Saturday, October 18, 2014

Reality Finance/Millionaire Challenge and Everything You Need to Know about Finance in a Few Blog Posts, Part 1

Hey everyone.
Today's post is intended to give you all a bird's eye view and general understanding of how the global economy and financial markets work. But before I get into that, I just wanted to let you know where my finances stand, as part of the "Reality Finance/Millionaire Challenge".

I generally try to save about 10% of everything that I earn, before taxes. However, it doesn't always work out that way. Sometimes I save less and sometimes I even save more. My savings rate is also affected by upcoming bills that I know I must pay. For instance, if I know that my rent is paid for the month and all of my automatic debits have come out of my checking account, then I can save more than if I know I have a large student loan payment coming out of my account automatically, or I know that I still have to pay the remaining half of that month's rent.

As a solo practitioner lawyer, my income doesn't always come at the same time each month, but it is fairly consistent. I generally earn anywhere between $4,000 to $5,000 per month and this month, I forecast that I will earn approximately $6,000 given my talks with clients who want to retain me and other attorneys who have expressed to me that they need my assistance in various drafting projects.

Yesterday, I made $275, and being that I didn't have any bills coming due immediately, I was able to transfer $40 of it to my Roth Individual Retirement Account, $35 of it to my regular investment account, and I put $110 of it into my savings account. The stock market kind of got slammed today, and so the two stocks that I currently own - Baidu.com and Lockheed Martin - got hit. Not as badly as the broader stock market though. So in total, I lost $14.84, leaving my Roth IRA balance at $1,296.33, and my regular investment account balance at $206.29, for a total investment account balance of $1,502.62. My savings account balance currently stands at $110.

Now that I've gotten that out of the way, it's time to begin to learn everything you need to know about finance. So here we go.


The topics of personal finance and finance generally are all about money. So what exactly is money? 

The Definition of Money

Money is just a medium of exchange. A long time ago, humans used to trade whatever they had in order to get what they needed. For instance, apple farmers used to go to pig farmers to get ham, and the pig farmers would get apples from the apple farmers. This is known as a barter system.

At some point , people decided that always carrying around goods to trade or having to accept illiquid services was inconvenient. So humans came up with the idea that since everyone can agree that gold is pretty, malleable in form, and hard to duplicate, that's what should be used. The gold standard was used for some period of time, but then governments decided to move to a fiat currency system, whereby money is not tied to a physical commodity like gold. A fiat currency system is what every major developed economy uses today. 

What are the benefits of having a currency system that is not tied to a physical commodity? Well, if the amount of money that is in circulation is not connected to a physical commodity, then - you guessed it - money can be created out of thin air. And that's exactly what the government does and is doing as we speak.

In the next blog post, I'll talk about exactly what entity is in charge of monitoring the amount of money in circulation and how it affects you and me on a daily basis. 

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