I am sure you have listened to a lot of advice on saving your money and being able to achieve your goals. But how has that worked for you over the years? Have you achieved your goals? Let me introduce you to the money markets and how they work, just so you see for your self.
Money markets are basically a component of financial markets that trades more liquid instruments or simply put near money instruments including money itself. With money markets, borrowing and lending happens alongside trading of short term financial instruments (securities with maturity equal to, or less than a year).
For the money markets to exist, there must be at least 2 major players but quite often, there are 3 players. The two fundamentals players are the borrowers and lenders. And the third player is the intermediary.
- Borrowers – These are usually the government and Corporate organizations
- Lenders – These are saving individuals or as some times referred to, households
- Intermediaries – These are financial institutions such as Banks, Insurance companies and Investment companies.
The basic flow is that households save their money in banks or insurance products, the money is pooled together usually by intermediaries, and lent to the government and Corporations. And while all this is happening, this money is subjected to loss due to inflation and risk of loss (Credit risk); something that brings about two questions; i. time value of money and ii. risk vs reward. For these two, you should watch this space, I shall break them down further in other articles.
So here comes the Golden question. When you save your money, what is happening to it?
- If you save it under your bed or in a current account, you probably get the same money at a later time that buys less than it could buy the day you decided to save it. Your money would have lost value to inflation depending on which economy and what currency you operate
- If you are putting it on a fixed deposit account, you are certainly getting some reward from it, usually above the inflation rate.
- But what if you could earn better, experience more liquidity (access your money more often) and have the chance to re-invest it at better rates and/or cease new opportunities as they emerge.
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