what you never have enough of, no matter what you do. Money is what the rich people have. Money is the green paper in your pocket. Money is what you need at the store. But, what is money?

Money is a vehicle for the storage of value; and useful for the transfer of value. Value is created when you provide, produce or deliver a product or service. You are entitled to money when you create value.

Here is an example

Rancher Smith raises cattle. His ranch is in the Midwest and his cattle spend much of the year happily grazing on his endless acres of prairie. Now Rancher Smith likes beef as much as the next guy but even we can see there is no way Rancher Smith is going to be able to eat all that beef!

Down the road a piece, over the last hill just to the west of the river Farmer Jones is driving his tractor dragging his tiller behind across endless acres of prairie planting wheat, barley and soy beans. Farmer Jones is particularly happy atop his huge tractor since the Farmer’s Almanac has predicted this to be a banner year for weather and Farmer Jones expects a bumper crop from all his plantings.

Sure enough the weather holds all spring and summer and as fall approaches Rancher Smith is thrilled at the weight gain of his herd while Farmer Jones is tickled pink at the height of his wheat, barley and soy. Farmer Jones begins his harvest and sure enough is reaping a bumper crop as the weather holds and there is no late rain.

The no rain thing quickly becomes a problem for Rancher Smith’s cattle as the prairie grass rapidly turns brown, dries up and dies. He has a big problem; until one day he is in town, at the barber shop. Rancher Smith is stilling in Mel’s chair getting a trim while Farmer Jones is sitting in Sam’s chair getting a shave. Farmer Jones hears Rancher Smith telling Mel about the grass.

At a pause in the conversation Farmer Jones says to Rancher Smith, “Tell you what I’ll do,” he says. “I’ll give you twenty bushels of grain for each head of cattle you give me.”

Rancer Smith gives that a few moments thought and replies, “That’s mighty generous, but I’d have to have at least thirty bushels of grain for each head.”

“I’ll give you twenty five.”

“Done.”

“Thanks for the shave Sam, what’ll I owe you,” Farmer Jones asks as he gets out of Sam’s chair.

“How about a head of that cattle you are gonna get for your twenty five bushels of grain?”

Farmer Jones considers that for a moment. “Seems a bit steep for a good shave, Sam, though you do give a good shave I’ll admit.

“Tell you what I’ll do Sam,” he says, “I’ll give you the head of cattle, and twenty five bushels of grain and you take care of my shave and trim for the rest of this year.”

“Done!” Sam exclaims happily. Now his family will have bread and meat all winter.

“Ah, excuse me Jones,” came a voice from the third chair in the barber shop that morning. “When can I get the hundred bushels of grain you promised to give me for the seed stock I gave you in the winter for the spring planting?” The banker looked around Rancher Smith to see Farmer Jones in the third chair.

“I have that all sacked up for you in the barn right now,” Farmer Jones called across the shop. “You coming by to get it or you want me to drop it off?”

“Be mighty handy if you drop it off so I don’t have to lug it to my place. But, tell you what, I’ll come by and get it if you would trade me fifty bushels of the grain for one head of the cattle Farmer Smith here is trading to you.”

“Done.”

And so went the dealing that morning in the barber shop.

What were they all doing? Rancher Smith was getting feed for his cattle. Farmer Jones was getting cattle for his feed. Sam was getting cattle and grain for his services. The banker was getting cattle and grain for his lending. But what were they really doing?

They were exchanging value. However, before the value could be exchanged, it had to be created. Without someone first creating the value there is nothing to exchange.

Rancher Smith created value raising his cattle. In the beginning he watched for the cow to come into season. He kept the bull separated until he was sure the cow was ready. He knew when that was because he is a rancher and had learned it from his family. When the cow was ready, he put the bull with her. The mating created a calf, new value for Rancher Smith.

Over the spring and summer Rancher Smith moved the new calves from field to field with the herd and they rapidly grew happily munching on the prairie grass, all the while creating more and more pounds of calves. When it came time to trade some of those cattle for grain to feed the rest, Rancher Smith had created the cattle he was then able to trade to Farmer Jones. He had created value. He had also created more value than he required for himself.

Farmer Jones on down the road near the river planted crops. Before he planted however, he required something to plant. He required seed. Having no seed, he went to the banker who provided the seed in the form of a loan. Farmer Jones would grow the banker’s seed and they would share in the harvest. As Farmer Jones’ crop grew in the good summer weather he created value. He created more value than he required for himself, even after he gave the banker his part of the crop in return for the loan of the seed.

The banker provided the seed. Without it Farmer Jones could not have planted his spring crop. Yet, without Farmer Jones borrowing the banker’s seed, the banker would have had no additional grain at the end of summer; he would have only had the unplanted seed. The banker created value in his willingness to risk his seed in hopes of a return of grain at a later date.

All the while Mel and Sam spent each day in their barber shop cutting, trimming and shaving. With each cut, trim and shave the customer gave them something in return. Mel and Sam created value by providing services to their customers.

All of this seems a bit complicated. After all driving a herd of cattle from Rancher Smith’s place over to Farmer Jones’ place is a chore. Then when they are there Farmer Jones needs a place to keep them and he has to feed them and make sure they stay healthy and… Wait a minute Farmer Jones raises grain. What does he know about cattle? That’s Rancher Smith’s job. And, what is Sam going to do with a live cow anyhow? He’s a barber sure, but is he a butcher?

This is where money comes in.

Rancher Smith begins to realize with the continuing days of no rain that the grass is drying up and he is going to need to feed his herd. Because he is a good rancher and an astute businessman, over the years he has saved up some money from the value he has created in the past.

Farmer Jones sells his bumper crop of grains to the Coop that stores it in the grain elevator in town until a buyer makes a deal and hauls it off. Farmer Jones take money home which he can they use to pay Sam for his shave, and pay the banker for the use of money he loans to by the seed for his planting.

Money is a vehicle for the storage of value. Value is created when you provide, produce or deliver a product or service. You are entitled to money when you create value.

From value evolves wealth.

Over the years Rancher Smith has consistently raised big herds of healthy cattle for which he has been paid high prices. His cattle are known far and wide as the best beef and demand for his top quality beef is strong. Though he has consistently invested in his ranch, buying equipment, new land and veterinarian services the value he creates each year (the money he earns from selling his cattle) exceeds the cost of his ranch and family. Over time he has created wealth. Some years when things aren’t so good Rancher Smith dips into his wealth to keep the ranch running; some years he replenishes his wealth with the return from a particularly good herd.

Farmer Jones had a good crop this year, a bumper crop of which he is rightly proud. But, this crop follows three years of poor crops which he had sold for barely the cost to produce them. This year Farmer Jones had to go to the banker and borrow the money to buy the seed to plant the crop. Had he not borrowed the money he would not have had the bumper crop and missed the opportunity to erase the losses of the three poor years. However, in borrowing the money for his spring planting, he promised to pay the banker interest for the use of his money, further reducing the actual wealth created from his bumper crop.

Sam and Mel opened the barber shop each day and created value through the sale of their services. Each time they cut, trimmed or shaved a customer they were paid for their services and created value. Operating the shop consumed some of the money they earned and what was left became their wealth.

Wealth is left after the expenses of creating value have been paid.