If you love to read classics, and within that if you love science fictions, popularly known as sci-fi, you would not have missed H G Wells and his famous work The Time Machine.

The book’s introduction in Wikipedia states:

The Time Machine is a science fiction novella by H. G. Wells, published in 1895 and written as a frame narrative. The work is generally credited with the popularization of the concept of time travel by using a vehicle that allows an operator to travel purposely and selectively forwards or backwards in time. The term “time machine”, coined by Wells, is now almost universally used to refer to such a vehicle.

Imagine how much ahead of his time he was. This book was published in 1895 and the first car was invented in 1879. And time travel is still not a reality – after almost 125 years. 

However, one industry has seen an equivalent of time travel and that is the business involving money – whether you call it finance or banking. The industry has invented some instruments that allow your money to “time travel”. 

This may sound surprising to many, but the banking and finance industry has seen money traveling across times – both in the past as well as in the future. The entire concept of money is so brilliant that it allows one to move one’s ability to buy stuff in the present using money of the past or money of the future. 

This last line might have worked as a hint for some. Yes, we are talking about the ability of buying things either from the money accumulated through savings or by taking a loan.

Before we proceed further, it is important to understand one concept – purchasing power. It is related to the amount of goods one can buy with the currency notes. 

Let us elaborate on this concept.

We earn money – called income and we spend the money – called expenditure. In an ideal world, you would like to meet your current expenses through your current income. Real life is very different. The income often is more than the expenses, and vice versa. If your regular expenses continue to be more than the income for a long period of time, it is impossible to sustain that situation. For majority of us, our regular income is more than our regular expenses most of the time. The surplus thus generated, is known as savings. As many of us know, this saving is invested into what we popularly call investment assets. 

These investments allow the purchasing power of your money to be transported into the future. In other words, it allows you to transport the purchasing power of your money from the past to the present.

 

When you use the money you have saved, you are taking the money from the past to purchase a thing in the present. However, when you borrow money, you are borrowing from your future to spend the same today.

There are also situations when you do not have enough money to pay for some major expense and you have not got enough time to accumulate money for the same from your past. In such cases, banking and finance industry has another common instrument called loan. You can borrow money to fund your big expense and pay off the loan later. 

In other terms, a loan allows you to transport the purchasing power of your money from the future to the present. 

Few things to keep in mind at this stage:

● Since the finance industry offers such a facility, it normally takes some charge for the facility offered. This charge is levied in a very interesting manner – in fact, it is so interesting that it is called “interest”.

● Normally, the interest you earn on your investment is lower than the interest you pay on the loans. This difference is the money that a bank would make.

● If you intend to earn higher than what you pay on your loans, you got to take some investment risks. This means that while there is a potential to earn more, there is also a possibility to earn less, or lose some or all of your capital. 

● The higher the expected return, higher is the risk that you must take.

Understanding these basic lessons is a good first step in learning about money.