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Money: spend, save or invest

Money is a tool for swapping, and you can spend it now, save it for later or invest it so it might grow, knowing it could also shrink.

In one line

Every rupee, dollar or yen you get can do one of three jobs. Which job should yours do?

Explained simply

Money is like a ticket that everyone agrees to accept, so you can swap it for a book, a snack or a bus ride. You can spend it now, save it somewhere safe for later, or invest it by buying something that might grow. An investment can also shrink, so it is only for money you will not need for a long time.

The lesson

Money is anything people agree to accept in a swap, such as rupee, dollar or yen notes and coins, or the numbers in a bank account. Before money, people had to swap things directly, called barter, which only worked when each side wanted what the other had. Saving means keeping money safe for later, often in a bank that may pay a small extra amount called interest, while investing means buying something, such as a small part of a company, that might be worth more later but could also be worth less. Prices of everyday things usually creep up over time, which is called inflation, so money left sitting still slowly buys a little less.

A worked example

Illustrative example: Asha has 1,000 rupees. She spends 200 on a book and saves 500 in a bank that pays 4% interest a year, which leaves 300 to invest (1,000 minus 200 minus 500). After one year her savings have earned 20 rupees (500 times 0.04), so they are worth 520 (500 plus 20). The 300 she invested might have risen 10% to 330 (300 times 1.10), or it might have fallen 20% to 240 (300 times 0.80), which is less than she put in.

The same idea at four levels

1. Beginner. Money is something everyone accepts, so it makes swapping work and things easy.
2. Foundation. Spend money you need now, save money you need later, and invest only money you will not need for a long time.
3. Intermediate. Savings in a bank are usually safe and may earn a little interest, while investments can grow more but can also lose value.
4. Advanced. Prices tend to rise over time, called inflation, so cash that just sits still slowly buys less, which is one reason people invest.
5. Expert. Things that might grow more usually carry a bigger chance of falling, so careful people match each pot of money to when they will need it and how big a drop they could live with.

Mistakes to avoid

• Thinking investing is the same as saving, when invested money can fall as well as rise.
• Investing money you will need soon, such as next month's school fees, in something that can drop in value.
• Forgetting that prices usually rise over time, so cash kept for years slowly buys less.

Goal of this lesson: Explain what money is for and the difference between spending, saving and investing.