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Concept of Money: Needs, Types, Advantages, and More

  • Hrithik Saini
  • Jul 30, 2022
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Money sensitivity is once again becoming more prevalent. The time had passed when the general public was duped into believing that economists, governments, and banks should handle this issue, which has always ended in tragedy. Controversy on what money is, where it flows from, and how it should originate has been sparked by the demonization in India.

 

In this article, we will understand some important aspects and the concept of money.

 

 

What is Money?

 

As the quote goes, money may be what makes the world go around. And the majority of individuals around the globe have undoubtedly dealt with money, many of them frequently. 

 

However, despite its widespread use, very few individuals could probably describe precisely what money is or how it functions. Simply said, anything that may be used as a unit of account for the money:

 

  1. It is a store of value, allowing users to save and use it at a later time to spread out their purchases;

 

  1. Standard of account, which establishes a standard price foundation; or

 

  1. An exchange medium, or something which allows people to purchase and sell with one another.

 

Imagine what might happen if people did not have enough money. This is maybe the simplest approach to thinking about the function of money. We would have a barter economy if there was no money. Everyone would have to trade in whatever they wanted to buy for something they could offer.

 

But when you have money, you don't have to look for a certain individual. To distribute your products or services, all you need is a market. For specific commodities, there is no bartering allowed at that market. 

 

Instead, you trade your goods or services for money, which is a widely used form of transaction. Then you may use that money to purchase whatever you need from those who embrace the same kind of payment.

 

Also Read | The Time Value of Money

 

Why Do We Need Money?

 

While money can't buy happiness, it may provide you and your friends and families with protection and safety. Humans require wealth to support all the necessities of existence, including food, housing, and quality education. 

 

To compensate for these items, you don't necessarily need to be Bill Gates or even have a good amount of money, but you'll need sufficient money till the day you pass away.

 

Acknowledging personal finance is crucial since money is required to buy the necessary goods and services you require to exist. To make sure you will still have enough when you can no longer exchange your labor for money, you must be careful with the income you make and also save plenty for the next.

 

 

Different Types of Money


Here are the five types of money you must know about.

Types of Money


Fiat, commodity, representative, fiduciary, and commercial bank money are the five distinct forms of money in use today. Additionally, they all perform the very same three tasks: they act as a medium of transaction, a repository of property, and a measure of value. Let’s discuss each type in detail.

 

  1. Fiat Money

 

A government-produced currency known as "fiat money" is not guaranteed by a tangible good like gold and silver, but rather by the administration that created it. Instead of being backed by the value of a substance, fiat money derives its value from the interplay between producers and consumers as well as the integrity of the government that issues it. 

 

The majority of contemporary world currencies, including the U.S. dollar, the euro, rupees, and other significant world exchange rates, are fiat currencies.

 

  1. Fiduciary Money

 

Money that is used as a means of trade because the parties involved have mutual confidence in one another is known as fiduciary money. Currently, the financial system is quite conservative. 

 

Fiduciary money is what a bank refers to when it decides to pay its clients in several forms of currency and the consumer has the option to sell or transmit the commitment to another party.

 

Fiduciary payments are typically made in gold, silver, or cash. As they're both tokens that are used as currency or have the same worth, checks and bank notes are instances of fiduciary money. The likelihood that fiduciary money will be extensively used as a means of trade determines its value.

 

  1. Representative Money

 

A certification or token that may be traded for the fundamental good is known as representative money. For instance, the gold was perhaps housed in a safety deposit box and then you might hold a paper certificate that reflects or was "backed" by the gold inside the vault rather than bearing the actual gold commodity currency.

 

It was agreed that the certificate might at any moment be exchanged for gold. Additionally, carrying the certificate was secure and simpler than carrying the actual gold. People eventually began to place equal confidence in paper certificates and gold. Fiat money, the kind employed in response to the changes, evolved from representative money.

 

Also Read | Comparison of Money & Barter System

 

  1. Commodity Money

 

Commodity money is defined as a currency that takes the shape of a commodity and has inherent worth. The main feature of commodity money is this component of intrinsic value. When this type of money was initially utilized, commerce, exchange, and economic activity, in general, were not as sophisticated as they are now.

 

Any tradable product can serve as a form of commodity money. This product must adhere to a set of requirements. For instance, it must be in high demand, strong, lightweight, and convenient to store. Any commodity that can't meet these requirements in the former was not recognized as commodity money.

 

  1. Commercial Bank Money

 

Bank commercial The creation of money through into the monetary system is effectively the creation of debt. Banks are only permitted to retain $10 of each $100 in deposits for relatively brief transactions by depositors while lending the remaining $90.

