This month, Wired Magazine is running an interesting cover story entitled The Future of Money: It’s Flexible, Frictionless and (Almost) Free. The article was quite thought provoking, but the general focus of the article was pretty deftly summed up in the final paragraph:
A generation ago, when people made the choice to switch to plastic, credit cards did not just replicate cash; they fundamentally changed how we used money. The ease with which people could make purchases encouraged them to buy much more than they had in the past. Entrepreneurs suddenly had access to easy — though high-interest — loans, providing a spark to the economy. Now, while it may be hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitized, infinitely transferable, and friction-free, it will again revolutionize how we think about our economy.
The technology discussed in this article is undeniably cool. It will make transactions for many purposes much, much easier than they’ve ever been. The acquisition of goods and information will become even easier.
Here’s the thing, though: each time there’s a new technology for exchanging money between people, there’s a cost for the people exchanging money.
Take cash, for example. We pay for the cost of printing cash with our taxes. With credit cards, we pay for the convenience with financing charges and higher costs at retailers. With electronic transactions, we pay for the convenience with a small surcharge in each of the transactions.
In each case, there’s an inherent cost of using the means of exchange. With cash, the people who have more of it pay more taxes and thus bear more of the burden of the cost. With credit cards, some of the burden is pushed to the retailer, but the consumer still pays for it. With purely electronic transactions, even if the fees are entirely pushed to the retailer, the customer still pays for it with higher costs on the items they buy.
The “future of money” is just a remix of the past of money. The more you spend, the more it costs you.
If you spend lots of cash, that means you have lots of cash and you’re going to be taxed for it. If you rack up large credit card balances, you’re likely paying finance charges, you’re paying higher costs at retailers because they’re covering some of the cost of that transaction. Similarly, if you make lots of electronic transactions, you’re losing more and more money to the overhead fees.
It doesn’t matter what format of financial transaction you’re using, the basic method of success stays the same. Don’t spend money with reckless abandon.
If you hold onto your cash, you can eventually move into a position where your savings supports you, either in part or in full. In that position, you pay less taxes than you did before.
If you don’t put balances on your credit cards, you’re not socked with the finance charges and you’re not paying the “surcharge” built into the prices of the stuff you buy.
If you don’t do lots of PayPal transactions, you don’t lose money to the fees charged on all of these transactions. The fewer transactions you make, the less money you give away.
The new money works the same way as the old money. The less you spend with reckless abandon, the better financial shape you’re in. The more you spend, the more money you simply give away in the form of fees, taxes, and surcharges.
The danger, though, is the same as it was with the move from barter to money and from money to credit cards. It’s now easier to spend the money. When we bartered, an exchange of value was difficult and time consuming. When we moved to currency, it became much easier to spend money and debt became prevalent. When credit cards appeared, consumer debt grew like crazy because it was so easy to spend. Electronic transactions are even easier – just a click of your mouse and it’s done. It becomes even harder to think through the buying decision, which means that there’s even more room for businesses to profit from you.
The best thing we can all do is separate what we’re buying from how we’re buying it. Do we need to buy this? If we do, buy it in a way that’s the most personally responsible. If we don’t need it, though, play it safe and careful. Shy away from the easy buy, because that’s the road that creates personal financial trouble.