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The Young Investor
Projects and Activities for Making Your Money Grow
By Katherine R. Bateman Chicago Review Press Incorporated
Copyright © 2010 Katherine R. Bateman
All rights reserved.
ISBN: 978-1-61374-054-5
CHAPTER 1
All About Money
WHAT IS IT, AND WHERE DOES IT COME FROM?
How to Buy Money
Before you can save money, you need to have some to save. In the introduction I said you buy money. You can buy it in a number of ways. The most common way to buy money is in exchange for a skill you have. You can earn money for chores in your home, such as helping with dinner, taking out the trash, washing the family car, or doing yard work. You can earn it by babysitting in the neighborhood, by walking dogs for a dog-walking service, or by feeding and playing with your best friend's cat while her family is out of town.
Whatever the skill, the end result is that someone pays you for your effort. The amount you are paid depends on the level of skill or the length of time required to complete the job, and sometimes it's a combination of both. This is how people earn money: they exchange their skills for their paychecks. Then they take their paychecks and pay the dog groomer and the grocer and all the other people who do things for them.
Another common way to buy money is to exchange it for something you own, such as a sweater that you don't wear anymore, DVDs that you don't watch anymore, or vintage Star Wars figures that you received as a gift when you were 7. The amount you are paid is based on what you and the buyer think is a fair price. If either of you think the price is not fair, the exchange won't happen.
The History of Money
You've heard people — usually people like parents — say that money doesn't grow on trees. It doesn't. It doesn't actually grow anywhere. It's printed by the U.S. government or the Japanese government or the French or Nigerian governments. Every government prints its own money, or currency.
The first money was not metal coins or paper as we have now; the first money was salt. In ancient China, people paid for something they wanted to buy in salt. In ancient Rome, soldiers were paid in salt. The word for salt in Latin — the language the Romans used — was sal. When your parents talk about their salaries, they are using a word from the history of money, because salaries comes from sal.
Other things were also used to pay for the goods and services people needed. In some places, such as the Yap Islands, money was made from stone. In Fiji, whale teeth were used for money. In Africa, elephant hair was the currency. On the Solomon Islands, tobacco was used as money.
Around 2500 B.C.E., or about 4,500 years ago, precious metals like gold, silver, and copper began to be used as money. Coins found in the region of ancient Mesopotamia (now occupied by Iraq and parts of Syria, Turkey, and Iran) weren't perfect circles like our coins, but they did have pictures stamped on them as ours do today. You can find some of these coins at museums or coin collection shops.
Paper money came much later than metal coins. The earliest surviving paper money is from China. It was issued a little before 1400 C.E. and was about the size of a piece of notebook paper. About 100 years before that, the Mongol warlord Kublai Khan used pieces of bark from mulberry trees for money.
Making Money in America
The United States Bureau of Engraving and Printing prints our paper money in two cities — Washington, D.C., and Fort Worth, Texas. Since money is worth a lot, there are many secrets regarding the making of money. One of the secrets is about the paper itself. We know that it's made from a mixture of linen and cotton. We also know that the paper has tiny colored nylon threads in it. But only a few people know the exact formula for making the paper on which our money is printed. Those people work for a company that has produced the paper for more than 100 years. Another secret is how the ink that is used to print on the money is made. It is slightly magnetic, but the formula is a carefully guarded secret.
To make money as fast as possible, multiple images of dollar bills are printed on large sheets of paper. After 100 sheets are printed, the money is cut into single bills. The stacks of bills are bundled together until they are approximately the size of a brick. These "money bricks" are then sent to banks, where people usually go to find crisp new bills.
Paper money in the United States comes in different amounts, called denominations. The denominations are $1, $5, $10, $20, $50, and $100. The Bureau of Engraving and Printing used to print $500 and $1,000 bills, but these big denominations were primarily for banks. Individuals liked to order $500 and $1,000 bills for special occasions like a big birthday or retirement party, but now you can only find them in numismatic collections.
