Now that we understand where money comes from What Is Money And Where Does It Come From, we can start to trace its path and get an idea of where it flows and finally ends up. If you haven’t read the post already, pause and read it. It is contains important information that you need to know to really understand money.

But in case you’re someone that decided to read on anyway, I’ll summarise. Most of the money in existence is debt. Most debt in existence has been and will be issued by commercial banks; the banks you, me and millions of other people and businesses bank with. Names like HSBC, JPMorgan Chase, Barclays, BNP Paribas and Santander should come to mind.

If you’re wondering why money is issued as debt, we discussed this in Why We Need Debt (It Drives Economic Growth). To summarise, it’s because it’s needed to finance everything from house building, business start-ups, business growth, job creation all the way down to house purchases and personal spending.

To illustrate the flow of your money, we’ll be using the average joe as an example to represent a majority of our readers, your numbers and figures may vary. Joe’s only source of income is a full-time job that pays him 40 hours a week. He earns the UK median average salary of £37,500.

Joe is an assistant manager at a large grocery store. His employer makes their money by selling groceries and other household goods. Joe works hard throughout the month to make sure that his team complete his manager’s tasks day after day until…

It’s that time of the month (no, not that), we’re talking payday! Joe gets just over £2500 paid into his bank account after taxes by his employer.

To be able to pay him, they had to sell those goods in the first place – which Joe’s employer took out a business loan out to purchase, not to mention other costs such as fitting out the store with refrigerators, flooring, signage, checkouts, delivery trucks and more. Moreover, many customers paid for their groceries using credit cards. This key point illustrates our finding from earlier posts – Joe’s money originated from loans from several sources of some sort and eventually circulated their way into his bank account.

Joe is just like any reasonable average person – he lives a somewhat balanced lifestyle. He saves what he can while still making the most out of life.

Joe lives in a 1 bed flat outside of London but still in the south of England, so he spends £850 a month on rent. He spends £100 on utilities (that’s a low estimate) and £200 on council tax. £40 on a phone contract, £200 on groceries, £200 on car insurance, fuel, vehicle tax, MOT and maintenance. £75 on 4 subscriptions, £40 on broadband and £150 on nights out/takeaways. He’s also got a bit of a young bachelor in him, he’s got a used BMW 4 series convertible that he’s still paying off; that sets him back £250 a month. So that leaves him with about £400 a month which he saves for future expenses such as for extra treats, holidays, emergencies, birthdays, Christmas gifts or a house deposit. If he’s got anything left after that, he might put it towards his pension/investments.

That in a nutshell is how the average earner spends their money – you may spend more or a lot less on some of the stuff mentioned, remember we’re talking about the average person here. Now lets find out where all that money ends up:

The utilities and phone bill? Most of the money goes towards operational costs, setting up infrastructure and buying in the energy from energy com bpanies. About 11% is net profit which goes back to the company.

With the groceries the cost of operations and inventory (buying in all the groceries) make up a lot more. 3% ends up with the retail store.

Subscription services usually make anywhere between 4% to 26% in profits. Their costs can vary depending on the type – Spotify spends around 70% of their revenue on just licensing alone, not to mention other costs such as server hosting services and facilities, app development and staffing costs. Companies like Netflix have similar costs, but they spend way less since they own and produce most of their content. We’ll say that subscription-based services spend 85% of their money on expenses while making 15% for themselves on average.

The bars Joe spends his nights out at? Most of their costs are staff, rent, utilities and the cost of goods themselves. Bars can typically make 10-15% in net profit for themselves, although it varies depending on factors such as location, footfall and management.

The car he bought from the dealership? The dealer typically only makes about £1000-£2000, on a used car sale, but typically make more by selling add-ons such as finance, extended warranties and gap insurance, translating to 8%-15% profit per sale . Once you add on their biggest costs such as staff, rent, utilities, insurance and financing, that shrinks to 3-5% that’s for the dealer to take home.

We’re starting to see a pattern here, the money he saves and spends on emergencies, gifts, and holidays also face a similar fate – it goes to a business that uses that to pay off their costs and then they retain the rest as profit.

You’ll notice that every cost that a business incurs are typically for other goods and services – either provided by individuals (such as the salesman at the car dealership) or other businesses (such as the energy companies that supply the gas and electricity).

For individuals, it’s easy to guess where the money goes next, it just starts all over again, it’s just won’t be Joe this time.

As for the other businesses, however, they’ll have their own costs to cover, but once that’s done, the shareholders/owners are free to do with the rest of the money as they please!

They could either:

• Pay their employees bonuses
• Pay themselves dividends (a payment that distributes the profits), or
• Reinvest the money back into the business, either to:
  • Pay down debts, or
  • Grow it further (by opening more factories, stores and purchasing more stock for example – we call these capital goods)

The first one is a rare scenario, it doesn’t happen in most businesses (and when it does, it only accounts for a small proportion of the profits made), so that means that most of the profits stay with the owners:

Reinvesting back into the business also means that the money stays with the owners. After all, the goods purchased to expand the business are worth something – those goods are owned by the business which in turn is owned by… the owners! Other expansion costs such as extra staff and training aren’t assets but they will be make the company more profits in the future, so consider the money spent here as money that stays with the owners. Paying down company debt also makes the owners richer: think of it almost like a mortgage on a house: as you pay it down, the value of your equity in it goes up – owning a company is no different.

A dividend is payment that distributes a company’s profits to its shareholders (the owners). Think of it as a reward paid out to the owners for investing in the company. This money goes directly to the owners of the business.

So what happens with the money that the owners do take out of their companies? You’d think they spend it like Joe does….

… And yeah, you’d be right: business owners are people too, they have groceries, mortgages, utilities, and every other expense to pay for, sure.

But we’re missing one important fact, and it’s that business owners are extremely wealthy: The wealthiest own about 93% of all stocks (Financial Times).

In case you don’t know, owning a stock makes you a part owner of that company. So 93% of dividends are paid to the wealthiest of people.

Sure, if anything this means that they’ll spend more money than Joe does on their lifestyle – they’ll living in bigger houses, they’ll be using more energy, driving nicer cars, going on fancier holidays etc.

So surely all the money goes ends up back into the economy anyway right?

No.

You see, the wealthiest of people are so rich, that they couldn’t spend all their money even if they tried. Even sports superstars such as Cristiano Ronaldo (who isn’t nearly as rich as most billionaire businessmen) earns $488,000 a day, how does one spend all that?

As we know already, keeping most of it in a bank account is a bad idea – as we found out in a previous post, inflation erodes the value of currency over time. The rich know this all too well.

So that only leaves them one other option:

They invest most of their money in assets, which include: Real estate (property), businesses (stocks, mutual funds, private equity), art collections, cryptocurrency etc.

And it doesn’t take a rocket scientist to realise that over several economic cycles, the amount of money that ends up in these assets grows and grows. It’s why the stock market is at record highs, houses prices are through the roof and cryptocurrencies (ever heard of Bitcoin?) are more expensive than ever before.

So the answer to the question? Your money ends up being invested in assets to make even more money for the wealthiest people.

Now the question is:

Do you want it to be the rich or yourself?

The rich will continue doing what they do, that’s a given. All we can do is join them.

Here at Unstrealth, we’re on a mission to educate people on how they can set themselves up for wealth and success in an increasingly expensive world. Keep reading to find out how.

Unstrealth – Wealth, Unstratified.