Money Info Site

How to Cut Costs Easily

2008-05-18T08:52:00.000-07:00

Cutting your household expenses doesn't have to mean washing and re-using Baggies and living on rice and beans. (Unless, of course, you like washing Baggies and never get tired of rice and beans.) You can save some serious money with a few barely noticeable changes.

Difficulty: Moderately Easy

Step1

If you carry credit card debt and are a good customer (no late payments or overlimit charges), call and politely ask if your company will lower your rate. A 5% cut in your interest rate could save you hundreds (or thousands, depending on your level of debt) of dollars a year.

Step2

Look into "package deals." If you're willing to get your telephone, cable and Internet service all from one source, you might be able to score a deep discount. Check the providers in your area to see who's running a special.

Step3

Trim the fat. If you're paying for premium cable channels you never watch, cancel them. Put your cell phones on a family plan, or consider using pre-paid phones if you only need them for emergencies. Alternately, if you can't get enough of your cell phone, consider canceling your land line and relying on cell service alone.

Step4

Adjust the temperature. A two-degree difference on the thermostat can save you a chunk of change on your heating bills. Keep it a bit warmer in the summer and a bit cooler in the winter.

Step5

Cook and freeze. If you find yourself spending lots of money on lunch or dinner out, pick one day a week to cook a big batch of food and freeze it. Soup, stir-fry, and pasta dishes all keep well in the freezer, and you can grab one for a quick meal anytime.

Step6

Up your insurance deductible. This doesn't work for everyone, but if you're a generally safe driver with a little bit of savings accessible, consider bumping up your car insurance deductible to $500 or $1,000. This can substantially lower your monthly premiums.

Step7

Go generic. Target and Wal-Mart both feature $4 prescriptions on a host of generic drugs. This is lower than many insurance company co-pays. Check with your doctor to see if there's a generic version of a medication that would work for you. (Also look into mail-order delivery of your meds -- this can give you some significant savings, too.)

Successful Marketing with Maslow

2008-01-27T07:25:00.000-08:00

When Abraham Maslow conceived his Hierarchy of Needs in 1943, he couldn't possibly have known that it would be one of the most influential advances in the field of human behavioral study and would remain so well into the subsequent century.

The theory developed by Maslow put forth that the motivation for any action made by any human being is an unfulfilled need. When we have unmet needs, we are motivated to meet them in a specific order. Once the needs on the first level are met, we move on to the needs of the next level, and so on until we reach the top tier.

Physiological requirements are primary concern to a person that keeps him alive. Next is safety needs and then comes social needs. Later in the list is the need for self esteem and last is self-actualization. A student following Maslow's theory will know how this can be adapted in the marketing world. During the attempt to make a sale, it applies not only to the product that is sold; the idea of the product, and the image, but, in the end, the result of the product is also sold. Thus, one or more requirements in the hierarchy may be fulfilled.

Obviously, a marketing campaign will be more successful the more it appeals to the lower levels of unfulfilled need in a person's life. What this means for you, the marketer, is that knowing your audience's needs is key. A product that promises to fulfill an esteem need will be virtually useless to a customer whose safety needs are not yet met.

In order to be successful in any marketing endeavor, the first step is to get a firm grasp on the psychographic motivators to which you will be appealing. Which need on the hierarchy is your product going to fulfill? How will it fulfill this need, and how can you prove to your potential customers that it will effectively fulfill their need?

A more important issue is how you can address the level of need of potential customers you are trying to reach. If a product is requested by a customer, then they are doing your work for you. It is hard, however, to tell what a total stranger wants when you are trying to approach them for the first time.

The best way to overcome this obstacle is simple, and it's one that every marketer is taught from the very beginning of their career: just talk. Talk about sports, the weather, or family life - anything other than the product you are trying to sell. Chatting with your potential customer in a friendly, non-pressured way will allow you to pick up on invaluable clues about their needs.

When you are able to understand the motivations of your potential customers, you approach the ability to meet their needs. After you figure out what motivates them then you can gear your sales pitch towards what will be effective for each customer. As you understand the needs of customers in general you can be more effective in selling to the market in general.

Many management practices today are based on Maslow's theory. His theory can also be useful when it comes to marketing. The most important thing is to be aware of how you can help the customer decide that they need your product.

