05 March 2012

Don't Save Your Money Before Read This: Money, Currency, Inflation and Investment

Firstly, we should understand what is money. Money is a currency which we use to exchange some things we want. Money is a replacement of barter system. This is because the latter system is no convenience and hardly to be implemented fairly. For example, how many fish can be exchanged to a chicken? And how can you carry out those chichens to the market for bartering?

Next, what is inflation. Inflation is an effect that decreases the purchasing power of every dollar we have from time to time. For instance, one dollar in ten years ago can buy a fish or a chicken. But now, a fish or a chicken will probably cause you five dollars. It is worthy to highlight that the 'value' of a fish is still same as a chicken regardless of the value of a dollar. That is, you still can exchange a fish by a chicken today as you did in ten years ago in this example.

The price of one fish is $1.
The price of one chicken is $1.
Therefore, we can sell one fish to exchange $1, then use the $1 to buy one chicken
After 10 years (1990):
The price of one fish is $10.
The price of one chicken is $10.
Now, we can sell one fish to exchange $10. But since the price of one chicken is also $10, we can only buy one chichen after exchange (sell) one fish for $10. In short, the value of one fish equals to the value of one chicken is still the same as last 10 years, regardless the change of the value of the currency.

After understand what is money (currency) and the power of inflation (dilute the value of money annually), we should understand the risk of money saving. Yes, money saving is very dangarous in the long term because the purchasing power of every dollar decreases from time to time. So, what should we do?

Save asset or commodities instead of money/currency. Yes, just save asset or commodities which has its own value instead of currency (money). Of course, you cannot save a fish or chicken for 10 years in a fridge. Therefore, we need to find a suitable way to maintain the value of money we earn annually. The core idea is to use our money to exchange some things which is useful for mankind everlasting.

Gold, for example, can be used as a raw material or jewelry. If now 100 chicken = 1 gram gold, for example, we store 1 gram gold is equilavent to store 100 chicken. However, I must highlight that the price of gold may has huge deviation from its true purchasing power now. Therefore, we must do homework first before making any decision.

Buying properties or land is also another way to maintain the value of our hard earned money. Among these options, personally, I prefer to buy the shares of a particular business due to some advantages as stated below:

1. Liquidity
We can easily exchange the shares we have to money and vice versa.

2. Available Information
We can easily obtain annual reports quarter reports from an exchange center to do analysis before making decision.

3. Small capital
Required capital can be as few as few hundred dollars.

4. Low cost
Low transaction fee and zero annual maintance fee.

5. Cash flow
Some companies pay attractive dividend annually.

6. Value
Yes, the value of a business, e.g. human capital, fixed assets, properties, land, network, plant, instrument, products and goodwills, has been divided into million or billion number of shares in such a way that all people is capable to participate the business and ultimately earn money. For example, if a business will give you a dividend of $10 dollar per share annually, what price you are willing to pay for it? $100? for 10% return annually. $50? for 20% return annually. Remember, nobody is going to sell you if your ask price is too low. But if you ask price is too high, you may increase your risk in a investment.
1. Short term market price fluctuation

2. Business fails
Yes, all kind of business can possibly fail in the future. Therefore, we must monitor the condition of the companes quarterly.

Therefore, do you still want to save your money for 10 years in a bank? No? But please save some money for 3~6 months expenses in the case of emergency first before doing any investment (exchange your currency to assets). That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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