What would you do without money? Imagine carrying around leather coats you just finished stitching together from hides you tanned from an elk you shot and skinned, with the hope of finding someone willing to take them in exchange for that new smartphone you want …. Or imagine having to wash dishes at a restaurant to pay for the meal you wanted. Not fun!
Except if you’re ridiculously good at it.
The advent of money was a big deal in finance. It created a standard. As long as everyone accepts the value of money as a currency, it allows you to handle many financial transactions: you get paid, you buy goods, you pay for services, and you save.
Money stores the value of what you do for work
Without it, you would still be using the barter system, and you would have to be prepared to offer many jobs or diverse goods to make trades.
Barter: the exchange of one good or service for another good or service.
I went to the bank and asked to borrow a cup of money. They said, ‘What for?’ I said, ‘I’m going to buy some sugar.’
– Steven Wright
Money splits up the barter exchange: one person pays you money for your good or service; you use that money to go buy the goods or services you want. This way, you no longer need the “double coincidence of wants.”
With money, you have new possibilities
As soon as you can store the value of your work, new possibilities arise. First, you no longer need to be able to offer many services for barter, you can develop a special skill. Second, money is “liquid,” meaning it is available whenever you need to use it compared to pulling out your fur coats from storage. Finally, you can save up to buy big ticket items.
How do you save enough to buy a car when you need the car to go to work to earn and save money? There’s an app for that, it’s called credit – credit cards, revolving credit, short-term loans, long-term loans, etc.
Buying on credit
The advent of loans to buy cars, sewing machines, refrigerators, and other items was another big deal in finance. The short-term loan from a bank allows you to purchase and use a car right away, if you have good credit (more on building credit later). Same goes for using a mortgage to buy a house.
Credit cards are not money; they are a form of a short-term loan from a bank that you can use in place of money for purchasing goods or services.
You then repay the lender all that you borrowed plus interest. Of course, to keep your credit good, you have to make all the payments on your credit cards, car loans and mortgage on time.
Benefits of money and credit, with some concerns
We now use apps to pay with our smartphones in place of money and even plastic credit cards. The apps, like credit cards and money itself, are all part of finance.
While this all sounds wonderful, there are some serious hitches: as soon as you introduce money, you find many companies make money off of you almost any time you use money or credit: bank fees, PayPal fees, investment fees and commissions, interest on loans, share of profits on sale, life insurance, commissions and real estate commissions.
But then again, money permits you to purchase and own another type of asset:
More on fees and on investing in future posts – stay tuned!