Tips For Choosing High-Performance Mutual Fund

2008-01-16T05:48:00.001-08:00

Most people who invest in mutual funds don't know what they are doing. They take advice from someone at a bank or perhaps a friend and plunk down money into a fund. Sometimes this strategy works, but most of the time, it doesn't.

When you invest your money in a mutual fund, you are trusting someone to invest in the stock market for you. Because of this, you want to be sure this person knows what he or she is doing. Also, you want to make sure that this person is not charging you too much to manage your money for you. Mutual funds fees are "hidden," in the sense that they do not charge you an upfront fee but rather a percentage of the amount of money in your account. If this percentage is too high, you would do better just blindly picking stocks yourself.

Here are five helpful tips for choosing the right mutual funds.

1. Keep the fees low. Generally, expense fees should not be much higher than 1% if it is just a basic domestic equity fund. You should never invest money in a fund that also charges a "load," which is an additional fee that is ridiculous to pay. Never invest in funds that charge loads; those funds are for suckers.

2. Check the asset base. Mutual fund managers only know of so many good investments. When they have too much money to manage, they begin investing in stocks they don't like much but need to invest in anyway or else they'll just have money laying around. There's little reason to invest in a fund with over $5 billion in assets. It's best if it's under $2 billion generally.

3. Consider an index fund. This is a fund that tracks a stock index, such as the S&P 500. For these funds, the manager just buys whatever stocks happen to be in the index. Since this is not much work, the fees are much lower. Even though this method is simple, it has proven to perform better than most mutual funds. Some high performance index funds include FSMKX (Fidelity S&P 500) and VIMSX (Vanguard S&P 400 Midcap.

4. Evaluate the fund's strategy. If you have a long term outlook, look for a more aggressive fund that invests in small-cap stocks, international stocks, and riskier stocks in general. High risk tends to result in high performance in the long run. If you are more risk-averse, consider an S&P 500 index fund.

5. Keep the fees low. Did I mention this already? Well, I'll mention it again. This is where most people mess up. Make sure you are not paying a load or paying too much in fees to the mutual fund.

How to Find Cheap Car Insurance

2008-01-14T07:06:00.000-08:00

With the rising costs of fuel and just about every other good or service we purchase, many of us are looking for cheap car insurance. When it comes to cheap car insurance most of us are clueless as to how to go about getting a low cost car insurance policy. There are many factors that influence your car insurance costs drastically.

For example, did you know that the type of car you drive will influence the cheap car insurance you're looking for? Or did you know that using anti theft devices will help reduce your over all car insurance costs? A good driving record will allow you to get cheap car insurance?

The deductible is the amount you pay first out of any claim for an accident. The car insurance policy's cost is directly related to your deductible. A lot of people, especially those with a good driving record, who have had their insurance policy for a long time, have never considered varying their deductible. If you have a clean driving record and are prepared for the risk of paying a larger amount in the event of a claim you can save money by increasing your deductible.

Many times you can get cheap car insurance by combining policies with you existing insurance company. For example if you have a home owners insurance policy contact them and ask for discounts for switching your car insurance to them. If you don't own a home perhaps you have renters insurance or life insurance, contact these companies about the savings you could get by switching your car insurance over to them. Most insurance companies are very accommodating to these requests.

It also pays to shop online for your cheap car insurance; many of the big companies offer a comparison of their coverage versus other companies. As you are requesting cheap car insurance quote online be sure to be completely truthful in answering the questionnaire. Additionally, you should know when you get your online quote you will need to follow up with actual paper work.

Whatever your motivation, with a little work you too can find the cheap car insurance you're looking for.

Common Mortgage Refinance Mistakes

2008-01-12T20:52:00.001-08:00

By: Lesley Lyon

During the process of getting a mortgage refinanced, many things might go the wrong way. The mistakes made while refinancing the mortgage may cost more a fortune for the borrower. Most of us, who overpay for their mortgages, may not even be aware of it. To avoid this, the borrower should take some time while researching for the options of mortgage refinance and should contact different lenders to get a better idea on how it works. Some of the valuable suggestions are given below:

Many people do concentrate only on the interest rate while looking for mortgage refinance. Interest rates are very much important, but it should not be the only criterion as the rest of the aspects of mortgage may cost more if the closing costs are enormous. All the aspects of the mortgage need to be considered. To avoid this the borrower can get a good faith estimate from the lender in a written form, which is normally given, only if it is asked for. It will outline all the aspects of the loan to make an informed decision. Along with the interest rates, the length of the loan term and the amortization schedule should be studied, as it will give an idea about the payment to be made. Selecting a right mortgage will save money while at the same time wrong decision leads to financial disaster. Hence, it is good to know the basics of different loans and select the one, which is very suitable.

