Money Talks: Financial Literacy Month
Bills of the euro, the common currency used by many member nations of the European Union, have replaced the currency of some individual countries. Almost none of the materials from which modern money is made are rare or valuable. Money’s value comes from its acceptance as a medium of exchange.
Credit: © Shutterstock
April is Financial Literacy Month. The basics of financial literacy start with understanding what money is. From there, important skills include understanding credit, creating a budget, and investing.
Money is anything accepted by members of a community in exchange for the things they sell or the work they do. The importance of money in an economy cannot be overstated. Money encourages people to exchange goods and services. People can save it for future purchases and living expenses. People state the price of goods and services in terms of money, just as they use hours to express time and miles or kilometers to measure distance.
Whether money consists of pieces of metal or paper or of electronic data on a debit card, people exchange it for work or goods for only one reason: They know that others will accept the same metal or paper or electronic data in exchange for the things they want. The value of money results from the fact that everyone will accept it as payment.
Credit enables people to obtain goods or services even if they do not have enough money to pay for them right away. For example, a person who cannot immediately pay the full price of an automobile or a house may make the purchase on credit. Banks and businesses issue credit cards that can be used to charge purchases at many stores, restaurants, and other businesses. Although a customer can use a credit card to pay for things, using a card is in reality requesting a loan that must be repaid. Credit cards are not money.
A budget is a financial plan that helps people make the best possible use of their money. It identifies sources of income and assists in planning expenditures. Income and expenses may vary, and so most budgets consist—at least in part—of estimates. Money for monthly payments that are the same each month, like rent and insurance, should be set aside first. Many other necessary expenses, including clothing, food, recreation, and transportation, vary from month to month and may be controlled to some extent.
Such factors as age, family size, income, and personal tastes all affect individual spending. Some people save to pay for their children’s education. Others put money aside to buy a home or an automobile. A family with a low income may have to spend most of its money on food, clothing, and shelter. A family may want to save a certain amount to use in an emergency, such as illness or unexpected repairs. The budget should have a surplus that can be used for unexpected expenses.
Investment is the use of savings to produce future income. Many people invest part of their current income to consume more in the future. Some do this by letting others invest their funds, while others invest directly in their own businesses. Direct investments involve purchasing physical goods, such as a piece of real estate or a business. Indirect investments involve purchasing financial assets, such as stocks and bonds. Money invested in a savings account is also considered an indirect investment.
It is easier than ever to invest with online investing or e-trading. People should consider many types of investments, such as stocks and bonds, only if they are willing to incur the risk of losses. They should also have enough secure savings to protect themselves against any temporary loss of income resulting from illness or unemployment.
