New Rule of Money #1: Money is Knowledge

Why what you know, not what you have, makes you rich

This is the first in a series on the new rules of money. I lay the foundation for this series in my post "The Real Reason You Feel (and Are) Poorer". I highly suggest you read that post in preparation for this and the following posts on the new rules of money.

Have you ever heard anyone say they wish they had a million dollars? Then they'd be rich, right? How about someone wishing they'd win the lottery? Then they'd be set?

Of course the world is full of people who have made a million dollars or won the lottery and lost it all. They are not rich any longer. Why is that?

Fundamentally, it's because they misunderstand what makes you rich in the first place-and what money really is.

How the definition of money has changed

Today, traditional assets do not make you rich or financially secure. Just ask all those "investors" who lost everything during the last Great Recession when their homes and 401(k)s were decimated. Today, you can lose money on business, real estate, stocks, bonds, and commodities. Any asset class can take fail at any given moment.

This wasn't always the case. My parent's generation, for instance, could count on the old rules of money to work. For the most part, the dollar was steady so saving made sense, houses rose modestly each year in value, and employers took care of you in retirement. Money, for all intents and purposes, was money, and you could count on it.

That is not the case any longer. If you trust in those things, you're in a world of hurt come retirement.

The four economic ages of humanity

In my book, Increase Your Financial IQ, I wrote about the four economic ages of humanity.

They are:

  1. The Hunter-Gatherer Age: In the Hunter-Gatherer Age, humans relied on nature to provide wealth. They were nomadic and went where the hunting was good and the vegetation plentiful. You had to know how to hunt and to gather-or you died. For the hunter-gatherer, the tribe was social security. Socio-economically, everyone was even. They were all poor.
  2. The Agrarian Age: The Agrarian Age saw the rise of different classes of people. Due to the development of technology to plant and cultivate the land, those who owned the land became royalty, and those who worked it became peasants. The royals rode horses while the peasants walked. Socioeconomically there were two groups, the rich and the poor.
  3. The Industrial Age: While many people would place the beginning of the Industrial Age in the 1800s with the rise of factories, I actually think of it as beginning in 1492 with Columbus. When Columbus struck out for the New World, it was to find new sources of valuable resources such as oil, copper, tin, and rubber. During this time, the value of real estate shifted from growing crops to providing resources. This led to the land becoming even more valuable. And three classes emerged: the rich, the middle-class, and the poor.
  4. The Information Age: Today, we are in the Information Age, where information leveraged by technology and inexpensive resources like silicon, produces wealth. This means that the price of getting wealthy has gone down. For the first time in history, wealth is available to just about everyone. There are now four groups of people: the poor, the middle-class, the rich, and the super rich.

But even though we live in the Information Age, it is not information that makes you rich.

The difference between information and knowledge

In my travels, I've literally seen local people texting on their cell phones while riding on the back of a donkey cart. In classrooms all across the world, the Internet is readily available and technology is second nature to most kids. Regardless of socio-economic class, information is largely free and abundant. For the first time in history, people can access information and learn about anything no matter whether they are rich or poor.

While all this information is valuable, it's not as valuable as knowledge. Knowledge gives you the ability to filter out unimportant information to find the important information. Knowledge gives you the power to act on information. Knowledge is what makes you rich-not information.

How knowledge makes you rich

My rich dad once said to me, "Oil is valuable. Many people would love to own lots of oil. But owning lots of oil won't make you rich. It's understanding how oil can make you rich that brings wealth. For instance, crude oil is of little value until it is refined. That is a complicated process that requires science and equipment. It takes knowledge to refine oil and make fuel. Fuel is valuable and will make you rich. But you can't have fuel without oil."

Today, it's no different in the Information Age. You could have all the information in the world, but without knowledge, you would still be poor. The reason Mark Zuckerberg, for instance, is such a success is because he has knowledge of what to do with information and knowledge of how to build technologies to leverage information.

Mark Zuckerberg's knowledge of Internet technology enabled him to build Facebook. He also knows how to build a team and find people smarter than him to make Facebook bigger and better. Finally, he has knowledge that information is valuable for selling. Facebook excels at collecting your information, processing it, and selling it to advertisers who target their ads to make money off of you.

It is not the information that makes Mark Zuckerberg rich, it's his ability to process and leverage it-again, that is knowledge, and knowledge comes from education.

We live in an age where wealth is abundant and accessible by everyone-including you. But you have to be financially educated to be able to process and leverage it.

Today, knowledge makes you rich and a lack of knowledge makes you poor. In this brave new world, it's your knowledge that is the new money.

I encourage you to increase your financial IQ by increasing your financial education. Then you will be able to find the important information and have the knowledge to act on it.

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