The borrower should get a guarantee on the interest rate that will give him enough time to close the mortgage. In case of any fees charged for making a guarantee by the lender, the borrower should never get scared for paying the fee as the interest rate lock gives enough time to the borrower to close the loan. In case the borrower fails to close the loan before the expiry of the lock period, the lender will raise the interest rate, hence it should be made sure that the guarantee covers the points paid and what the borrower gets for paying points. A borrower should not accept a loan that includes prepayment penalty as one of its conditions.

Predatory lending practice is still a common phenomenon in the market. Despite laws protecting the borrower from predatory mortgage lenders, some of them will take advantage of the borrowers by charging more interest rates and lender fees. Mortgage guidebook can provide valuable knowledge on how to compare mortgage offers and select the best one from them.

Break-even analysis has to be made to know how long the borrower needs to stay in his house to attain break even on the refinancing cost. Another mistake is that the borrower pays more towards mortgage insurance called as PMI. The PMI need not be paid if the person has 80 percent equity stake in his home. Since the interest rates and loan terms are dependent on the credit score, it is good to correct the credit report incase of any mistakes in it and then apply for the mortgage refinance as the borrower can get better interest rates and loan term.

The Importance of Finding the Right Business Coach

2008-01-09T06:07:00.000-08:00

Discover why you need business coaching, and why which business coach you choose is so vitally important to your business.

A business coach is like a personal trainer--for your business. A good business coach will help you to realize your dreams, goals, and achieve success through careful step by step planning and processes. The business coach is there to help you with resources, support, motivation, and planning of your business venture. If you already have a business, the business coach is there to help your business succeed and grow in ways that you could only imagine. You can find a business coach in a number of different ways, and in many places. The key is to find the right business coach for you and your company.

There are several things to consider when looking for a business coach. The first thing that you will be likely to consider is cost. Many business coaches are quite expensive, but there are some that are extremely cost effective. The important thing to remember when considering the cost of a business coach is the cost of not getting the business coach. Starting a business can be difficult and costly, but starting that same business can be more costly if you are not sure what you are doing. When you have a business that seems to be failing, or if your business is simply not going anywhere, you are more likely to lose money by doing nothing than by spending the money on a good business coach.

There are several steps that your business coach will lead you through to help you create a successful business. First, your business coach will make sure that the business that you want to develop is a sound business venture. To do this, the coach will take your skills, talents, experience, and resources into consideration. Once these assessments are completed, the coach will help you with your business development by walking you through the steps of a marketing and business plan. When you are ready, the business coach will help you to develop your business by implementing the plans that you made while under their care and tutelage. If any problems arise or you begin to have doubts, your business coach will be there for support, guidance, and resources.

You also want to make sure that the business coach that you choose specializes in business start ups and development, not one or the other. Someone that can only assist in business development will not be able to help you start your business effectively. Likewise, you will quickly outgrow a business coach that can help you start your business but not manage it effectively. Our business coaches are trained and educated in all aspects of starting, running, and growing a business. We are committed to building long lasting relationships will all of our clients, and taking your business from conception to perfection.

Our group of business coaches and professionals are available to you with inside information about legal matters, tax matters, registration requirements, and the best structure options for your business venture. This type of information is important and likely one of the reasons that you are looking for a business coach in the first place. Like other business coaches, we will also have information available to you about resources for funding, grants, loans, and other financial resources that you may be unaware of.

The Nitty-Gritty Of Accounting

2008-01-05T03:36:00.000-08:00

By: Samkern

Accounting is as ancient as man's attempts to transact with fellow human beings. With the predominance of money measurement in economically useful activities, accounting became the most vital tool. At the center of all accounting principles is the urge to ensure accuracy and consistency. This takes the form of double entry system of accounting. The 15th century Italian mathematician, Frater Luca Pacioli, first extolled about the features of the system.

Double entry method offers a convenient and accurate format for recording transactions. Put simply, all transactions have two aspects. Therefore, omissions or numerical errors would automatically stand out. Thus, it acts as a self-correcting mechanism.

