How money is created around the world?

How money is created?

How much is Trillion Dollars?

Think in this way….

Let one million seconds = 12 days

one Billion seconds = 32 years

one Trillion seconds = 32000 years

But Why are we talking in Dollars but not in rupee or any other currency. Dollar being the world reserved currency, will be very easily understood by most of us.

Lets begin..

Around the world we see the central banks print the money. But we told from our own childhood that money is very hard to earn and we need to study hard and work for life to earn the money.

But no one told us how money is created? Every one says only about how to earn.

Today I will share you, how money is created around the world.

There are 3 ways to create money in any economy.

1. Money created by Government.

Government create money indirectly, by outsourcing to the central bank of the economy. Money created by central bank will be in two forms. 1) coins & 2) paper money (i.e. notes). This money is only about 3-8% of the money that we see in the economy. But wonder how the remaining money comes from? To know read to the end.

Physical Money

Even this physical money is created only in-order to meet the obligations of the private the banks.

Ever wonder how much costs to make/print the money? For example to make 10 dollar note, it takes only 3 cents and the remaining $ 9.97 cents are profit to government. This $9.97 cents can be added to governments tax revenue. And this revenue is called as SEIGNIORAGE. This being the governments revenue, you might be thinking that why they don’t decrease taxes to be paid on public. Why the government printing money always to clear out all the debt?

Consequences of Excess printing of money

But this might results in Inflation and make money lose its worth. you wont believe in me? you have a look at Hyperinflation_in_Venezuela. In simpler words even million dollars wont get you a meal per day.

1 USD equals to 47883 VES in 2019

As inflation rate goes up people tend to loose faith in the currency. For 1000’s of years the gold is used as the measure of money. But in 1971 USA president gave a announcement that gold cannot be used to measure money anymore. This created revolution around the world and from then we are seeing the inflation in the economy.

2. Money created by private banks:

Most the money is created by banks. But its not physical money like created by government. Its completely “Digital”. yes you heard it right, its digital money. In most developed economies the around 97% money is created by the banks.

But wonder whats the digital money? you can consider a promissory note as a digital money. Any debt can be considered as digital money. For example when a consumer want to buy an house and he borrows money from the bank saying that he will pay it back with interest. so bank creates the money and lends it to the consumer. Here i mean by creating is not any form of printing money. banks use that 3-8% of money created by government which they got it from the deposits of savings/current accounts. So this is how the money will be in circulation. it sounds a bit complicated but when the consumer pays back the debt and interest. bank earns the profit on money which is not theirs. Banks mostly give debts in real estate, as they feel its the safest bet they can keep on.

How banks create and make money

But are you feeling that your money is not safe with bank now? Don’t panic. This is how private banks work , this process is known as Fractional reserve banking which is a banking system in which banks only hold a fraction of the money their customers’ deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money. This gives commercial banks the power to directly affect the money supply. but there is a announcement from the government that there is no need for the reserves as per the current situation, Covid-19 and can lend out the 100% of your deposited money.

If there are no borrowers, banks don’t keep the deposited money idle. They invest in different securities and try to multiply the money.

As around 97% of money is made from debt, when it cannot be paid back then the economy would collapse and then central banks will bail out the private banks.

3. Money created by Central banks:

This happens only in situations like now, Covid 19 or any financial crisis. Central banks buy the T-bills, bonds from the government. But this will be burden on Tax payers, because the public will be paying it back to government in form of tax or increased interests.

Central banks cannot go bankrupt. but they are buying the real assets with just a digital money. This is how they can bailout the stimulus packages. but why the economy didnot revive even after the stimulus packages all over the world?

When ever there is creation of money there will be increase in inflation. But haven’t seen yet the inflation in the economy?

its because the inflation comes into existence only when the money gets circulated between the people. unless then there wont be any inflation. By this stimulus packages only rich people get benefited. so rich will becomes rich always.

But what can individual do to be safe from this all cycle and be debt free? I am not an financial advisor but can tell you the options that can save you from this situations.

