What are the Functions of Your Money?
What are the Functions of Your Money? Barrett Strong once sang, “Now, give me money (That’s what I want).” Donna Summer proclaimed that we work hard for money and the Beatles believed it couldn’t buy love.
Pink Floyd, so they say, consider money the root of all evil today. According to Biggie, the more money we come across, the more problems we see.
Macklemore was going to the thrift shop cause he was saving his money. And, if the Barenaked Ladies had a million dollars, they would buy you a house, furniture, a reliant car, a fridge full of food, exotic pets, and a Picasso (or Garfunkel).
Just like that eclectic group of songs, we have a diverse and unique relationship with money. We earn, spend, and save it. For 77% of us, it causes anxiety. And, despite what you’ve heard, money does buy happiness, but only to a point — $75,000 if you want a dollar amount.
Regardless of how you view money or how you specifically use it, it’s generally accepted that it’s the payment for goods and services and the repayment of debt. For some, that could be legal tender fiat money like dollar bills, fiduciary money such as banknotes, or commodities like beads, shells, spices, or gold coins.
Despite the differences, each type of money has a common thread; they each share a few common functions.
Functions of Your Money
A Medium of Exchange
Arguably, the most important function of money is that it acts as an intermediary between a buyer and the seller. That means when you go to the grocery store; you pay for your food using cash or a credit card. If you hire a freelancer, you will pay them electronically through PayPal.
Many of us might take this for granted. But, consider the alternatives. Without money, we would have to rely on something like the barter system.
For those unfamiliar, a barter system is where you would exchange one good or service for another. For example, you could trade a basket full of tomatoes for a chicken or design a website for a haircut. That may sound simple, but it’s inefficient in today’s world.
As explained in Principles of Economics by Rice University
“In an economy without money, an exchange between two people would involve a double coincidence of wants, a situation in which two people each want some good or service that the other person can provide.”
“For example, if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be difficult to arrange. Think about the complexity of such trades in a modern economy, with its extensive division of labor that involves thousands upon thousands of different jobs and goods.”
What’s more, the barter system “does not allow us to easily enter into future contracts for the purchase of many goods and services. Let’s say that you’re trading perishable goods, like your tomatoes. It’s probably “difficult to exchange them for other goods in the future. Imagine a farmer wanting to buy a tractor in six months using a fresh crop of strawberries.”
Money eliminates the double coincidence of wants. Think of it this way. When you buy a product for $20 in a store and hand the cashier a $20 bill, there’s no confusion here since it’s a widely accepted payment method.
Store of Value
“Second, money must serve as a store of value. In a barter system, we saw the example of the shoemaker trading shoes for accounting services.” But what happens if the shoes go out of style? They will decrease in value with each passing season — until there’s a resurgence and they become popular again.
Shoes, unlike, money are not a good store of value. After all, you could take a $100 bill and hide it under your mattress for five years. Guess what? It’s still going to be worth, or at least close to, $100 when your future self goes to use it.
Of course, thanks to inflation, there’s a chance that money will lose some of its buying power over time. In fact, during periods of rapid inflation, a better store of value would be commodities, such as land or gold. However, it’s still money and will be accepted as a type of payment. That makes it more liquid and convenient.
Unit of Account
“Third, money serves as a unit of account, which means that it is the ruler by which other values are measured.” An example of this would be your accountant, who charges $100 to file your tax return. They can then use that $100 to purchase two pairs of shoes — if they’re $50 a pop. “Money acts as a common denominator, an accounting method that simplifies thinking about trade-offs.”
To put that another way, think of money as a yardstick. You can use it to assign prices to the products or services your business offers. When shopping, this means knowing how much something costs so that you know how much you’re going to spend on it. As a result, this makes comparing prices much easier. It also assists you in saving and budgeting for purchases.
Standard of Deferred Payment
While these are the three main functions, this is often considered another function of money. But, what exactly is a standard of deferred payment?
Well, if you can use money to buy shoes, get a haircut, or hire a contractor, then “it must also be acceptable to make purchases today that will be paid in the future.” In other words, we’re talking about loans where you would borrow a specific amount of money and pay it back in an agreed-upon timeframe.
What Does Money Really Mean to You?
I’ve just gone over the textbook functions of money. But what purpose does it have for you?
Yes. You need money to put food on the table and a roof over your head. And, it can also help you create a budget to ensure that you have these necessities met. But, that might all change.
Money can also represent:
- Freedom. Financial independence lets you live the life that you want, like being able to start your own business.
- Happiness. Money is needed to buy experiences, donate it to those in need, and outsource tasks to give you more time, like hiring someone to mow your lawn.
- Security. What I do see at first glance is security for my family and me. “Living a financially stable life means that my children will have the best chance at growing up with all of the opportunities in the world,” writes Trent Hamm over at the Christian Science Monitor. “It means that I won’t have to worry for quite a while about putting food on the table or paying for an extracurricular activity for one of my kids.” Hamm adds, “I can make some career missteps without having our lives fall apart.” And, it means less stress in my life.”
- Power and respect. When you have enough money, you don’t have to be concerned about others pushing you around. And, because you worked hard at earning and saving your money, you’ll be respected by others.
- Love. Did you know that ⅓ of married couples fight over cash each month? While money won’t solve all of your relationship problems, it can reduce friction like reducing debt or frivolous purchases.
While it’s certainly a need, “Money is not simply money,” states Darrell Urban. “Money represents power, love, joy, and much more. If it was just money, our ‘money problems’ would be easily solved,” he adds. “We could just stop spending more than we make and live happily ever after!”
In other words, money can be whatever you want it to be. The trick is to make money work for you; however, you see fit.
So, what are the functions of your money?