What is money? Why do we use it?

Money (currency) is a medium of exchange. The money we use in the United States is dollars. The money used in many parts of Europe is the Euro. All over the world, there are different forms of money and are used in specific regions depending on government and culture acceptance. We use the money to make exchanging goods easier.

Living in a world without money would be much harder to deal with. You would have to exchange your possessions for other people’s possessions to get what you wanted. A very long time ago this was how the world was though. To learn more about the history of currency visit Wikipedia. Let’s look at some examples to see how different a world without money would be.

How many eggs would you trade for an iPhone?

John has a chicken coop that laid eggs all the time. One day, he needed to replace his phone, so he brought 15 dozen chicken eggs to a phone store thinking that he wouldn’t need more than that to buy the phone he wanted. Perusing in the store John was calculating how many eggs each phone was worth. After he found the phone he wanted and thought it would be worth 70 eggs he went to the store manager with his proposition. The store manager rebutted saying that the phone was worth at least 103 eggs. The two argued for a while and then finally exchanging the phone for 95 eggs.

Think about the store manager now. What is he going to do with the eggs? He can eat them, find another use, or trade them for something else. On top of that, he has an inventory of a bunch of random things since his customers pay for his phones with various items and services. He has to find a way to make use of the things in his random inventory or exchange them. Do you see how much more difficult this would be than just using currency as a medium of exchange?

Your Job Pays you in toilet paper

Wonder if you worked at a toilet paper factory and since we were living in a world without money they would pay you in toilet paper. Yes, every other week would be payday and HR would calculate how many hours you worked. Then they gave you an amount of toilet paper rolls according to the worth of your hours to them and the worth of the toilet paper. Hopefully, you worked hard enough or else you might not have enough toilet paper to get by until next payday.

Imagine going to the store with toilet paper rolls to buy your groceries with or going to the hardware store, or shipping toilet paper on Amazon for another good. Again, you run into the problem of deciding how much your toilet paper is worth, how much the other person’s good or service is worth, negotiating the price, and then dealing with the extra amount of the other person’s good or service you will get from the transaction. Maybe if you exchanged for lawn mowing services and have extra left over you can have the lawn mower do your neighbor’s yard too.

The Bottom Line

As ridiculous as the above examples seem, it would be true if we didn’t use a single medium of exchange like money. It reduces negotiation, and in some instances eliminates it. You don’t have to worry about having extra money left over after a transaction. One thing that is always going through our heads is valuation: Is that product really worth $10? Can I get it for cheaper? However, we can conclude that money is a good thing. It makes life easier. We only need to bring a wallet around instead of a cart of eggs.

What is my money worth?

Money and currency worth is determined by the number of people using it. The more people that use it the less volatile the currency will be. In the United States, there were an estimated 325 million people in 2017. That means we know that at least 325 million people use the U.S. dollar and are influencing its worth. The biggest influencer is the U.S. government since they spend the most. However, we will leave the government out to make it more simple to understand.

Every time you buy something you decide how much your money is worth. This may be easier to comprehend if you think of how much the product is worth instead of how much your money is worth. How much is a product worth to you? Is it too expensive? Why so? Is the product cheap? Why is the product cheap?

Example

You are at the store buying snacks and you see that the Oreos are an extra dollar than usual ($4.00 instead of $3.00). You like Oreos, but right now they are too expensive for you, so you don’t buy them. This action can be translated to your money ($4.00) being worth more than the Oreos. If a massive amount of people did the same thing, then the people who sold Oreos would drop the price. There are actually many reasons why people don’t buy something on the spot, but the cost is considered a significant factor and can be influenced by a large scale of people.

When people go on strike for higher pay, they are implying the work they do for that organization is worth money than what they are being paid currently. You can also flip it around: The workers are current pay is not worth enough for their work.

I Challenge You!

The next time you go to the store, count every time you put something in your cart if money is part of your decision. By doing this you will see how much money is a factor when you shop. To some extent, money is a factor in all our shopping behavior.

How can I use money to my advantage?

Knowing the worth of money to you can help you make better decisions with it. There are many ways you can use it to your advantage. Again, the key is knowing what it’s worth is to you. Here are a few examples:

  • Budget and make a money plan
  • Save Money
  • Bargain with big ticket items
  • Don’t buy unnecessary things
  • Be conscious of price when looking at things to buy
  • Buy items that grow in value instead of depreciating
  • Spend money on things that will teach you how to use it better

See other posts on budgeting

Categories: Budgeting

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