The basic aspects of accounting relate to correct classification of transactions. There are four major accounting heads: assets, liabilities, revenues and expenses. At any given point of time, the firm's assets should equal its liabilities. This is the accounting equation. If they do not match, there is an apparent error in the accounting process.

The enterprise's assets represent the productive resources used by it. Plant and Machinery, building, stock of raw materials and stores, debtors or accounts receivables, cash and bank balances are some of the assets. Liabilities are the sources that finance the assets. Owner's capital, long-term loans, short-term bills, sundry creditors and other financing are the liabilities.

When revenues exceed expenses, the firm makes a profit and in the reverse it is a loss. Ultimately, profit or loss reflects in the financial position or the values of assets and liabilities on the given date. An increase in assets or decrease in liabilities means profit and decrease in assets or increase in liabilities mean loss.

Profit is the driver in any business enterprise and no wonder entrepreneurs seek to maximize it. More critical than profit is the measure of profitability because the latter reveals the firm's efficiency in utilization of financial resources. Return On Investment is the most common profitability ratio. The claim over profits of a business depends on the organizational type. In ownership or partnership firms, the owner or partners have total claim over the profit. In joint stock companies, the stockholders are entitled only to the dividend as declared by the Board Of Directors.

The work of an accountant is crucial as he reports the performance of the enterprise to the management and the owners. Based on the figures supplied by him, important decisions like capacity expansion, make or buy, retaining or hiving off unprofitable lines of business and employee incentive computation are taken.

Article Writing Secrets To Help Increase Your Profits

2008-01-04T00:51:00.000-08:00

By: Mark Burdett

If one of your New Year resolutions is to make your business more successful then read on as writing articles could (and indeed should) form a big part in making sure your resolution comes true.

And these 2 tips can turn your article into something people might want to read and publish into a piece of writing that will get you and your business exposure.

Top Tip Number 1: Be different

The internet more so than any other communication tool gives people the chance to air their views and have a voice. The trouble with such a forum is that you are usually competing with hundreds, thousands and indeed millions of other people also wanting their views and opinions to be read or heard.

The truth therefore is that when writing articles you have to stand out from the crowd in order to get maximum exposure and results. The good news is that so many people who you are up against dont do this so opportunities exist for the minorities who do have something different to say (or say something in a different way). Here are just a few ways in which you can stand out:

a. Be controversial. This is a sure fire way to get your articles published and read.
b. Be trusted. By becoming a recognised expert in your chosen field your views and opinions will make you stand out.
c. Be funny. If the opportunity arises for you to put a humorous slant on your article then give it a go and see how it goes. Remember people like to be entertained.
d. Be first. If your article writing is on topical subjects then very often the person who gets their article and opinions in first will get the most exposure.
e. Be passionate. People with passion about a subject stand out of the crowd. Weve all seen them and their passion is contagious. It makes you want to know more and it makes them successful. Look at the top business men and women around and they all share one quality and it isnt to make money. The quality they share is that they are passionate about what they do. Be passionate about the content of your articles and I guarantee you will get results.

Top Tip Number 2: Get action

So you have written your article and are ready to share your thoughts with the World. How do you actually do this though?

Well the real beauty of article writing is that there are thousands of websites that are looking for articles to add content rich information to their sites. And there are 3 main ways in which you can get your article listed and read. These are:

1. Do it yourself and submit your articles to article submission sites. These are sometimes free sites that allow you to submit articles on a regular basis. The result is they pretty much do all the work for you and people from across the world can see your articles and even post them on their own sites. This means you and your business gets exposure and inbound links to your website (which if you dont already know is the number 1 way to help with search engine optimisation or SEO).

2. Pay an article company to get even more exposure. There are many article sites that for a fee will allow you to submit an article and they will then submit your articles to their network of article sites. This could well result in numerous inbound links and if you write an interesting and keyword rich article could really help with your SEO.

3. Get someone to do it all for you. If youre too busy to write and submit articles but still want to see how it could benefit your business (and believe me it really can) then you can now get people to do it for you. A Marketing Consultant or specialist article writing and submission service could both help out so shop around and see what is available.

The bottom line is that unlike press releases (where you are often relying on the media to help you get exposure) with articles you can make sure you get exposure by being pro active.

