Learn What The Rich Know: Pillar 1 - A Primer on Economics

• “The poor and the middle class turn cash into trash, or liabilities. Meanwhile, the upper class buys things like stocks, real estate, and businesses, turning cash into assets.”

• If you start saving young, it’s easy to be rich. There’s a staggering difference between the assets of a person who starts saving consistently at age twenty and those of a person who starts saving at age thirty.

• Inflation is linked to supply and demand: how many goods and services are available at any given time and how much consumers are willing to pay for them.

• What you do or don’t do with your money matters, and not only to you. Other people have saving and spending habits similar to yours. Together these habits form a system of collective behavior. Sometimes the collective behavior stimulates the economy, in which case you might benefit; at other times the collective behavior causes the economy to stagnate, in which case you might suffer—but maybe not.

• Time is money— and you have to seize the day.

• Economies took shape when people started trading things they had for things they wanted.

• Money, or currency, is anything used as a means of exchange.

INTERESTING!! : In ancient Rome soldiers were often paid with sacks of salt. The Latin word for salt is sal, the root of the word salary.

• “An economic system built on fiat currency is a house of cards.”

INTERESTING!! : The term dollar comes from a silver coin minted in sixteenth-century Bohemia, where it was called the Joachimsthaler. The unit of currency was called the daalder in Holland, the daler in Scandinavia, and the dollar in England.

1. M1 money, or narrow money, is money that people can spend immediately, such as cash and checking account balances. 
2. M2 money, or broad money, is M1 money plus any money that can’t be spent immediately but can be converted easily into cash, such as money in savings and certificates of deposit. 
3. M3 money is M1 and M2 money plus the assets and liabilities of financial institutions that can’t be easily converted into cash. Together, the three Ms are known as the monetary aggregates.

• A change in interest rates affects the financial markets and, ultimately, the decisions investors make. When interest rates are high, yields on bonds go up and investors buy more bonds; when interest rates are low, it’s cheaper for businesses to borrow money for growth, and when businesses are growing, investors flock to stocks.

• “Those who work the hardest and are paid the least suffer the most from the constant erosion of money’s value. Since money has an ever-declining value, a financially wise person must constantly seek ways to create value and produce more and more money.”

1. Any financial plan you put in place for yourself should take inflation into account. Inflation mostly hurts those living on fixed incomes, such as Social Security payments or pensions. It’s also detrimental to those whose savings are tied to fixed interest rates, such as savings accounts or bank certificates of deposit, unless of course the fixed interest earnings exceed the inflation rate.
2. But inflation isn’t always bad. High inflation usually favors those who owe money. Each year that a debtor makes payments on a fixed loan, he or she is repaying it with dollars that have declined in value since the previous year. Sometimes inflation can even help create wealth, especially when investments increase in value faster than the inflation rate, as can happen, for example, in real estate.

• The law of supply and demand, one of the fundamental economic principles, is really quite simple. When demand exceeds supply, prices rise, but when supply exceeds demand, prices fall. This law shapes the business cycle.

• Three consecutive rises in the index of leading economic indicators signal that the economy is growing. Three consecutive drops signal a downturn.

• Measuring the economy’s vital signs

1. The Index of Leading Economic Indicators. 
2. The Gross Domestic Product.
3. The Consumer Price Index (CPI).

• “There will always be market booms and busts. The trick, in a bust, is to buy instead of sell. Don’t panic, profit!”

• Great opportunities are seen not with your eyes, but with your mind.

• Information will free you from the boom-and-bust cycle and help you profit in a down as well as an up market.