Money is systematic. If you have it, you can use it. The truth is anyone with money in their hands can use it to effect transactions or purchase goods. This means that financial acumen is not a necessity in undertaking the spending of money, which can make money cost too much, for most.
According to most financial literature, money is defined as a unit of account, medium of exchange and store of value. In a consumption-led economy, money tends to be more transaction-focused and less so about savings and investments. In reality, the language of money is often misunderstood, mainly due to the systematic nature of money. So, what is the language of money?
When one speaks of money, one can move from holding cash in your pocket, to deposits with banks, to investing in stocks, businesses and even other mediums of exchange. As the old adage says, it takes money to make money. However, the uncommon truth is that the language of money involves the relationship between risk and reward, or as commonly known in the finance world, expected return. Therefore, where there’s a lack of understanding it can become costly to hold money. Whereas the transactional aspect of money is commonly known, there is often a lack of understanding involving the savings and investment landscape.
Savings and investments are two languages of money that are often used interchangeably, albeit incorrectly so. It is important that one understands the risk and return framework that involves money usage, so that one doesn’t save instead of investing and vice versa. Savings should be seen as the portion of one’s current income that is not spent on consumption, but rather aimed at future consumption; for instance, saving for a wedding or a house. Investing, however, is the purchase of assets, financial or otherwise, with the goal of increasing future income; for example, investing in stocks directly or via unit trust, art, sneakers, or crypto currencies. Therefore, an understanding of each money vehicle or term is vital as it allows one to utilise money appropriately according to a desired outcome. There are varied risks and rewards that come with each approach. The profile of risk and return changes as one moves from cash in your pocket, to savings and then to investments.
In South Africa, research has shown that savings and investment rates are low, with consumption mainly taking the lead, as shown by the high rate of indebtedness. Understanding the language of money is another way of addressing these statistics, by ensuring that where money is available it’s used efficiently. One shouldn’t take away from the fact that inequality and access to money does play a part. Therefore, in our quest to reduce inequality and to increase access to money, we should ensure that everyone understand the language of money.
“No society can surely be flourishing and happy, of which the greater part of the members are poor and miserable.” Adam Smith, The Wealth of Nations.