On Friday evening, Buddy hears some news: there's one place left on the ski camp, but he has to pay CHF 150 by Monday. He does his sums. He has CHF 100 in his piggy bank, a card collection worth about CHF 120 and a bike he's outgrown worth CHF 80. CHF 300 in all. He's "rich". And yet he's in a real fix.
Having value or having money
The piggy bank is simple: CHF 100 available straight away. The cards are another matter. To get CHF 120, he'd have to find the right collector, and that takes weeks. The shop round the corner will buy them right now… but for CHF 60. The bike? Nobody's going to buy it this weekend.
That's liquidity: how easily you can turn something into money, quickly and without losing value. Cash is perfectly liquid. A house, a collection or a share in a friend's business are much less so.
Why money exists
In 1892, the Austrian economist Carl Menger asked where money came from. His answer: from liquidity. In trade, some goods were easier to sell on than others, such as salt or metals. People got into the habit of accepting them even when they didn't need them, because they knew they could trade them on later. Little by little, the easiest good to sell became money, without anyone ever decreeing it.
The price of speed
The card shop buys a card for CHF 6 and sells it for CHF 10. That difference, CHF 4, is the price of speed: the shop is paid for always being there when you want to sell.
The researchers Yakov Amihud and Haim Mendelson showed in 1986 that this difference matters on the stock market too. Investments that are hard to sell must pay a little more, or nobody would want them. And it's mainly patient investors, who don't need to sell quickly, who benefit from that small extra.
The two-pocket rule
To never end up like Buddy on a Friday evening:
- A "right now" pocket: money available for the unexpected. For adults, people often talk about a few months of spending.
- A "later" pocket: money you won't need for a long time, which can go into things that are harder to sell but earn more.
If your "right now" pocket is well filled, you're never forced to sell at the wrong moment, at half price.
Try this tonight with your child
Make an inventory of their treasures together: piggy bank, games, cards, books, bike. For each item, ask two questions: "What's it worth?" and "How much would you get if you had to sell it tomorrow morning?" Compare the two columns. Then decide together how much they always keep in their "right now" pocket.
Read also: Pocket money: how much, how often, and should it be “earned”?
Further reading
- Menger, C. (1892). On the Origin of Money. Economic Journal, 2(6), 239–255.
- Amihud, Y. & Mendelson, H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17(2), 223–249.
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Educational content, not investment advice.