Personal money supply

ECONOMICS DEALS with money supply from a macroeconomic perspective. It classifies different levels of monetary volume into M1, M2 and M3. This classification depends on time availability. M1 covers cash in circulation. M2 includes M1 plus savings and time deposits, with M3 covering long-term placements of bonds and T-Bills in addition to the first two classifications.

When money supply rises, don’t expect your savings account to move up as well. Does personal money supply have its own classifications varying in time of availability?

Present money (M1) includes cash in your pocket, bank accounts (accessible by check or ATM withdrawals) and even quick cash from an easily messaged benefactor. (Please send the cash online.)

Next in accessibility (M2) are time deposits, liquid investments like managed stocks or funds handled by banks or fund managers. These may take at least three days to access.

M3 in personal money supply includes other investments like property and insurance-linked investments, plus the first two categories.

There are other sources of money supply. The traditional credit cards for purchases of consumer goods like sneakers or even services like open-heart surgery (amortizable in six months without interest depending on the cardholder’s credit limit).

Another source of quick cash is the now widespread online lending for low amounts and usurious daily interest rates. Collection methods can also be harsh when accessing the contact list in one’s phone — your friend has a bad debt which you should settle. This product may also be connected to online gambling.

There are also standard long-term bank loans to purchase a house, finance travel or pay for school tuition. Future income must be set aside to amortize the loan, reducing the available cash from the regular income stream.

Even farther out in terms of availability are such monies (yes, it has a plural form) such as expected inheritance, not always a sure amount when dealing with cousins, sale of a club proprietary share or condo unit, or a windfall from some deal where one is only an intermediary and maybe a future whistleblower.

The only money which a personal finance consultant wants you to spend is present money, which is not the same as the present value of money, an economic concept that is also hypothetical and can’t buy you a signature bag tomorrow.

The present value for future cash flows is a construct where upcoming revenue streams from different investment options are brought to the present using a discount rate, such as interest. Thus are revenue streams of varying schedules and time frames comparable to present cash, on an apples-to-apples basis.

Credit card companies are always asking the cardholder to spend more by offering discounts with a high minimum spending at restaurants, bonus miles in airlines, as well as generous repayment terms, with nominal interest rates.

Personal income should be defined as actual revenue after tax. A narrower sub-set is set aside for discretionary spending. This amount has removed cash obligations like rent, loan amortizations, utilities, groceries and tuition fees. Discretionary cash is limited to the amount after all operating expenses (OPEX) are netted out. When that number is zero or negative, it’s time to look at a change in lifestyle and to remove “fun money” from one’s vocabulary.

Behavioral economists have a term called “mental accounting,” which segregates discretionary spending into categories like travel, eating out and creature comforts that range from foot massage and other afternoon delights like a Turkish dessert. There is here an attempt to segregate funds into specific uses. There is no transfer of mental accounts. Eating-out money cannot be applied to plane fare, even if these two categories may be jointly enjoyed.

(Have you read this far already?)

Still, it’s likely that money supply available is not enough to allocate in the categories provided. Then some categories can be dropped like medical contingencies and season tickets for games.

How much real money you have can be a complicated subject. It’s not just what is readily available. Anyway, only those with a high level of income are concerned with personal money supply.

The only items that make the wallet (or wallets) thick and hard to jam into the pants pockets are not just paper bills but plastic cards — including the one for senior discounts.

Tony Samson is chairman and CEO of TOUCH xda.

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