  • Gold
  • Silver
  • Crypto currency
  • Equities (stock market)

But YOU need to take decision how you are willing to take step forward. But take the intelligent decision so that you wont regret it after a decade.

For more follow Learn Investing

Liquid Fund – a NEW FD?

Liquid Funds

FIXED DEPOSITS

Usually a good way to earn fixed income passively. Will get a certain amount of interest rate when you give your money to bank for a certain period of time.

Usually FD returns would be around 5-6.5% per annum. But are these can help us to beat the long term inflation which is considered as 4% per annum generally.

FD

So basically we are earning a rate of 1-1.5% per annum. Further you loose based on your tax slab. Now you may feel that we are not earning much. Exactly let’s see the pros and cons of FD.

Pros:

  • No risk (very negligible)
  • Fixed amount of return
  • Goal oriented ( can be very useful to kill your urges and save a certain amount of money)
  • Very known saving instrument

Cons:

  • Low liquidity ( money locked for a certain period )
  • Relatively low returns.
  • Income earned on FD is taxable ( not known to many)
Worried about the decreasing interest rates?

Thinking of how to beat the inflation passively?

So here’s the way to earn fixed income with very low risk compared to stock market. That’s Liquid Fund.

Liquid Fund

But wait….

  • Whats liquid fund?
  • Will my money be safe?
  • How will liquid fund make money ?
  • Are the returns guaranteed like FD?
  • What if they loose all my money?
  • When to choose liquid funds?

There are many questions might run in you mind right now. That’s obvious anyway. Even me, when I heard of liquid fund for the first time had most of this questions in my head.

But don’t worry, your money will be safe as FD. Let me answer you, all the questions one by one.

What is liquid fund?

Liquid fund is a type of mutual fund that invest in Securities with a residual maturity upto 90 days.

Assets invested in liquid funds are not tied up for a long period. As these don’t have any lock in period like FD.

Will my money be safe?

Absolutely yes, as Liquid funds can invest only in listed commercial paper, and they have an overall exposure limit of 20% in a sector. They are not permitted to invest in risky assets as defined by SEBI norms. These norms aim to contain credit risk in the liquid fund portfolio.

How will Liquid funds make money?

Liquid funds earn mainly through interest payments on their debt holdings. so let us understand it in some detail.
When interest rates fall, bond prices go up. When interest rates rise, bond prices fall. The negative relation between bond prices and interest rates is stronger for long term bonds. This means that the longer the maturity of a bond, the more it responds to changes in market yields.

Since a liquid fund invests only in short term securities, it’s market value does not respond much when interest rates change in the market. This means that liquid funds do not have significant capital gains or losses.

When/who to choose Liquid funds ?

When you have a certain amount of cash, but not ready to invest in anywhere. You have 3 options.

  • Have completely in cash form
  • Put in savings account.
  • Invest in liquid funds

Cash: it doesn’t earn you a penny, even if you if you keep with you many days you keep it with yourself

Savings account: here you can get around 2.5- 4 % of returns per annum.

Liquid fund: You can earn more than 7% ( it can be upto 9%) per annum.

This returns greater than 7% are rare but can be possible.

Pros:

  • High liquidity
  • Low risk when compared to other mutual funds
  • Low cost
  • Flexible holding period

According to me the High liquidity and low risk are the best advantages of liquid funds.

Can withdraw 50,000 or 90% of your money instantly (which ever is lower). And remaining money within 2 days.

Best performing liquid funds right now are following :

Best performing 5 liquid funds 2020

How to choose liquid fund?

Returns : always see the last 3 months returns of the fund and check if it generates desired returns or not. As liquid funds invest only for the time period of maximum of 90 days.

Expense ratio: lower the expense ratio better for the investor.

Note:

Liquid funds are of low risk which doesn’t mean zero risk. So before Investing make your own research regarding the liquid funds and invest if and only if it’s suitable to you . Dont invest in any of the securities without understanding it. Even it guarantees the profits. It’s my opinion.

