Money is a relative concept, and the amount of money that may seem like a large sum to one person or business may not be considered much at all to another. How much money is relative depends on the individual or business’s needs, wants, and environment. For example, a family living in an expensive city may consider $100,000 to be a modest income while someone living in a rural area may consider it to be quite wealthy. Additionally, the same amount of money can have different values depending on when and how it is measured. It’s important to understand these nuances when considering how much money is relative.
When I was a councillor in a small town, I had the unenviable responsibility of trying to explain the concept as we made strategic investments in infrastructure and gave out a few economic development grants. I did not knock this one out of the park. However, I feel that with a few more years under my belt and a few more letters at the end of my name I will give it another try.
Why should you care about this? Because, if you are anything like me or the people I come into contact with you have an opinion on how money should be spent, how much things should cost and what the value of a dollar is. Whether or not it is your dollar, a tax dollar or a potential investment the relative nature of money is not something to ignore.
If I gave you a million dollars today, to do whatever you wanted to with it, would it change your life? In all likelihood, yes. 1 million dollars even to those making objectively good livings would feel a net positive impact from having an infusion of $1 million dollars into their bank accounts.
But let’s add some strings, I can give you $1 million dollars today, but in 8 years I want my principle + 12%. That last one is a pretty common venture figure. So, now the relative value of that million dollars has changed because its a kind of debt. It can still change your life but is it really a million bucks.
Now, let’s say that you are a government, and you have 1 billion dollars in surplus (cough, cough). You have an outstanding debt (as all governments work with some kind of debt, it’s basic economics). You have several priorities including debt reduction but for every dollar you spend in one sector, that is a dollar you cannot spend in another. The opportunity cost around having to invest that much money is substantial, and again reduces the real value of that money significantly.
This is one of those concepts that can make your head spin around so I will make the conclusion of this post short and to the point. The money that you, your business, your community has is relative to the forces surrounding it.
A potential investment opportunity may seem like a risk but what are you giving up if you don’t invest? What’s the opportunity cost? A $40,000 grant may seem like a lot of money, but how much of the budget of the grant provider is being spent? In times of recession or decline cash may not be as valuable as assets. The long and the short of it is, that money is never worth a finite amount. The circumstances of the day always dictate the beneficial and negative consequences of mobilizing money. So, if you are thinking of making an investment, funding health care, or even just buying a new pair of shoes. Your dollar today is not the same as your dollar tomorrow and understanding the maximum utility point of your money is a relative calculation that most people do not consider.
Sandenn has been plugging away at his entrepreneurial journey for over a decade. With degrees and lived experience to spare he hopes that these blog posts can be of some help to you!