What is Money?
Money is any item or verifiable record that is generally accepted as payment for goods and services. Hence we are ascribing value to the symbol "$" as the unit for measuring the quantity of money.
Historically a barter system was used as a system of exchange goods and services. But I can imagine that one person may not always want the things being received in exchange. That would have led to the need for a common ground or a common medium of exchanging goods.
That is how objects such as gold, silver and other precious metals became mediums of exchange since we ascribed value to these objects proportional to their rarity. Rarity of an object makes owning it more valuable. After all it is just something extracted from the earth, so is underground water. Which brings to question why did we use metals in the first place as a common medium? Might as well have used wood, leaves which were more widely available to exchange.
Given the context of what money is it is only human nature to want more money to be able to purchase more goods, services or experiences. In the current world we live in, we are enticed by so many things we want to buy, experience that all expect something in return — Money.
Why do we need money?
- Sustain — Make enough to afford ever increasing prices of necessities
- Grow — Expenditures which aren't a necessity
Why do we need to increase our earnings over the years just to sustain?
Prices of commodities that we consider as bare necessities may not always remain constant. They keep rising, raising cost of living. People have dependents they need to provide for and the rising costs of living adds further financial burden.
Why would prices of necessities increase in the first place?
- Scarcity of goods (given a constant demand) — Wood required to build a house is a limited resource if not replenished. Scarcity of wood will raise the prices even if the number of people demanding it remain unchanged.
- Increased demand (given a constant output) — Growing population raises demand for food, but if the farms cannot keep up with the demand, prices rise.
Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.
Money Lender-ing
As individuals we can acquire money mostly in the following ways:
- Provide a service to others in exchange for money (e.g. Deliver Food, Barista)
- Make something and sell it in exchange for money (e.g. Farmers)
- Profit off something or what someone else is doing
Profiting off what someone else is doing is what the intention of this article is.
How can an individual earn more?
Work multiple jobs, have a side gig. But this is constrained by the finiteness of time.
Why do businesses need to earn more? And the need for investment as a tool.
Given the rising prices of items, my employees need more money for themselves. Employees spend more on items than before and we expect the business to provide for that. If the employer is paying everyone more, less is left to grow the business and hence it needs to make more money as well. Two questions arise here:
- Why do I need more money to grow the business?
- How do I get more money to grow the business?
Why do I need more money to grow the business?
As explained above, businesses need to meet ever rising costs of operating. To compensate for the rising costs, the revenues must rise as well. They can increase revenues by acquiring new customers, manufacturing more products and varieties to meet the demand, cut costs. Hence the case for more money. Also corporations are battling inflation at the same time via employees as well as through the business itself.
How do I get more money to grow the business?
Without money in the first place, I cannot increase production nor spend efforts to acquire new customers. So borrowing money from someone is the easiest way — opening up for investment. Hence investment is an easy way to increase your expendable resources. As a business I borrow money from others to purchase more raw materials, make more products, market them to new customers and in turn increase revenues.
Why borrow?
Institutions can certainly self-sustain without borrowing money. However to keep up with increasing customer demand, a company needs to borrow to scale up the business as well as to get through tough times. A company cannot charge an absurd amount per customer to make up for the rising costs of running the business. Hence it tries to raise money in other ways.
If there are unexplored avenues for growth, new product lines, un-acquired customers — if not one company, a new one will offer it, causing your company to lose customers to them. Hence the motivation for a company to raise capital should be growth and innovation in an ideal world.
Hence the expectation of a company to always grow or have infinite growth seems valid.
What is meant by growth?
Individuals can grow by raising their standard of living.
Corporations grow in terms of their revenue — by attracting and retaining more customers to their products.
Governments may grow as well, but the primary source of revenue for the government is taxes collected from individuals, corporations and other sources. Growth for the government is usually indicated by the nation's GDP and some socio-economic indicators.
Government offers investment opportunities too — how do they offer returns?
Yes, governments offer investment objects such as bonds or treasuries, even though running a country is not a business in its true form. Government revenue is acquired via taxes it collects from corporations and individuals. Governments use these funds to build or purchase defense equipment for our safety, and to maintain facilities such as roads, railways, and natural recreation areas.
Hence for government to raise capital by issuing bonds, there lies an inherent expectation for investors that it will collect more taxes in the future either by increasing taxes or improving the standard of living.
Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.
Investment for Individuals
To profit off another person's labour we need to give something to get something in return. There is no case for free money. That is where investment comes into the picture. Investing is simply lending money.
I would lend money to my friend to build a bike and he/she in turn would sell it for a profit, off which I would take a share in return for my initial investment. Similarly I could lend money to an institution in return for expected profits in future. It is always prone to risks — my friend can fail to sell the bike, perhaps due to lack of demand or the bike being of inferior quality.
What if you don't keep up with inflation?
If I am not able to keep up with the rising costs of living, I would be left with less and less money after meeting my basic needs. That reduces my ability to spend time on leisure activities or afford items for leisure.
How much should be invested for the future?
Enough to sustain your current standard of living at the projected future date. That is where a lot of companies that manage retirement accounts come into the picture — they require you to input your current income level and expenses and project how much you should get each month in future after you retire.
Modes of Investment
Bonds — Institutions issue bonds to raise money. It's an agreement between the issuer and the lender that allows the institution to borrow money from other entities in exchange for interest paid at regular intervals and an expiry date when the original amount lent must be returned.
Stocks — Institutions release ownership of a certain part of their company and allow others to own that piece of the pie. As the value of the company grows, the size of the pie increases and so does your own share.
Derivatives — Their values are based off prices of an underlying asset.
Bank Account — Keeping your money in a bank account keeps your money safe from fluctuations or risks associated with lending. Banks provide this service for you to safely store your money and make it accessible whenever you want. Banks earn by investing some part of the money customers deposit, lending money to customers at an interest rate, and charging fees for services.
PS — This is in no way an article to encourage investing. It is risky, so tread carefully.
Disclaimer: Content and examples stated in this post have been simplified for the purpose of understanding.