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Money Matters
Money Matters
Functions of Money:
Medium of Exchange: Money act as a medium of exchange when it is used to intermediate the exchange of goods
and services
Store of Value: Money acts as a store of value since it can reliably be saved, stored and retrieved and is also
predictably usable as a medium of exchange whenever retrieved.
Unit of Account: For determining the market value of a good, service or any other transaction a unit of account is a
necessity which acts as a standard of numerical monetary unit of measurement.
Standard of deferred payment: payments which are withheld until a specific time like money is an accepted way of
settling a debt
MONEY MATTERS: TYPES OF MONEY
There are many types of Money
Commodity money is the simplest kind of money used in barter system in which valuable resources fulfil the
functions of money. Example: gold coins, bronze coins, beads, shells, pearls, stones, tea, sugar, metal, etc
Fiat (meaning command of sovereign) currency does not have any intrinsic value and it cannot be converted
into valuable resource. Government by order determines the value of Fiat Money thereby making it a legal
tender/instrument for all transaction purposes in areas within the jurisdiction of that government.
Example: Paper currency, Coins.
Fiduciary Money (meaning involving Trust): If a bank assures the customers payment in different types of
money and if the customer can also sell these promises (legal tenders) or transfer them to somebody else, it is
known as fiduciary money. Examples: Bank notes and cheques
Other types of Money: Electronic Money, Credit Money, Plastic Money, Representative
Money etc.
MONEY MATTERS: MISCONCEPTIONS OF MONEY
A rupee in hand is two in the account.
Money is meant for spending.
We are not going to take money with us after death.
Don’t have enough income to save.
Insurance is an investment and Term policy is a waste.
Why bother about pension when my children are doing well.
Banks ask too many question and will not approve my loan.
Stock market is too complex for common people to make investment.
Don’t have enough time to make a plan and invest.
Need vs
Want
Matrix
Wealth vs Money:
Wealth refers to the stock of assets held by a person or household at a single point in time
Money is just a type of wealth.
Not all wealth need to be in the form of money, can be in form of Land, Goldm Precious metals
etc.
MONEY MATTERS: COMPONENTS OF FINANCIAL PLAN
Budgeting is a process where you evaluate your current financial position by assessing your income, expenses, assets and
liabilities.
Managing your money: Money Management vs Credit Management;
Money management involves decisions regarding how much money to carry in liquid form and how much to allocate to short-term investment.
Credit management involves decisions about how much credit you need to support your spending and the sources of credit to use.
Financing large purchases: Huge expenditures like purchase of a car or a house often are financed by a loan; Things to
consider before looking for financing: Amount of Loan, Maturity, Interest Rate and finally Instalment plan
Protecting assets: Insurance plans are available to protect your assets. Insurance companies offer different types of
insurance policies with varying amounts of premium to be paid depending on the risk associated.
Investing money: The extra funds which you have can be invested in shares, bonds, mutual funds and property to earn a
higher return. A risk return analysis may be done and funds may be invested according to your requirement.
Planning your retirement: After retirement you do not get a fixed amount as salary, therefore a certain amount must be
set aside and invested so that some return is assured at a later stage. Examples include provident funds, public provident
fund, national saving certificate, etc.
Tax Planning: Taxes are an essential component of financial plan. Whatever you earn, part of it has to be paid to the
Government in the form of taxes. However, tax planning enables you to plan your investment in such a way so as to
minimize your tax.
MONEY MATTERS: FINANCIAL PLANNING PROCESS
1. Consider your skills, 2. Identify and establish 3. Devise a plan how to
education, and interests. All your financial goals for achieve your goals.
this need to be tied to your short, medium and long Evaluate and alternate plan
future goals term and select the best plan