The money circuit in nature

Do you remember the water cycle in nature?

Water, through evaporation, due to the heat of the Sun’s rays, is transferred from the surface of the seas and oceans into the air. From water vapor, through condensation, it turns into liquid droplets that end up forming clouds. In the form of precipitation, they fall on the ground, infiltrate the ground and end up, again, in the evaporation position.

The process is a complex one. There are several sections depending on the movement of water, vertically and horizontally, capillarity and adequacy, but, in general, this represents, simplified, the water cycle in nature. It is also true that there is no point where the water cycle in nature begins and ends. The form presented is the one that was given to us in school, being a comprehensive and easy to remember one.

In school we learned the water cycle in nature. But did anyone explain the money cycle to us?

The money cycle

We have three interdependent entities: the government, the citizens and the industry (factories, companies, corporations). Just as in the case of the water cycle in nature, there is no point where the money cycle begins and ends. There are also two more elements: the National Bank and the financial market.

The government provides citizens with systems, such as education (not financial education, however), pensions, health and certain subsidies, and citizens pay taxes to it. Furthermore, citizens receive salaries from the state or private companies and consume the products of private companies existing on the market. Basically, citizens receive but also offer, earn but also spend within this process. This makes there a continuous flow of exchange and a kind of help between the two entities. Of course, what citizens produce, through their work, industry will also export.

Industry also pays taxes and duties to the government and receives from it the so-called: government expenditures: financing.

If we were to represent the above in a graphic form, they would look like this:

The National Bank is the central bank of a state. It is an independent public institution, the only one authorized and responsible for issuing banknotes and coins valid on the territory of that state. The National Bank has as its fundamental objective the assurance and maintenance of price stability. Also, its duties include: establishing and implementing monetary policy and exchange rate, authorizing, regulating and supervising economic stability, issuing banknotes and coins as legal tender, establishing the currency regime and supervising its compliance, managing the state’s international reserves.

The financial market represents the market for financial instruments, such as: government securities, bonds, shares and other derivative financial products. The financial market is the one that collects cash and places it in financial instruments. The main goal is to obtain returns; profit. Both individuals: citizens and legal entities: companies invest their available money to obtain profit. This can be reinvested or kept as an additional source of income.

The way money circulates and impacts our lives

From a macroeconomic perspective – the circuit of money in nature, the only determinants we can change and have easy access to in order to improve our personal financial situation are the consumption and investments we make.

If we cannot change the government’s rules, in order to collect more money from us, the citizens, such as from taxes and duties and from adopting new monetary policies, we can modify our income, expenses, savings and investments.

Both the money circuit and the water circuit in nature help us understand the mechanisms of these materials, vital for survival, and to realize the movements we can make to achieve our goals.

We cannot change some aspects, however, those that concern us are mandatory to do so. We want to prosper, to be well for ourselves and our family, but if we do not know how, we are tied hand and foot. Knowledge of financial mechanisms is decisive in our action.

Knowledge is power. Anything you know helps you to manage it. If you don’t know where the money comes from, how it gets to us and where it goes, it is very difficult for you to plan anything. It is good to have the big picture. Although you cannot change some aspects, you can change others and it is your responsibility to do so. By knowing everything around you and how it works, you can manage what is available.

How does money circulate in your life?

Knowledge at the macro level follows that at the micro level. You need a perspective of your financial situation – a circuit of money around your household. You are responsible for your income, your expenses and your investments. The level of your remuneration is determined by the level of your contribution to the economy. What can you do to change this? This question can help you figure out what skills you have, what you like to do and how you could use all of this to generate more money for yourself and your family. Maybe it’s a professional retraining, maybe it’s an extra activity that you can start in parallel with your job.

What expenses for your and your family’s maintenance are there and what extra expenses do you make? Are the extra expenses expenses to develop a certain aspect of your life or are they unnecessary expenses? Can you do something about this? What would you like to do, what would bring you greater satisfaction?

Do you save? Do you include investments in your money circuit? In what aspect of your life do you want to develop and do you need money? How can you start, right now, to achieve that development?

In this way, by putting the answers to all the questions on paper, you will create your own money circuit. See where you can go and where you can’t. What you can change, what you would like to change and what you would like to keep or improve. Having the big picture, you can draw a detailed plan, you can establish some implementation steps so that you create your own functional circuit, to make you fulfilled by the financial side of life.

Money is part of human nature. Without it, we cannot survive. Basic, physiological needs also require money. Money is a resource that we must take care of. Money, like water, is unlimited. But it is necessary to find out how this resource works so that we can conserve it. After all, any resource can become exhaustible. And, if we want to preserve it as an inexhaustible resource for as long as possible, we need to know what the mechanisms are that make it possible.