Still have questions? Shoot in the comments 😜

Basic rules of Investing

Know the Rules

Do you think that you are far behind many in the process of Investing?

First you need to have 2 things to be in place before starting with the investment process.

  1. Security plan ( term insurance,health insurance)
  2. Emergency fund

Don’t merge these two things with Investments. These are not Investments.

Even if you have health insurance from your employer, it’s always better to have one on own. As you can’t take your employer health insurance to be granted. It will be terminated once you leave the job.

Emergency fund, it’s basically a fund of 6-12 months of basic expenses you have. For example house rent, food , any emis you pay. It is good to have emergency fund than before Investing. We can’t predict the future. Anything can happen like covid 19.

Note: SIP’s don’t come under basic expenses.

If you don’t have these two plans firmly in place don’t start investing. It’s very risky. Don’t go further for Investing rules. Comeback later.

Do you have security and emergency fund in place? So welcome to “Investing” club mate.

Let’s dive into the basic rules of Investing then

Rule 1

Always know what type of income that you are earning.

There are 3 types of incomes

  • Income from paycheck
  • Portfolio income
  • Passive income

Income from paycheck is most commonly earned income, it’s highest taxed income. So it’s very hard to become rich from this income alone.

Portfolio income, generally derived from stocks, mutual funds,bonds or any paper assets

Passive income, it’s generally derived from real estates, royalties, patents. There are many tax benefits available on this type of income.

Try to have combination of incomes, as passive income and portfolio income classes saves you the most valuable asset for you. That’s “time

Rule 2

To convert the income from paycheck to passive / portfolio income.

Many have only one question as what if I loose all the money ?

What if I can’t afford to buy real estate property?

There are always what if’s in life. There is always risk to loose.

But only then we have option to win when there is option to loose.

Not taking any risk is the biggest risk

Mark zuckerberg

Rule 3

Buy secured security to turn your paycheck income to portfolio/passive income.

What’s the security? Security can be any stocks or real estate property or bonds or any that can generate income.

Securities can be assets or liabilities. To know more on assets/liabilities visit : Assets

If a security generates income then it’s an asset or else it’s an liability. Thats why we have SEBI (Securities and Exchange Board of India) but not Assets and Exchange board of India.

Sane security can be asset and also liability.

Example: If I buy 10 shares of a stock for 100$ and then sell 5 shares for 150$ and then again in the next month sold remaining shares for just 50$. Due to pandemic. So here you can observe in the 1st transaction I made profit of 50$ per share then it’s a Asset. In the next transaction I get loss of 50$ per share. So it’s became liability.

Rule 4

Investor being asset or liability.

Wait what ? Is it not the security being asset or liability?

Yeah you have read it correct. It’s always Investor being risky factor in Investing.

The Investing process becomes risky when Investors don’t understand the security being asset or liability.

Be greedy when others are fearful

Warren Buffett

A true Investor always can validate the security to know the real value of the security. If it’s a valid security with cheap prices grab the opportunity.

Rule 5

True Investor always be prepared for whatever happens in the market.

Even it’s bull market or it’s bear market. And grabs the opportunity at right time.

But how to know the right time?

It always comes with experience same like chess. There’s always opportunities available.

But don’t hang on to the single opportunity that you had missed. Because you will miss the current opportunities.

Main takeaway is Don’t predict and miss the opportunities that you have right now with negitive vibes.

Rule 6

Good deals attracts money always.

What if you have opportunity but no money to seal the deal?

Validate the deal, if rewards are higher invest in by borrowing or be a mediator to some other Investor and get the partnership in the deal.

If rewards are not that great to invest by borrowing, then it’s not a great deal at all.

So that’s all the rules about.

Main takeaways from the rules are

Don’t rush to invest, validate the deal. You are not in race to win. Generating wealth is not a competition. Slow and steady always wins.

Source: Rich Dad’s guide to investment.

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