Monday, August 15, 2011

Part 3.1: The basic concepts of money management - cash, assets and liabilities

To begin understanding how money works and how it increases or decreases in value, we first need to understand the basic concepts, the things that decrease or increase in value.

We can classify all of our properties into three things:

1. First there is cash. Cash is what almost everyone wants. Cash is money, the bills and coins that we use to buy food at the grocery, to pay for our gas or fare. Centuries ago, people traded objects with objects. If a fisherman wanted to buy salt, he will exchange part of his catch to pay for the salt. Now, we use cash, the standard, universal object with value (as printed on the bill like $10, 20, etc.) to pay for the things we need.

People want more cash because lots of cash makes one rich. Or so we think. Hold that question, let me explain this later.

2. There are also assets. Simply put, assets are properties that earn money for you. There are different types of assets; there are tangible assets such as a house,a  building and businesses, then there are intangible assets (or paper assets) such as stocks, treasury bills and mutual funds. As the word suggests, we would like to have assets because these add value to our wealth. I'll expound on this on my next post.

3. Then there are liabilities. Liabilities are exactly what the name implies, they are a burden because simply put, liabilities are expenses. They make us lose our money or current value of our money. For instance, if you spend $30,000 or Php1,200,000 peso for a brand new car, in a three years, your money will decrease its value to P400,000 because that will be your car's worth after three years. So your money decreased. Liabilities work this work way, that is why we would like to get rid of liabilities in order to become truly wealthy.

Now, let's delve in deeper in the discussion:  How do these differ in value? Which of the three would I want to become rich? I'll tell you more in my next post so stay tuned.

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