Ch 3 - Five Core Principles of Money and Banking

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  • Five Core Principles of Money and Banking: 

  
  1. Time has value: Not only does your time literally have value, but also, loans taken out over a period of 2+ years will have monthly payments set up by a bank. After that period of paying off the loan, you will find that the total exceeds the amount of the loan
  2. Risk requires compensation: dealing with risk requires facing all possibilities that could occur, and eliminating the risk. Assuming and analysing risk is a job which requires compensation, which is at the core of banking and finance. For example, car insurance companies profit off the fact that people are worried about the risks of accidents.
  3. Information is the basis for decisions: researching about something before making a decision as decisions must be reasonable, practical, and beneficial.
  4. Markets determine prices and allocate resources: well-developed markets are essential for healthy economic growth. A better developed financial market leads to a quicker country’s growth. The higher the price investors are willing to pay in the market, the more appealing the idea will be, the more likely it is that the firm will issue securities tortoise the capital for the investment
  5. Stability improves welfare: economic stability improves wages for workers. Stability does not refer to personal stability. 

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  • Legal Tender Money: money which is legally approved as a payment tool 
      * This money is approved by the reserve bank. Anything can be used as a currency if it is officiated properly 

  • Standardisation: same set of rules for every person 
      * Store of value = medium of exchange 

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  • Liquid: available asset which is accessible, unlike gold for example, which cannot be used quickly to make purchases 

  • Liquidity position: cash access available immediately
      * Asset quickly converted to cash 

  • Durable: money that can be saved over a period of time and not use its value 

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  • Credit cards: cards given by a bank which give users a line of credit that can be used to make purchases without paying instantly, as it can be given back on a loan monthly payment basis 
  • Debit cards: cards that can be used to make purchases using the holder’s money, not the bank’s money

 

  • Facts about Credit and Debit cards: 

  
  1. Credit: 
     * Late payments can ruin your credit score
     * A lot of interest is added is payments are missed/delayed 
     * Large purchases can be made immediately, although it is not recommended (no instalments) 
     * Online purchases are safer with credit 
     * A good credit score leads to higher rewards as the card holder seems to be responsible (trust is gained by the bank)
     * Better used for insurance 
     * Annual fees apply, and can be bad for people who do not pay off debts on time. Intretest stacks up over time if payments are late
     * Cards are subject to credit card fraud 
     * Card holders can be tempted to overspend 
     * Credit could be easier to manage than a loan (as payments are usually smaller than a large upfront loan)
  2. Debit: 
     * Money is available in your bank account 
     * Money is increased from the income added 
     * No interest is charged 
     * There is a limit a limit of spending as to prevent bankruptcy 
     * No excess annual fees 
     * Aren't completely safe (Debit cards are subject to theft and fraud)
     * Has 6 types of cards which all serve different purposes (debit cards could come with rewards depending the bank used)
     * More convenient for everyday purchases 

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