Our metal coins are made by the United States Mint in plants in Denver, San Francisco, and Philadelphia. The process of making coins is called minting. Each coin has a letter on it for the city where it was minted: D for Denver, S for San Francisco, and P for Philadelphia. (There are, however, a couple of exceptions. For example, Philadelphia was the first mint in the United States. Because there was only one place to mint coins then, there was no need to include a mint mark to tell where the coin was made. Lots of Lincoln pennies have no mint mark. Also, between 1965 and 1967, the Coinage Act of 1965 banned mint marks altogether.) Check your coins and see if you can find out where they were made. Special commemorative coins in gold and silver are minted in West Point, New York, where some of our gold and silver is stored. The bulk of our gold, however, is kept under lock and key in a huge fortified vault at the bullion depository in Fort Knox, Kentucky.
When metal was first used for money, the coins were made of precious metals like gold, silver, or copper. Now our coins are made from a mixture of copper and nickel, because there's more copper and nickel available than gold and silver. When someone talks about "the gold standard" or "the pound sterling," he or she is referring to a time when money was made from gold and silver. If you are interested in learning more about the history of money and how it is made today, the U.S. Department of the Treasury has a Web site that is fun to poke around on. Just go to www.ustreas.gov/education. You can even get a virtual tour of the Treasury and the various sites where coins are minted.
The Money Circle
Once money is printed, it's put into circulation. Circulation is a good word for it because money circles around and around, going from one person's hands to another's, over and over again. Sometimes this happens slowly and sometimes very quickly. Around holidays like Christmas, Hanukkah, and Kwanzaa, it can circle like a whirlwind!
Here's an example of how money circles. Your sister babysits for a little girl on the next block. She takes the money that she receives and buys a cashmere sweater that she's had her eye on for some time. The store where she buys the sweater pays the clerk who sold it to your sister for the time he worked. The clerk takes his salary and buys a white puppy with a black spot over its left eye. The dog breeder who sold the dog to the clerk takes the money the clerk gave him in exchange for the puppy and buys a calico kitten for his wife, who doesn't like dogs at all.
With all that circulation, paper money gets old and ratty and coins get so worn out that you can't read the mint mark. One-dollar bills last the shortest period of time — about 15 months — because they get circulated the most. Bills worth $5, $10, and $20 last longer since they don't change hands as often.
When money gets worn out, it must be replaced. So, when a really old bill or a really beat-up coin comes into a bank, the bank teller sets it aside to exchange for new money. Armored trucks take the old money from the banks to the Department of the Treasury. These bills are shredded into tiny strips, then the strips are burned until they turn into fluffs of white ash. The coins are sent to one of the three mints, dumped into a huge pot, and melted. The melted metal is then minted into new coins.
Not All Money Is Printed with Secret Ink
Did you know that no cash actually changes hands for the majority of purchases in this country? About 60 years ago almost everything bought and sold was paid for with cash. Now we use other forms of money: Credit cards are often used when a person wants to pay for something and doesn't want to use cash. Checks are another common way to pay for things.
Many people keep money in banks. In order to keep track of everyone's money, the bank gives each person a number that applies only to that person's money. Your number is your account number. It's sort of like having a combination lock on your locker at school. All your stuff is safe from friends who want to borrow things without asking when it's locked in your own locker. There are many kinds of bank accounts. Right now, though, I'll talk just about checking accounts.
Here's how a checking account works: You have some birthday money and some cash from chores you did for a family member, friend, or neighbor. You take this money to a bank and tell someone at customer service that you want to open an account. You will be directed to a person whose job is to help you do just that. She gives you a form to fill out that asks for your name, address, age, and Social Security number. You will probably be asked for your mother's maiden name (her last name when she was born) or the name of the town where you were born. This is for security purposes, in case your checkbook is ever lost or stolen. Then you have to sign a form so the bank will be able to keep a record of exactly how you sign your name. If you are under 18 years old, the bank will make someone over 18 sign his or her name, too. It's the law.
So you've filled out the form and signed it, and you've given the bank the money you've earned. The bank then gives you a checkbook, which usually contains 25 checks and a check register (where you record all the checks you write to keep track of your money). A checkbook is small enough to carry around with you. When you carry your checks, you don't have to carry money. Many people like paying for things with checks exactly for this reason. If you lose your checkbook, it can be replaced. If you lose your cash, it's gone for good.
