Money is surely one of the essential aspects in our life. However, there is no easy or secret way to make money. In the first place, to make money, you need to first understand it`s real meaning. In short, you need The Beginner’s Guide to Money!
In this article, you can browse through a step by step guide that will refurnish your basics of money. There were many not-so-simple questions asked by people & we have given very simple answers to all of them. These answers will solve all your queries. Thus enabling you to broaden your perspective towards understanding money in a better way & earn more of it!
What is money after all?
Money can be defined in the following ways-
- It can be defined as the medium of exchange which simplified the complex system of barter.
- It can be defined as a certificate assigned as the common perceived value for a good or a service.
- It can be defined as an instrument to standardize & store the value for a particular good or service.
Why do people prefer depositing their money in banks instead of locking it in treasure chests or hiding it under a mattress?
This question can have numerous answers. Let’s begin with the most apparent one. When you deposit money in a bank it is secured. There are less or no chances that your money will get stolen. The next apparent reason is that you get an interest on the money which is an extra income to you. Another interesting reason is that you can carry money with you easily in form of cards & cheques. Imagine if you keep all your money at home & when needed to take somewhere all the hard cash what would happen! After all money is something that works best when it moves around!
Why doesn’t a country print lots and lots of money and make everybody rich?
Gold has a higher value than many other commodities. This is not due to its ability to shine. However, it’s because gold is a commodity that is rare. Similar is the case with currency. Remember one thumb rule that implies to every asset. If the availability of an asset is more, then its value decreases.
Similarly, if a country prints loads of paper money then, its value will decrease & will lead to currency devaluation. Hence, whenever the currency amount rises, the price of goods & services spreads out as per the increased currency. This makes every unit costlier. In simple terms, consider if the government increases the supply of currency. However, the government doesn’t increase the supply of goods & services. This will hamper the balance of our economy. Eventually it will lead to a price rise of goods & services.
You will clearly understand the same when you read the following illustration-
Assume that there are 100 oranges in the market. The total currency amount is Rs.100/-. Thus, a person will get one orange for one rupee if distributed equally (Rs 100/ 100 oranges). Now the government prints additional 50 rupees & distributes it equally among the people. Now total currency available is Rs.150/. However, the numbers of oranges available are still the same 100. Now a person will pay Rs.1.5 rupees to buy one orange (Rs 150/100 oranges).
As discussed before, the availability of money has increased from Rs.100/- to Rs.150/-. However, its value decreased as the same orange which was available for one rupee before has become expensive by 50 paisa (Rs.1.50). Thus, it implies with the thumb rule as discussed before. This happened as the supply of oranges did not increase with the supply of money.
Hence, the more currency government will print, more expensive the commodities will become. The following event greatly justifies this statement. Long ago, Germany took a decision to print further more currency during the year 1921-1924. Germany decided the same to refurnish the drastic consequences of World War 1. However, the implications were disastrous. In some period, the worth of German mark depreciated so severely that ‘One American dollar (1$) = 4,210,500,000,000 German marks.’ Can you believe it!
How to Combat Inflation?
Consider this statement. The rise in prices leads the workforce to ask for higher wages. The higher wages in return leads to rise in prices. Thus, inflation is a vicious cycle that rejuvenates itself.
An excellent way to tackle inflation is to ensure timely investment in assets that will ensure higher return as compared to the inflation rate. Suppose if you have 100 rupees & the current inflation rate is 5%. Hence, you should invest in an option such that it will give you more than 5% returns. This will help you to gain leverage over inflation.
How do Banks Create Money?
Banks create money by lending money to borrowers & earning the interest on the principal amount that the person borrows. Banks lend this money received from the pool of investments that the investor deposits in a bank. A small portion from this pool is kept in the reserves (about 10%) & the rest is lent out (90%).
Can Money Buy Happiness?
Money can’t buy happiness. Money alone has no value. The real wealth or value is in us & the goods & services. If you are baffled then just imagine yourself marooned on an island with lots of money. However, there is no one around there & no food, clothing or shelter available. In such a case, all the treasure you have will be as worthless as the pebbles on the island.