This has always puzzled me: why do people with similar backgrounds and intellects vary so widely in their effectiveness in dealing with money? One guy goes to work straight out of college, saves strategically, quits and starts his own SAP consultancy in 5 years, and is worth a few million by age 30. Another gets an MBA, gets sucked into a high-class lifestyle of expensive suits and dinners, and ends up with a BMW and barely $50,000 saved by age 30. And yet another, for reasons obscure even to himself (ahem!) goes off into a PhD program, and emerges, blinking at the harsh sunlight, at age 30, with exactly $0. Last weekend, I finally began to understand. Here is the secret: depending on your direct experience of the money you manage, you think about it with different metaphors. Your metaphors, not your financial or mathematical acumen, determine the outcome of your dealings with money.

Money Mindsets

Let’s get two misconceptions out of the way. Money as a conceptual or theoretical construct ^[1] (academic debates about fiat vs. gold-backed)  or as a technical definition ^[2] (the M0, M1… stuff) is mostly irrelevant to managing money at any level from big bailouts to a kid with a weekly allowance.  So is advanced mathematics (in fact an interest in mathematics makes it harder to be interested in money, because money-math is among the dullest kind).  You don’t need more than basic arithmetic and some trivial algebra to “get” money mathematically. Even all the statistics and optimization doesn’t get you to truly interesting math.

What trips us up is money metaphors. I began to realize this when I noticed that I was relating very differently to the completely trivial amounts of money this blog makes, compared to my paycheck. The first clue that put me on the track of this idea was this bit from The Organization Man (I haven’t yet blogged about this part in my ongoing series ^[3] about the book):

[Organization men] have little sense of capital. The benevolent economy has insulated them from having to manage large personal sums…

Whyte’s point was that those of us who have gotten our finances onto the ammortization autopilot thanks to paycheck deductions even for big sums like annual income taxes and house purchases, have simply never learned how to think about large quantities of money at a personal level. Thanks to the Nanny State and the Nanny Corporation, our financial horizon is the month, and through autopilot math, 80% of the cash flow that we are aware of in our lives passes by like clockwork: we watch it, but don’t actively manage it. The remaining 20%, we do manage consciously. This gives us the basic financial calibration point:

• High water mark: the largest amount of personal money you’ve ever dealt with
  

Middle class people in the US have a high-water mark of around $5000, whatever their actual income levels. This leads to two metaphors we are comfortable with: money as a clock (the limits between which we watch our bank accounts rise and fall predictably, like a pendulum) and money as renewable energy (like a cellphone battery). Here is the mental model of money this leads to, for an average middle class person in the United States (applicable, mutatis mutandis to the rest of the world):

Note that everything we commonly associate with different amounts of money falls into the “renewable fuel” or “clockwork” bucket. Even if we are nominally dealing with much larger sums (say $350,000 as the value of a house), the “high water mark” of $5000 or so limits our imagination. At this level, for instance, we don’t take interest seriously (8% is $400 a year) since it maps to an apparently trivial sort of expense (a couple of nights at a nice hotel).

But if you take somebody operating with an entrepreneurial mindset in the same rough range, that person actively thinks about and works with money very differently. He or she thinks on a scale at which the clockwork and fuel metaphors break down, and other metaphors work better. The “paycheck” person above might be a 100K a year employee. For this person, $1 million is not an obscene amount. If he had the true capitalist mindset, and lived with Protestant Ethic frugality on just $40,000 a year, and invested the rest at 8%, then $1 million is what he’d have built up as start-up capital to strike out on his own in 10 years, age 32 (yeah, yeah, I know, nobody is talking 8% returns at the moment). So why is this path so rare? I’ve met many people with the right level of frugality (mostly immigrants), but they are still stuck in clock/battery metaphors.

For the entrepreneurial mindset, the same money is viewed with metaphors of building material and “time to deadline.” Thinking of  money as time to a deadline, or non-renewable fuel (for example, time to build up a certain capital position, or time to burn it down at a particular burn rate) or as building material (“this is what it would take to buy a McDonald’s franchise”), leads to a very different view of the same levels of money:

Since I worked at a startup as the first employee for a year, I’ve had a ring-side seat to this mindset. But even that doesn’t get to the visceral reality of living this metaphor by managing money with this mindset. But curiously, even something as simple as a blog can put your mind in this gear. I feel a child-like sense of emotion and excitement when somebody uses the “buy me a cappuccino” link on posts to send me $3.00, yet I feel no excitement actually buying my daily coffee at Starbucks. The difference comes from earning as a capitalist, but spending as a paycheck-guy.

These are just two different “money mindsets” based on two different sets of metaphors. So what are the others out there, and what happens when you use them in the wrong contexts?

