Money and Wealth

I got married recently to a very intelligent person (rare for ladies!) with some background of finance. During our discussion on money matters, she asked me as to why I keep most of my savings invested and not in real hard cash in safe bank account. This blog is an effort to answer this very questions and to relate to money as currency to actual wealth that one possesses.

Lets look at what is wealth and why do we really need it. From financial terms, wealth is capability of an individual to get required necessities from basic items like food to lavish things like weekend in most expensive hotel in Amsterdam. You are more wealthy if you are capable of buying more of those.

For making all the transactions simple, money was invented. (I have already written another blog which details out this part.) But with money, there are a lot of issues that a normal person is not made aware off. Lets look at them one by one.

How real is money? All currency notes mention about guarantee given by governor of central bank that he will pay the holder of the currency so and so amount. But how real is that guarentee? Just look at the currency rates for politically troubled economies and you will be able to answer the question. During Afghanistan war, there was no buyer to the currency Afghani and eventually all transactions moved to US dollars. Only later they released new currency and replaced old afgani with the new one. Again at a discounted rate... Only now as the country is stabilizing, people are steadily moving back from USD.

What about inflation? There is one face to inflation which happens because of increase in demand and since supply takes time to catch up, prices start rising. There are many more reasons for inflation (I can take it up separately). But most important from today's discussion point of view is inflation forced by printing of new currency by central bank. Most of the times new currency is printed only to take care of budget deficit. Second most important is as money gets into rotation, the actual holdings of individuals keep on increasing as for every dollar saved in bank, bank is giving away loans and since people get more money, buyer power is increased forcing rise in inflation.

How safe are banks? I am sure, you all are very well aware of small and big banks failing and issues associated.

So what is the best substitute to hold your wealth? I am not sure of the best substitute. However, gold looks to be a fairly good substitute based on the data available to us for last century. However, if human discovers a planet with gold, we may see price of gold crashing.

Second best substitute I can see is real estate. More suitably the land which is not unlimited. Hence I dont see any major crash in land price (of course, only if you price it properly while buying as it is most illiquid asset)

I am also inclined to investing into businesses through equity route. Although it does not save us from conditions like war, however in today's global economy, we have sufficient number of global organisations who are not much impacted with war in one location.

All said and done, currency is the most liquid asset that you can hold and you cannot buy a loaf of bread by giving peice of land or equity. And for unplanned money requirements, you have to rely on money.


Note: in todays environment money could be currency or plastic or electronic or bank holdings of currency

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I am writing this blog after a long time. I have been little busy with my money earner job and at home to add a sweat member to my family (wife)...
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