 

The result is what is known as the "money multiplier" effect. The monetary multiplier phenomenon works when money is given more than they've been in deposits and, as a result of the fractional reserve banking system, the growth in the supply of money surpasses the size of the upfront payment.

 

 

Advantages of Money

 

You may exchange your work for goods that you desire because money exists. The following are only a few of the many important advantages of money:

 

  1. Freedom comes from money.

 

You may live anywhere you choose, take care of your necessities, and participate in your interests once you have sufficient money. You'll experience even more independence because you'll be willing to spend your energy as you like if you're able to achieve financial independence and have enough money to support yourself without work.

 

  1. Homogeneous

 

Money must all be of the same kind, which is a necessary requirement. There are good coins and terrible coins among some of them. However, all banknotes are identical. As a result, it makes a perfect medium of trade.

 

  1. The ability to follow your aspirations is given to you by money.

 

You may launch a business, construct your ideal home, cover the expenses of starting a family or achieve other objectives you think would improve your quality of life if you have money.

 

  1. Stability

 

By carefully controlling its issuance, paper money's value may be maintained. Because of this, there are many supporters of "managed" paper money.

 

  1. Your security comes from money.

 

You won't have to ever think about carrying a shelter over your shoulder, enough just to feed, or even being able to get an appointment when you're sick if you have sufficient savings in the bank. You won't be able to purchase everything you desire because of this, but you will be able to lead a secure middle-class existence.

 

Also Read | How do Personal Loans Work?

 

 

Simple Ways to Manage your Money

 

When you are financially savvy, life is a lot simpler. Your credit history and the total level of debt you eventually wind up with depending on how you manage your money. Here are some suggestions to help you improve your financial habits if you're suffering from money management challenges like living paycheck to paycheck despite having made plenty of money.

 

  1. Maintain a Plan

 

Many people choose not to budget because they perceive the approach to setting out spending, going to add up figures, and trying to make sure everything balances to be tedious. You cannot use budgeting as an explanation if you've got a negative relationship with money. 

 

Why don't you do it if all that it requires is a few minutes every month working on a budget to get your budget under control? Focus on the advantages that planning will have on your life rather than the process of making one.

 

  1. Employ the Budget

 

Budgeting is pointless. If you do, store it in a filing system or bookcase folder and let it gather dust. To assist in directing your spending choices, refer to it frequently during the week. 

 

As people spend money on some other monthly costs and pay bills, modify it. You should always be aware of how much money you have available to spend each month, taking into account any outstanding bills.

 

  1. Maintain a Spending Track

 

Small purchases made every now and then soon pile up, and then before you realize it, your spending has exceeded your budget. Start keeping track of your expenses to find areas where you could be squandering without realizing it. 

 

To discover areas where you struggle to control your spending, save your receipts and record your expenditures in an expense notebook while classifying them.
 

Also Read | Top 10 Financial Softwares in 2022.

 

  1. Set a Ceiling for Unauthorized Purchases.

 

The operating earnings, or the sum of money left over after deducting costs from revenue, is a crucial component of your budget. If you do have any money left behind, you can, up to a specific amount, utilize it for leisure and enjoyment. You can't spend it all at once, especially because it won't be much and needs to last the extra month.

 

  1. Be Certain You Pay the Lowest Pricing Possible.

 

By price comparisons, one can earn the most out of your money and make sure you're getting the best deal possible on goods and services. When possible, search for special offers, coupons, and less expensive substitutes.

 

  1. Spending Large requires Saving Up.

 

Your capacity to postpone gratification can greatly improve your money management skills. You may give yourself more choice to determine if a major purchase is required and to compare prices by delaying it rather than forgoing other crucial necessities or charging it to your credit card. 

 

You may avoid paying the interest on the transaction by building up savings rather than utilizing credit.

 

  1. Regularly make Savings Contributions

 

Building sound financial habits can be facilitated by making a monthly deposit into a savings account. Even better, you may arrange an automated transfer of funds from your deposit account to your bank account. You won't have to recall to perform the transfer in this manner.

 

  1. Financial Competence requires Practice.

 

You might not be used to thinking ahead and delaying purchases until you have the money for the first. The more you include these practices into your everyday routine, the simpler it'll be to handle your funds and the better off they will be.

 

 

Conclusion

 

In summary, despite the fact that the concept of money has existed in a variety of forms throughout history. It has always served the same three purposes: as a store of value, a unit of account, and a medium of exchange. 

 

Modern economies employ fiat currency, which is money that is neither supported by nor represented by a physical good. Depending on the quality of money, even forms of payment that perform these functions may be more or less beneficial.

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