Articles can and will help you promote your business and are one of the best and most cost effective ways to help you with search engine optimisation. Give it a try and see how you get on.

Becoming Wealthy with Stock Market Investing

2008-01-03T00:46:00.000-08:00

By: Peter Brown

The question of whether or not you can get rich investing in the stock market is a common one. While such an endeavor can make you rich, there is no sure fire way of making sure that this happens. In other words, the answer to the question "Can you get rich with stock market investing" is both yes and no. In fact, you will need a lot of skill and some luck if you are hoping to get rich this way.

The market fluctuates on a daily basis. You need strong investing skills in order to make money day trading. In other words, you cannot simply buy some stock and hope that it will make you rich. Instead, you need to learn which are best, how to read trends, and when to buy and sell. All of these skills will come with experience. It is important for you to invest with patience when you are new to the market so that you can gain experience and maximize your future profits.

Luck also plays a huge role in profiting from this method. For instance, purchasing stock at a low price and then having it explode shortly thereafter will surely pay you a lot of money. But there is only very few stocks that can do that and those are hard to find for someone new in the game and no access to inside information. Simply put, there are some people who always seem to buy the stocks that grow and grow but it will take time and effort before you can become one of them.

There is no denying that you can get rich by investing in the stock market. However, just as the rewards are high so are the risks. Starting slowly and increasing your investments over time as you learn more can minimize the risks and increase your chances of a large payoff. The bottom line is that not everybody will make millions day trading. But at the same time, maybe you will be the next one to hit it big!

What Is A Public Insurance Adjuster And How They Can Help You?

2008-01-03T00:44:00.000-08:00

By: Bryan E. Thomas

Experience is key; Public Adjusters have the knowledge and training to successfully represent your interests and maximize your insurance claim. Public Adjusters work on your behalf so you receive the best possible settlement.

They maximize your recovery by representing your interests. Your insurance company will recognize the Public Adjuster as your representative because they are licensed by the State Insurance Department.

A Public Adjuster will prepare all necessary estimates and inventories of damage that are required to document your claim. Public Adjusters will assist you in fulfilling all policy requirements and demands made by your company.

Public Adjusters will meet with the insurance company representatives and handle all details and negotiations essential to you receiving a proper settlement. You are informed of the progress and status of your claim on a regular basis.

When you have a Public Adjusting firm representing your interests in the claim process, you don't just have one specialist representing you, you have a team. You will have a experienced specialist arrive to evaluate your contents and substantiate the claim. You will also have an experienced building estimator review any structural damage and provide real-world estimates for replacing what is damaged.

Additionally, you will have a licensed public adjuster who is a skilled negotiator to represent your interests at all meetings with company adjusters. This team approach will ensure that you leave nothing behind in your claim, and you will be fully reimbursed in the shortest time possible. Since we have worked with many insurance company adjusters over the years, we have an established rapport with them, making the adjustment process go smoothly.

Accounting As Simple As It Gets

2008-01-02T00:39:00.000-08:00

By: Sean C Anderson

Many people look at accounting and say, "Accounting doesn't make a lot of sense." Well I hate to be bold but there is no better way to say, "Hey I'm a moron, I shouldn't be running a business." Accounting is the story of your business and you should know not only how to read that story but how to tell the story. There are a lot of complex accounting issues, they can be a nightmare. The chances are that you will never deal with them. Don't worry about the complex stuff, focus on the larger aspec of accounting. You should be able to understand ninety-nine percent of all accounting issues with just a basic understanding of the principles and constraints.

Accounting is an ongoing story, the financial statements are a snapshot in time of the continuous action taking place. To understand and develop this story you only need a basic understanding of the fundamental and constraints of accounting. The fundamentals of accounting are based on Relevancy, Reliability, Comparability, and Consistency. To test the relevancy principle just make sure that the information can be used by outside users to analyze your business. Reliable information is unbiased and not a crock of b.s. you cooked up. This can be done by getting a third party account who is unbiased to you business to actually make or confirm entries to the accounting system.

If you report in a comparable manner you report in a way that is typical of other businesses in your industry. This is to ensure nobody is comparing your apple company to someone else's orange company. I always get confused when I compare apples to oranges. Consistency involves simply staying in line with the current accounting practices. You can't just simply switch accounting methods mid-stream (without fixing historical information) to make numbers look better. Your accounting should follow the same logic/method over time.