Thirteen Money Metaphors and their Uses and Misuses

1. Money as a clock: the predictable paycheck-in-auto-payments out oscillator is a good idea only for recurring necessary payments. Any money dynamics that don’t need to be on an auto-pilot should be taken off and managed actively.
2. Money as renewable fuel/rechargeable battery: this is only good for living expenses up to a middle class level. A misuse is to divide the national debt by the population to get a per capita debt. This may give the man on the street the illusion of comprehensibility, but trillions of dollars simply behave differently than thousands. At the trillions level, money is NOT renewable fuel, and it is dumb to let policy be informed by this metaphor.
3. Money as time-to-deadline/non-renewable fuel: good for small-time entrepreneurs, but really bad for countries. Applying startup “burn rate” thinking to the cost of the war in Iraq is probably a terrible idea.
4. Money as building/growth material: this is great for young businesses, but inefficient for older businesses. Kids consume calories and grow taller. Adults consume calories and grow fatter.
5. Money as freedom: beyond about $1 million, money represents freedom, since you could live very well off the interest alone if you were frugal. Good for lazy trust-fund kids and endowments that fund otherwise un-fundable causes. Bad for nearly everybody else.
6. Money as an organic creature: what if you get beyond the “endowment” mindset of money as something to live off, interest wise? At this point, your surplus is big enough that depreciation of cash assets is noticeable even to millionaires. This is money as rotting vegetables. If you don’t change your mindset and plant it in the open economy so it grows, you’ll mismanage money. But I am beginning to believe this is a TERRIBLE mindset for the middle class, and what keeps us trapped there. Mutual funds, like monthly payroll deductions, have made us much stupider financially, and lazy about thinking about money as capital/building material for specific projects.
7. Money as commodity: at a certain level, money becomes just another commodity like iron rods or size #9 bolts. It flows through your systems like a river, in large quantities, can be kept as inventory, depreciates, clogs up supply chains, and depending on the vagaries of the markets and interest rates, it may make sense to hold more or less of it.
8. Money as a lever: I can’t even begin to imagine the level of wealth where you get used to thinking of your money as a way to move more money. At the level we are familiar with (home equity) it tends to be a dicey business. But at a sufficiently high level, it is dumb NOT to think of it in terms of leverage. I suspect a lot of people use leverage mindsets when they play musical chairs with credit cards. Leverage is a bad metaphor to apply if you are using it to consume beyond your paycheck means, but a good one if you want to influence what money plants get fertilized.
   
9. Money as water: though this is about flows, sources and sinks, it  is subtly different from the commodity/supply chain metaphor, since it has natural origins. Think in terms of dams, rainwater, artesian wells, money “frozen up” in old families as glaciers/polar ice caps, and so on. This is probably the best way to think about money culturally and socially. Paris Hilton lives on a glacier.
10. Money as power: I suspect that there is a point of wealth at which entrepreneurs who got started thinking about money as building material realize that they’ve now made enough money themselves that they should think of themselves as investors helping others worry about the building material metaphor. I strongly suspect though, that this is probably a bad metaphor for governance. This is why I think Thomas Friedman is being dumb in advising Obama to invest like a venture capitalist.
11. Money as a work of fiction: once you get to the level of government, with control over the printing presses, where the only checks and balances are the hopes and fears of the Chinese government, you MUST think of money as cultural fiction. It is what you want it to be. There is enough obscurity in the international web of debts, bonds, export-import controls and currency trading controls that the only meaningful way to engage money is that of the high-integrity, truth-seeking artist.
12. Money as blood: this is where all those haemmorage and tourniquet metaphors come from. Money as circulating stuff that, if pumping pressure gets low enough, causes structural collapses and death. Though most of us resent the idea of the government bailing out fat cats, pure Darwinist “let ‘em pay the costs” opinions miss the fact that the world is not only like an ecosystem of many organisms, but also like a single connected living thing. You can cause a lot of pain or kill the whole thing if you are not careful. This is also the sort of metaphor switch that made Bill Gates switch from wealth creation to AIDS fighting.
13. Money as nonsense: we’ve all heard of those wartime economies with inflation at ridiculous levels like 1000%. This metaphor is related to the “fiction” metaphor: if you do the fiction part badly, you get nonsense. And then everybody has to scramble to buy gold or guns.

There are probably many other metaphors. I haven’t even looked at the entire “leisure” side of metaphors — the mindsets behind yachts, Louis Vuitton purses and the emerald jewelry worn by Angelina Jolie at the Oscars (reportedly worth millions).Many people with excellent metaphors on the management side have awful ones on the leisure side. That’s how you get the tasteless McMansions, crude new-wealth social behaviors and so on.

The metaphors you use determine your money personality, and how much you will be able to do with it. To get to the next level of money, you probably need to think with the metaphors appropriate to that level. Think too far above your league, and you’ll be reduced to daydreaming. Stick to your own level of metaphors, and you’ll never move anywhere. Change your leisure metaphor without changing your management metaphor, and you are in for frustration.

So much for the armchair lecture. When it comes to practicing what I preach, I admit I still haven’t got my mind out of the “paycheck” level of metaphors.