One cold winter afternoon you decide that you absolutely have to buy a new video game that your friends are talking about. So, instead of taking cash, you grab your checkbook and head to the nearest store that sells games. At the checkout counter you see a notice that says the store will accept checks if you have a picture ID. Since you have your school ID, you write out a check for $43.50. All you have to do is write in the date and the name of the store where it says "Pay to the order of." Then you write in the amount of the purchase — in this case, $43.50 — in the box and then write out the amount in words on the line below that. (This can stump you sometimes — occasionally I forget how to spell "forty.") Next comes the easy part — signing your name — and then it's done. Hand it to the clerk and collect your game.
Even though your check is as good as cash, the store is not paid in cash by the bank. In fact, no cash actually changes hands. Instead, the bank takes money out of your account and puts it into the store's account. In other words, the bank transfers funds from one account to another, and it does it all electronically. But there's a catch: the bank will only transfer funds if you have funds to transfer. Your balance, or the total amount of money you have in your account, must be larger than your check amount. The check register in your checkbook is designed to help you keep track of your money. Your check register is where you record an entry every time you write a check. Your register will look like the one below. Each time you write a check, you fill in the number from the top right-hand corner of the check, the date the check was written, the name of the store or person you wrote the check to, and the amount. Then you subtract this amount from your balance. That way you can keep track of just how much money you have in your account at all times.
The bank will also help you keep track of the checks you've written. Once a month the bank sends you something called a statement. A statement lists every check you've written over the past month, all the deposits you've made, and any fees they've charged you. A deposit is the banking term to describe money that you've added to your account.
The bank statement includes directions on the back that explain exactly how to know what your balance is at the current moment. That's in case you've written a check or made a deposit since the bank mailed your statement. Balancing your checkbook is the phrase used when you doublecheck the statement's record of all checks, deposits, and fees charged to your account. You should end up with the same amount of money that the statement says you have, minus any unrecorded deposits or plus any checks that have not yet cleared or been deducted from your account.
Debit Cards
Although lots of people use paper checks (especially to pay bills), more and more people have turned to a plastic version of a check. When you open a checking account, most banks offer you a check card, which is also called a debit card. It's called those things because you can use your card in place of a check to withdraw money from your account, or "debit" your account. Just like checkbooks, debit cards are a little safer than cash. If you lose cash, it's just gone. If you lose your debit card, no one else can use it because you have to have a special number, like a secret code, to use it. It's called a personal identification number, or PIN. You even get to choose your own PIN number so it's easy to remember.
Another thing about debit cards is you can use them to deposit money into or take cash out of your checking or savings account even when your bank is closed. You do this at an automated teller machine, called an ATM, at any hour, day or night. ATMs are located almost everywhere: in malls or grocery stores, on the sides of buildings, even in bank lobbies. You just follow the easy directions on the screen of the ATM to put in your PIN and make your deposit or get your cash. At the end you get a receipt that shows the balance on your account.
Comparing Credit and Debit Cards
Now let's look at plastic money called credit cards and compare them to debit cards. Credit cards work like this: when you buy something and pay with a credit card, you promise the store that you will pay for your purchase at the end of the month. Actually, you are promising the store that a bank will pay for it at the end of the month. When you buy something with a credit card, a bank will pay for your purchases even if you don't have any cash in your pocket.
But there's a hitch: many banks make you pay a fee each year for the use of their credit cards, and a bigger hitch is that if you don't pay off your credit card bill in full each month, the bank charges you an extra fee for using their money. These fees can add up the longer you don't pay your balance. It's like paying more for items that, maybe, you bought on sale in the first place. Sadly, you can get into financial trouble with credit cards. This is because credit card companies sometimes give you a line of credit (the total amount you can charge) that is far higher than you can afford to pay off easily. So even though credit cards have benefits, like not having to carry around a lot of cash, they have some dangers too. In 2008, almost 78% of American households — 91.1 million families — had at least one credit card, and that number is expected to grow.
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Excerpted from The Young Investor by Katherine R. Bateman. Copyright © 2010 Katherine R. Bateman. Excerpted by permission of Chicago Review Press Incorporated.
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