When developing accounting information there are two important constraints to keep in mind conservatism and materiality. Conservatism is simply saying hey I can represent a loss here buy reporting this way or a gain if I report another way; I am gong to choose to take a loss. This can change with tax reporting. There conservatism is reporting the gain. The government likes that money and they don't get to tax you on losses. That is what AMT (Alternative Minimum Tax) is all about.

By now you may be asking yourself what this accrual garbage is about. Well if you just bought inventory, prepaid rent or you owe your employees a bonus at the end of the year how do you want to represent that. You want a way of keeping track of your inventory, how long you have the rights to a building and what those cost over time, or you should want to know why you are going to owe your employees so you can anticipate what you'll need to pay. Well this is where accruals come in handy.

With cash accounting you would have expenses upon purchase of goods. With accrual accounting you say I've got a benefit/asset here I want to represent this benefit to outside users. You do this by reporting it as an asset and expense the cost of inventory when the product is sold (Cost of Goods Sold). This helps you tell the story of a business by telling all the parts not just bits and pieces at a time when cash transactions are made. The same thing goes on with prepaid rent. When the account reaches zero and you have nothing to expense and you know you better pay that rent next month.

Now, for accruing liabilities. Well you tell your employees that you are going to pay them a bonus based on performance at the end of the year. Hopefully, you plan on paying this bonus, because you don't want to face the dreaded everybody quits on you at once type of turnover. STRIKE!!!! Well if you are keeping track of your companies performance you can keep track of what you owe them each month and record the liability and expense.

Basically, you promised employees 1% of net income at the end of the year. Simply, multiply 1% times your profit(loss) and make the appropriate entry. Tie your expense and liability to the month in which the profit was realized. Doing this will give you a better idea of the cash outlay you'll need to make at the end of year. Accounting is full of good ideas and methods to keep track of what is occurring in your business.

At the end of the day tell a full story of what is going on in your company, through accrual accounting. Don't embellish the story, keep a conservative outlook. Don't change your logic without letting everybody know through restatement of prior year financials. Put out information that doesn't waste the time of internal or external users. Last but not least don't be an accounting moron by excepting that you just don't understand.

One Millionaire's Secret to Success in Business

2008-01-01T00:31:00.000-08:00

By: Rod Alan Richadson

A few years back I attended a meeting where a man who had created a successful business that was now selling goods to countries all over the world shared with us his 3 key steps to success. Although his points somewhat challenge traditional thinking, you must remember that he was successful by living this formula. These are his three key steps to success along with my thoughts:

1. The people who do the work get the reward. What a novel thought! When nearly all of us create a business, we divide up the stock and rest on our laurels! The man thought it was better to observe who the players were going to be and measure the ownership based on the amount of value the individuals contributed.

Even though this approach may work well if you're self-funding your company, there are possible problems in this strategy that you will want to be aware of. You'll want to be certain you have a solid relationship with the people you're in business with. There is nothing like somebody else determining your value. You may not be able to see eye-to-eye when it actually comes to delegating equity. I've used this principle myself to some degree. I prefer letting a business come together prior to dividing ownership up. I have had way too many partners fall away prematurely or do not exhibit the skills, contacts and drive they claimed to have.

2. Keep everything in-house. Normally, I recommend outsourcing everything you possibly can. It allows for greater flexibility and lets business owners scale rapidly both forward and backward. The successful business man's believed that you should generate profit on as many points as possible - particularly in the initial stages. If you outsource, you are outsourcing the profit.

I can see a lot of wisdom in his ideas. He demonstrated this idea well. He had a smaller manufacturing plant and did everything down to screen printing his own T-shirts. His pay was $20,000 a month.

3. Concentrate on accruing income. This point is the true pearl. Most budding businesses get lost in product development and lose sight of generating money and creating profitable transactions. The successful man's idea was to create your merchandise, in your basement if you have to, and then sell it for more than it cost you to build. efficiently ran his business out of his garage for a long time before he began renting commercial facilities.

I've observied that the businesses that I've launched this way grew risk-free to heights of profitability.

When the meeting was over, I folded up the paper and stuffed it in my pocket. I had concluded that this man's recipe for success, even though I might not agree with the whole philosophy, was certainly working for him.

