by Jerry Looper
An opinionated guide written by my father, Jerry Looper, in 2015, and posted here with his permission. This book does not qualify as financial advice, but comprises opinions. Your mileage may vary! Some of these suggestions can seem old-fashioned, dated, or overly conservative, but there are kernels of truth here from someone who grew up in the 1930s during the Depression in Oklahoma. It was written for his four children, and shared here.
Money is a convenience in commerce and a store of value. And that is all it is. It is more convenient that bartering and you can use it to trade now or later. Money is not meritorious. Having money is more convenient than not having it. The lack of it is not a sign of bad behavior. It is just a tool and as such it needs to be understood, maintained, and used properly.
The lack of understanding of money is the cause of more grief in life than any other single cause. You will have a working life of 40 years or so, then a retirement period of maybe another 30 years or so. This means money will be a long-term issue. It will affect your relationships with your parents, your spouse, your children, your neighbors, businesspeople in town, and the government. During your working years, you must balance income with your every-day expenditures – call it cash flow – as well as with long-term savings for emergencies and retirement. We will look at income, a budget of expenditures, the usual mechanics for managing money, and also at some retirement issues. But first, we need to consider some general aspects of money.
Gold or Paper?
In the modern world, money is actually just paper. But as long as people believe it is money, then it is money. And it is lighter to carry than gold. As trade was becoming profitable in early times, governments stamped out coins, usually with the leader’s image on them, to be used as convenient money. But when somebody needed more money, it was easy to clip some of the edge off each coin. Clipping only 5% off 20 coins got him a new dollar. Free money! (To make clipping easier to detect, coin edges were soon “milled”, ie grooved, as are all except the smallest-denomination US coins.) But eventually national governments realized that since they were in charge, all they really had to do was print up some paper and call it “legal tender for all debts, public and private” just like it says right there on our bills today. This is called “fiat” money. “Fiat” is Latin for “Let it be done!” We used to be able to trade in a bill for gold at the Treasury, but they stopped that long ago.
Other People’s Money
Not all money is dollars. Each country uses its own money, which can be worth more or less compared to other country’s money at a particular time depending on their comparative economies. (Except that the countries in the European Union all use the euro.) The conventional representation of this exchange rate is the three-letter-code of one country’s currency shown in the second three-letter-code currency. For instance “USDEUR=0.75” means that one US dollar is worth 0.75 euros.
Inflation
The actual purchasing power of money tends to decrease over time. This is called “inflation” and is defined as an increase in price without an equivalent increase in value. If the price of the same TV set goes up from year to year, that is inflation. If the new TV is bigger, or has better resolution, or receives more channels, it has more value, so the increased price may or may not be inflation. The standard metric for US inflation is the Consumer Price Index (CPI). It varies between maybe 2% per year to maybe 5%. It can be caused when the government simply prints more money without an equivalent increase in their reserves. Or it can arise when there is a scarce item (like crude oil) that people want. Those who want it more will pay more money for it, thereby raising the price when there is no equivalent increase in value. Things that are valuable and scarce tend to be inflation-prone.