The basics of money

Business

The basics of money

BY DAVID ROSE
Observer Business Writer

Wednesday, January 13, 2021

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THE concept of investing has been a foregone conclusion for many and was a distant idea in former times when the world moved normally.

This topic has always been seen as something only for the 'rich' and not something that needs to be discussed, since one could typically expect to always be fine in life.

However, the COVID-19 pandemic has forced many to re-evaluate the discussion surrounding investments and the role it can play in accumulating wealth to act as a buffer during negative economic events.

The traditional conversation with a child is more often than not focused on saving as much money (cash) as possible and seeking the best bank account with the highest interest rate to make that money grow.

In our grandparents' time this may have been a more conservative approach that would have yielded great success in a very limited world populated by those with a narrow scope of life.

The only problem with this logic in today's reality is that the world has drastically changed over the last half-century such that certain principles which proved beneficial can't operate in isolation anymore.

The simple use of money is for spending in a manner which provides some service, gain or opportunity to the holder of it. This spending can be for things such as food, utility bills or getting a lottery ticket.

All of these scenarios emphasise simple ways in which money is used in the everyday life of people. One thing which tends to be overlooked with respect to money,though, is this little term called inflation.

Inflation in its simplest form can be termed as the sustained increase in prices of goods over time. With respect to the time value of money, it speaks to the value of one dollar not having the same purchasing power tomorrow (future) compared to the present.

As a result of inflation, things cost more as time progresses, which reduces what one can purchase for the same value of money (purchasing power). An example of this can be the highly acclaimed Jamaican commodity known as the beef patty which has been consumed by persons from all walks of life for several decades. In 2006 $100 could have purchased a beef patty and left you with change to possibly purchase a drink or take the bus after. In 2021 the cost of a beef patty now stands at $170, which means that it would cost $200 (two $100 notes) to purchase this item. Although a patty itself hasn't had any significant deviation over the time frame, the cost to produce the good has increased — with the market prices following similar fashion.

In the short term, having a lot of cash is good and can be a sufficient buffer to weather any possible event during the current period. However, as time progresses, cash loses purchasing power as the prices of goods and services increase further. This in turn means that you will only be able to purchase less items with the same amount of money that has been saved to date. Even with interest being compounded on your money, an interest rate of 0.10 per cent isn't going to make a dent in preserving the value of that money.

Investing generally speaks to putting your money into an asset which can provide a positive return on your investment. This means that apart from the traditional financial securities one associates with investing such as stocks and bonds, a weed whacker or a new laptop can be considered an investment once it's put to use to increase one's income. An asset holds value for the owner since it can be used to derive further income such as royalties, brands or a building which can generate money. If one can invest in an asset which can produce a return higher than an associated benchmark, then one would be net positive depending on the metric used.

Stocks are seen as risky due to the volatility associated with the movement of the share price. Despite the fact that all investments carry an inherent risk, stocks are relatively the easiest way for someone to grow his/her money irrespective of the capital they start with at the beginning.

Unlike bonds or certain alternative investments which possibly require millions of dollars to start, investing in stocks can be as affordable as $100. Stocks or just ownership in a business allows for an investor to benefit from someone else's work while increasing the value of one's original investment.

In 2009 the Junior Market was created which facilitated the listing of small Jamaican companies and opened a new avenue for investors to gain exposure to the growth of these firms. Of the first 10 companies listed on the Junior Market, most have delivered more than a 200 per cent increase in the share price, with dividends (profits paid just for owning the stock) further enhancing the overall return on investment.

This isn't to say that stocks are the only answer to grow one's money but it's the easiest avenue for retail investors to start building wealth. One can use simple intuition to build a thesis of what would suit one's portfolio (collection of investments), just like the legendary investor Warren Buffet did with Coco-Cola.

Some local companies never stopped paying dividends during the negative downturn in the economy, which would have provided well-needed cash to some persons who would have possibly faced pay cuts or unemployment. By starting to invest one can build an asset base which can provide cash flow to the owner of that asset and act as collateral for future loans. This would also help to ensure that the future value of your money is greater than the present value it holds today. Saving is important, but investing is another principle that shouldn't be neglected in life.


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