I recently conducted a workshop on financial freedom for women one of the things that stayed with me was a question: are there certain businesses they just may not make money that you should stay away from? What got me thinking was my own answer - yes, if the numbers say so, because numbers don’t lie. 2+2=4 and that’s a universal truth. If you spend 2 and make nothing, that’s a loss of 2. Numbers are a language that can be trusted always. So, as an extension of my “money and you” series, this month, I thought, let’s get you acquainted with money and numbers in a simple way. Our relationship with money is one aspect, but, understanding the basics of money and numbers itself is non-negotiable.
I will start with the most basic concepts that most of us know:
What is inflation and value of money?
Remember Money acts as a tool to access goods and services. By extension, the value of money is how much you can buy. Earlier, I’ve mentioned that money is a finite resource. What this means is, the only way to increase money, is to earn it (including inheritance). However, money loses its value in more than one way. You could spend it or, if you keep it in a bank/cash, then over time with inflation, the value of that money will go down. What that means is, if you could buy 3 outfits for that money when you kept it aside, you may be able to buy just 2. The adage, “money saved is money earned” only holds true if inflation doesn’t exist or if you convert that saving into an investment that earns more than inflation.
Why is money today worth a different amount than money tomorrow?
The other concept to remember is time value of money which says that money today is worth more than money tomorrow. Why is that? Because we do not know what the future holds, and we do not know the actual purchasing power of money in the future. We do know its value today. So, we assume the risk of the unknown, lowers the value of money in the future, resulting in 100 needed in one year could mean you need to keep aside just approximately 90 (assuming 10% inflation).
What are interest rates?
It is nothing but the price of money based on a banks assessment of the specific risk that you carry. Essentially, if you are a very low risk customer or a no-risk customer, you pay the lowest interest rate and if you are a startup with no collateral, you pay a higher interest rate.
How does all this add up?
If you need financing, personal or professional, use the above concepts to understand how much money you need depending on when you plan to spend that money. If there is a way to delay taking that money because you need it earlier, you may choose to take it now (even as an added security) but be aware that doing that adds a price. Finally, when planning for long term expenses and figuring out how much to need to save today, use the above concepts and then fill in inflation and future rate calculators available online to realise how much to really need today.
Originally written for Bahrain This Month and published here