TYPES OF MONEY

2007-12-26T12:59:00.000-08:00

COMMODITY MONEY

Commodity money is any money that is both used as a general purpose medium of exchange and as a tradable commodity in its own right.An example is coins made of precious metal.

Commodity-based currencies are often viewed as more stable, but this is not always the case. The value of a commodity-based currency as a medium of exchange depends on its supply relative to other goods and services available in the economy. Historically, gold, silver and other metals commonly used in commodity-based monetary systems have been subject to regular and sometimes extraordinary fluctuations in purchasing power. This not only damages its stability as a medium of exchange; it also reduces its effectiveness as a store of value. In the 1500s and 1600s huge quantities of gold and even larger amounts of silver were discovered in the New World and brought back to Europe for conversion into coin. As a result, the purchasing power of those coins fell by 60% to 80%, i.e. the prices of goods rose, because the supply of goods did not keep pace with the increased supply of money. In addition, the relative value of silver to gold shifted dramatically downward.Such discoveries of huge sources of gold or silver are a thing of the past, and lend to their supply stability. More recently, from 1980 to 2001, gold was a particularly poor store of value, as gold prices dropped from a high of $850/oz. ($27.30 /g) to a low of $255/oz. ($8.20 /g).It should be noted that gold was not a currency at this time, and was fluctuating due to its status as a final store of value — that is, the price never goes to zero as fiat currencies inevitably do.The advantage of gold and silver, however, lies in the fact that, unlike fiat paper currency, the supply cannot be increased arbitrarily by a central bank.

It is also possible for the trading value of a commodity money to be greater than its value as a medium of exchange when governments attempt to fix exchange rates between different commodity monies. When this happens people will often start melting down coins and reselling the metal used to make them. This has happened periodically in the United States, eventually causing it to move away from pure silver nickels and pure copper pennies.Shipping coins from one jurisdiction to another so that they could be reminted was sometimes a lucrative trade before the advent of trusted paper money.

Commodity money's ability to function as a store of value is also limited by its very nature. Copper and tin risk rust and corrosion. Gold and silver are soft metals that can lose weight through scratches and abrasions, but this is nothing by comparison to fiat currencies, where billions of dollars can be injected ("printed") into the market within moments.

Stability aside, commodity-based currencies may have a tendency to restrain growth in a very active economy. For example, in order to maintain the price level, the supply of money in an any economy must be equal or greater than the volume of goods and services produced. If commodities are used as money, then the total production can easily outstrip the supply of those commodities, which leads to price deflation. The lower prices of goods would signal to their producers to reduce the supply of goods, hence restoring the price level. As such, production within commodity-based economies tends to be limited by the supply of the commodity currency.

This problem is compounded by the fact that money also serves as a store of value. This encourages hoarding (in other circumstances known as "saving") and takes the commodity money out of circulation, reducing the supply. The supply of circulating commodity currency is further reduced by the fact that commodity moneys also have competing non-monetary uses. For example, gold and silver are used in jewellery, and nickel and copper have important industrial uses.

Commodity currencies may limit the geographic extent of the trading market. To make large purchases either a large volume or a high weight or both of the commodity must be transported to the seller. The cost of transportation of the currency raises the transaction cost and makes long distance sales less attractive.

FIAT MONEY

Fiat money is any money whose value is determined by legal means, rather than the strict availability of goods and services which are named on the representative note. For differentiation examples, a "gold certificate" would be a kind of representative money, and a banknote from a well-trusted bank which is not a central or government-backed bank (such as the Bank of Scotland) would be a kind of credit money. Fiat money is created when a type of credit money (typically notes from a central bank, such as the Federal Reserve System in the U.S.) is declared by a government act (fiat) to be acceptable and officially-recognized payment for all debts, both public and private. Fiat money may thus be symbolic of a commodity or a government promise, though not a completely specified amount of either of these. Fiat money is thus not technically fungable or tradable directly for fixed quantities of anything, except more of the same government's fiat money. Fiat moneys trade against each other in value in an international market, as with other goods. Many fiat moneys accepted on the international market has having value (which not all fiat moneys are) thus trade indirectly against any internationally available goods and services. Thus the number of U.S. dollars or Japanese yen which are equivalent to each other, or to a gram of gold metal, are all market decisions which change from moment to moment on a daily basis.

