Economics

Understand Money and Banking

Money and Banking are the two most interrelated concepts that are essential for people for their daily life necessities. We can taught a specific paper we give and take to get and give the goods and services or what source of payments or savings of payments we need to have our money secure. We are using daily concepts we even don`t know. in this session, we will tell you about the difference between money and banking and certain terminologies.

What is Money First?

Money is a system we use to exchange goods and services. It’s not something valuable in itself, but it represents something valuable. Here are some key properties of money:

Medium of exchange: Money allows us to avoid barter, the direct exchange of goods and services. We can use money to buy what we need instead of having to find someone who has what we want and also wants what we have.

Unit of account: Money provides a common unit for measuring the value of different goods and services. This makes it easier to compare prices and make purchasing decisions.

Store of value: Money allows us to store purchasing power over time. We can earn money now and use it to buy things later, without having to worry about our money spoiling or losing value.

There are different forms that money can take:

Commodity money: In the past, money was often made from precious metals like gold or silver. These metals had value in themselves, besides their use as money.

Fiat money: Today, most money is fiat money. This means it has value because a government says it has value. Fiat money is typically made of paper or even digital records.

Cryptocurrency: A newer form of money is cryptocurrency, which exists only digitally. It uses cryptography for security and relies on distributed ledger technology to track ownership.

Money plays a crucial role in our economy. It makes trade efficient, allows for specialization, and facilitates saving and investment. Understanding how money works is essential for participating in the economy.

Stages of Money

There are two ways to interpret “five stages of money”:

Evolution of Money: This perspective looks at how forms of money have changed throughout history. Here are five stages:

Commodity Money: Early societies used valuable goods like seashells, beads, or salt as money. These items had intrinsic value besides their use as currency
Metallic Money: Precious metals like gold and silver became the dominant form of money due to their durability, portability, and divisibility.
Paper Money: Governments began issuing paper money backed by gold or silver reserves. This made money easier to transport and store.
Credit Money: This stage includes checks, promissory notes, and other forms of IOUs. They represent a claim on future payment, not physical money itself.
Electronic Money: Today, digital currencies and electronic payments are increasingly common. These rely on digital records and don’t involve physical cash

Personal Financial Stages: This approach focuses on how people develop a relationship with money throughout their lives. Here are five possible stages:

Earning and Spending: Young people just starting to earn money focus on immediate needs and wants, learning to manage their income.
Debt Awareness: As individuals take on loans or credit cards, they become more aware of debt management and building credit.
Financial Planning: This stage involves setting financial goals, budgeting, and potentially starting to invest for the future.
Building Wealth: Individuals focus on growing their assets through saving, investing, and responsible financial decisions.
Security and Legacy Planning: People in this stage prioritize financial security in retirement and may plan for wealth transfer to future generations

2ndly What is Banking?

Banking is a system of financial institutions and services that allows people and businesses to manage their money. Banks act as intermediaries between those who have money (depositors) and those who need money (borrowers). Here’s a breakdown of the key aspects:

Banks:

Financial institutions licensed to accept deposits from the public and offer various financial products and services.

Examples include retail banks, commercial banks, and investment banks.

Regulated by government agencies to ensure financial stability and consumer protection.

Banking Services:

Deposit Accounts: Allow individuals and businesses to deposit their money for safekeeping and earn interest. Examples include checking accounts and savings accounts.

Loans: Banks provide loans to individuals and businesses for various purposes like buying a house, car, or starting a business. Borrowers repay the loan with interest.

Payment Processing: Banks facilitate electronic payments, allowing people to pay bills, transfer money, and make purchases with debit cards and online banking.

Other Services: Many banks offer additional services such as wealth management, investment products, safe deposit boxes, and currency exchange.

Benefits of Banking:

Security: Banks provide a safe place to store your money, with measures to protect against theft and loss.

Convenience: Banking services allow for easy access to your money through ATMs, online banking, and mobile banking.

Interest: Depositors can earn interest on their money in savings accounts and other interest-bearing accounts.

Loans: Banks provide access to credit for individuals and businesses to finance important purchases and investments.

Overall, banking plays a vital role in the economy by facilitating the flow of money, promoting financial stability, and offering essential financial services to individuals and businesses.