One of the most commonly asked questions to me is ‘How does the monetary system Work’. To understand this concept let’s look at the differences between ‘Wealth’, ‘Cash’, and “Money’. As simple as it may sound, people do not know the basic differences between these three terms.
What is Wealth?
‘Wealth’ is measured in ‘time’ or the number of months you can maintain your current lifestyle before you run out of money.
So, if your monthly expenses are $5,000 and your bank balance is $50,000, you are wealthy for 10 months.
What is Cash?
This question may sound silly, but most people equate money with cash. Cash is just the physical money you have in your wallet or at home. Money in the bank is not cash.
Money that is physically not in your possession is not Cash.
What is Money?
Now I am going to challenge your definition of money. If there is one idea you can take away by reading this post, I really hope it is this one. Think about it for a moment, if ‘cash’ is money in your possession, what is that stuff in the bank?
Money in the bank is ‘Debt’
How? If you want proof, ask your banker. Bankers call customers deposits in their bank accounts ‘Liabilities’. This means ‘they are legally bound to pay you back your money in your account as ‘Cash’, should you wish to withdraw it.
Next – ‘Money as Debt’