Representative, credit, and fiat money all provide solutions to several limitations of commodity money. Depending on the laws, there may be little or no need to physically transport the money — an electronic exchange may be sufficient. Other types of moneys have as their sole use to be medium of exchange, so their supply is not limited by competing alternate uses. Credit and fiat monies can be created without limit in theory, so there is no limit on trade volumes.

Fiat money, if physically represented in the form of currency (paper or coins) can be easily damaged or destroyed. However, here fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated federal reserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed. By contrast, commodity money which has been destroyed or lost, is gone.

Paper currency is especially vulnerable to everyday hazards: from fire, water, termites, and simple wear and tear. Currency in the form of minted coins is more durable but a significant portion is simply lost in everyday use. In order to reduce replacement costs, many countries are converting to plastic currency. For example, Mexico has changed its twenty and fifty peso notes, Singapore its $2, $5, $10 and $50 bills, Malaysia with RM5 bill, and Australia and New Zealand their $5, $10, $20, $50 and $100 to plastic, both for the increased durability and because plastic may be easily specifically constructed for each denomination, thus making it impossible for counterfeiters to "lift" or raise the value of a bill by using the material of a bill of lesser value as a primary source to make a counterfeit note of higher value.

Some of the benefits of fiat money can be a double-edged sword. For example, if the amount of money in active circulation outstrips the available goods and services for sale, the effect can be inflationary. This can easily happen if governments print money without attention to the level of economic activity, or if successful counterfeiters flourish.

A criticism of credit and fiat moneys relates to the fact that their stabilities are highly dependent on the stability of the legal system backing the currency: should the legal system fail, so will the value of any type of money that depends on it. However, this situation is typical of the maintainance of the value of any promisory note system: if a guarantor creates money or wealth by means of any legal promise to provide goods or services in the future (as is the case with both credit and fiat type moneys), then any failure of a legal system which backs up the rights of the debt-holder to collect on the promise, will act to jeoparize the value of future promises.

CREDIT MONEY

Credit money is any claim against a physical or legal person that can be used for the purchase of goods and services. Credit money differs from commodity and fiat money in two ways: It is not payable on demand (although in the case of fiat money, "demand payment" is a purely symbolic act since all that can be demanded is other types of fiat currency) and there is some element of risk that the real value upon fulfillment of the claim will not be equal to real value expected at the time of purchase.

This risk comes about in two ways and affects both buyer and seller.

First it is a claim and the claimant may default (not pay). High levels of default have destructive supply side effects. If manufacturers and service providers do not receive payment for the goods they produce, they will not have the resources to buy the labor and materials needed to produce new goods and services. This reduces supply, increases prices and raises unemployment, possibly triggering a period of stagflation. In extreme cases, widespread defaults can cause a lack of confidence in lending institutions and lead to economic depression. For example, abuse of credit arrangements is considered one of the significant causes of the Great Depression of the 1930s.

The second source of risk is time. Credit money is a promise of future payment. If the interest rate on the claim fails to compensate for the combined impact of the inflation (or deflation) rate and the time value of money, the seller will receive less real value than anticipated. If the interest rate on the claim overcompensates, the buyer will pay more than expected.

Over the last two centuries, credit money has steadily risen as the main source of money creation, progressively replacing first commodity and then representative money. In many cases credit money has been converted to fiat money (see below), as governments have backed certain private credit instruments (first banknotes from central banks, then later certain types of deposits to banks), thus converting central banknotes to legal tender, and other types of notes (deposit certificates of less than a certain value) to a status not very different from fiat money, since they are backed by the power of the central government to redeem eventually with tax collection.

A particular problem with credit money is that its supply moves in line with credit/business cycles (colloquially: "booms" and "busts"). When lenders are optimistic (notably when the debt level is low), they increase their lending activity, thus creating new money. This may also trigger inflation and bull markets. When creditors are pessimistic (for instance, when debt level is perceived as too high, or unwise lending activity in the past has resulted in situations where defaults are expected to follow), then creditors reduce their lending activity and money becomes "tight" or "illiquid." Bankruptcies and market recessions (so-called bear markets) then follow.

REPRESENTATIVE MONEY

Representative money refers to money that consists of token coins, other physical tokens such as certificates, and even non-physical "digital certificates" (authenticated digital transactions) that can be reliably exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. Representative money thus stands in direct and fixed relation to the commodity which backs it. This is to be distinguished from commodity money which is actually composed of a real and intrically valuable physical commodity.