Chapter Two

WHAT MONEY IS AND HOW TO GET IT

When we talk about money, most of us think of banknotes and coins. We think of crisp, clean twenties new from the cash dispenser, or ragged greasy fivers from a back pocket; a golden sovereign sparkling in your hand or a tarnished bent penny lying in the gutter.

Although money means cash, you own many other things  which are 'as good as' cash. You can write a cheque. It is only a piece of paper, but you know you can hand it over just as though it were actual banknotes. Or you can go to the building society and produce your dog-eared old passbook, but the girl happily hands over the money you want. Probably you have a credit card or even a season ticket. They are all as good as cash, in the right place.

The first thing to grasp about money is quite straightforward. It is the difference between capital and income. One wise old judge said, 'Capital is like a tree, and income is the apples on it.' You plant the tree once but you pick apples from it every year.

Suppose your building society balance stands at £1,100. If you drew it out, all the notes would look the same, but they might represent different things. If you had only paid it all in the day before, so it had not earned any interest, all £1,100 would represent your capital. If you had paid in £1,000 a year ago and the interest rate had been 10 per cent, then £1,000 would represent capital and £100 the income your capital had earned you in that time.

Why does it matter when it all looks the same? For a start, only income suffers income tax. More than one person has written down the total amount in their bank account, their balance, on the income tax form and then paid tax on the lot.

Just as important, unless you know how much of your money is income and how much is capital, you have no way of judging how good your investment is. Similarly, if you run a business, this is how you calculate whether your business is profitable or not.

So capital is what you started with, and income is what you earn from it. Sometimes people talk about your principal. Then they mean the cash you started off with.

Sometimes they refer to your assets. Then, they mean the money plus the things that are 'as good as money' that you started with - like the shares in the diamond mine Aunt Freda left you, the winning lottery or raffle ticket you are about to cash in, the brilliant invention you have just patented which will earn you a fortune. In everyday talk, assets and capital mean pretty much the same thing.

Not all assets are the same. Some are more liquid than others. This just means that you can convert them into cash more easily.

Suppose you need cash in  hurry. If you have money in a bank account, you can rush to the bank and get it then and there - even when the bank is closed, if you use a cash dispenser. If you own some British Telecom shares, you can tell your broker to sell them. There will be no problem, but you will have to wait a few days before you receive your money, and the broker will have deducted his commission from it. Unlike withdrawing money from the bank, you can never be certain just how much you will get.

If you own a country cottage, you can call in estate agents to put it up for sale. You may have to wait months for a buyer, biting your fingernails and lowering your price. Then finally, when you do find a buyer, what you receive will be reduced by the hefty fees of estate agents and lawyers. The sum may be far less than you hoped for when you first decided to sell.

So, money in the bank is a more liquid asset than a share certificate, which is still far more liquid than a house. You should always bear the liquidity of an asset in mind when deciding where to invest. We shall look at this again.

Finally, assets can be quite invisible but still worth having. For instance:

A bold young man went to pester a famous millionaire J.J. in his hotel. He demanded a loan to start a business.

'Never', laughed the rich man. 'But I like your nerve so I'll do the next best thing. Come on.' J.J. put his arm around the young man, walked him down to the hotel lobby and shook his hand at the entrance. Outside the door, several strangers rushed up to the young man as he stood alone scratching his head.

'You're a friend of J.J.,' they beamed. 'Any friend of J.J.'s is a friend of ours. Want to borrow some money?'

J.J. had certainly given the young man an asset - confidence. When people talk about 'confidence' in money (financial) terms, they don't mean faith in yourself. The young man had that before he tackled the millionaire. They mean that other people (the market) have confidence in you. They believe you have a great future.

HOW TO GET YOUR MONEY

The most likely ways to get money - capital or income - are to earn it, borrow it or inherit it. Beyond that, you may be showered by gifts or outright windfalls, which we shall consider later. Meanwhile some people settle for stealing their lucre or, more subtly, engage in fraud. Most of us, unfortunately, have to earn it, so the next two chapters will cover income from a job - employment income - and Chapter 5, income from self-employment.

If working for it sounds too tedious, turn directly to Chapter 7 to discover how to get capital. On the other hand, maybe you have propped this book against a spare mound of the neatly docketed tenners that cover the table. In that case, you should turn to Chapter 8 to learn how to keep it.

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