The Lesson From Monopoly

submitted by jwithrow.Monopoly Man

Chances are you have played the once popular board game Monopoly. In the event that you have never played the game then I would highly recommend it to you as there is a valuable lesson to be learned. And it is a classic!

The object of the game is to buy up as much real estate as possible so you can earn rental income when another player ‘lands’ on your real estate. Once you have acquired the real estate then you can invest in houses and hotels to increase your rental income.

Common thinking suggests that the game is called Monopoly because players attempt to achieve a real estate monopoly.

I do not think this is accurate, however. I would suggest that the title is derived from the fact that the ‘bank’ holds a monopoly on the money supply.

The object of the game is not to hoard the Monopoly money but rather to convert the money into productive assets. These productive assets then generate additional money in the form of rental income which can be used to subsequently purchase more productive assets when the opportunity arises.

Interestingly, the money generated from productive assets can also be used to pay taxes when the player is unfortunate enough to ‘land’ on those spots.

Players of the game understand that the Monopoly money holds no inherent value. The Monopoly money is only the accepted means of exchange with which productive assets can be purchased.

This is the lesson that we would be wise to learn and apply.

The Monopoly money is not terribly different from our fiat currency today. Our currency holds no inherent value and the central bank (Federal Reserve) holds a monopoly on the money supply. In fact, the Monopoly money may actually be better in context than our dollar because the Monopoly money maintains its value over the course of the game whereas our dollar is constantly losing value due to inflation.

So in this regard, the key to our own personal financial success is not terribly different from the object of Monopoly. The path to true wealth in life is the same as it is in the game – use the monopoly money to purchase income-generating assets. Obviously this is more complex in real life as there are a myriad of assets of varying quality to choose from and the process of acquiring these assets is much more complicated than ‘landing’ on their spot. But the concept remains the same.

Mainstream personal finance does a poor job of emphasizing this. Personal finance gurus almost exclusively suggest that we invest all of our surplus money in stocks and bonds employing a “buy, hold, and pray” strategy. This may be due to the fact that financial advisors make their living by selling the securities they tout. And while there may be a place in our investment portfolio for paper securities, they certainly do not take the place of real productive assets and one would be wise to understand the nature of the markets and the business cycle before jumping in.

Keep this concept well in mind as you build and execute your own personal financial plan. The goal is not to end up with the most money at the end of the day; it is to use money to acquire productive assets that will then provide income streams. It is essential to also employ an asset allocation model so that you are diversified across several different asset classes.

Always remember that money is just an illusion. Its only purpose is to serve as a medium of exchange and a temporary store of value. It is wise to keep a healthy amount of cash on hand at all times for both opportunities and emergencies, but any cash above your allocation would best serve you in other asset classes.

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