FINANCIAL

PLANNING
STD 6
CONTENT

Ÿ An introduction of Money – its evolution & functions

Ÿ Needs versus Wants

Ÿ An introduction to Banking

Ÿ Basics of Investment – Savings versus Investment and the need for

early investment

Ÿ Risk – How to measure and manage Risk, Risk in investment and

Balancing Risk

Ÿ Financial Sector regulators

MONEY
Learning Objective(s): Understanding meaning of money, Functions and
Types of Money: Evolution of Money, Liquidity and Damaged Notes.

Activities for Students-

An Introduction of Money
What is Money?

“Money” can be defined as the most commonly accepted form of exchange for goods
and services from one person to another.

A centralised, recognized by everyone, accepted medium of exchange that helps

with exchanges of goods and services in an economy.

The money system varies with the governments and countries.

Different countries have different currencies.

The central authority is responsible for monitoring the monetary system.

There are various forms of money, and cryptocurrency is the newest addition to
the forms of money and few governments have legalized it; therefore, can be
internationally exchanged.
The standard money is a monetary unit which is declared by the government to serve as
the base of its currency system. The Reserve Bank of India, also known as RBI, is in charge
of overseeing the value and functioning of the currency in India.

The word “currency” refers to the aggregate coins and paper notes (paper money).
The term “paper money” sums the banknotes issued by the Central Bank, that is the
Reserve Bank of India (RBI). Paper money is generally accepted in daily transactions as a
mode of exchange for goods and/ or services.

Bill of exchange and cheques are also considered as paper money.

Functions of Money
Medium of exchange: Money is the generally accepted medium of exchange that is
used to make all the transactions. E.g.,- payments of goods, payment of bills, taxes etc.

A Measure of Value: The value of all commodities and services is expressed in terms of
money. It is a common denomination as a result.

Standard of deferred payments: Money is considered as the means for all future
payments. E.g.,- The payment of utility bills on upcoming due date.

Store of value: It indicates that money has the ability to be saved and has the ability to
transfer its purchasing power in the future. E.g.,: Using the money in a savings account to
buy a property or car.

Distribution of Social Income: Income can easily be distributed with the help of money.
E.g. Distribution of the earnings from fees by a school in the form of rent, salaries, wages,
bills, etc.

Basis of Credit Creation: The "store of value" function of the money helps in credit
creation by the banks. E.g.,: Using the money of demand deposits as a tool for credit
creation.

Liquidity: Money is the most liquid asset of the economy. E.g.,: Credit Cards, Debit Cards,
Cash in Hand and Bank.
What Are the Properties of Money?
In order to be most useful, money should be fungible, durable, portable,
recognizable, and stable. These properties make money easy to exchange.

Money Should Be Fungible – The ability to swap, replace, or return one item for another
with an agreement that the two items have equivalent values is referred to be fungible.
Thus, units of money should be interchangeable with one another. E.g., Gold coins should
have a standard weight and purity. Commodity money should be relatively uniform in
quality.

Money Should Be Durable – Money should be durable enough to retain its value for
multiple, future exchanges. A good that degrades quickly due to multiple exchanges will
be less useful for future transactions. Money should be durable enough to retain its
usefulness for several, future exchanges.

Money Should Be Portable – Money should be easy to carry and split so that a
meaningful quantity can be carried or transported. For example, trying to use a good
that's difficult or inconvenient to carry as money could require physical transportation
that results in transaction costs.

Money Should Be Recognizable – Using a non-recognizable good as money can result

in transaction costs relating to authenticating the goods and agreeing on the quantity
needed for an exchange.

Money's Supply Should Be Stable – The supply of the item used as money should be
relatively constant over time to prevent fluctuations in value.

Types of Money?
The following are the types of money:

Market Determined Money: Market determined money refers to any good that can be
widely accepted by the people of an economy in exchange for various goods and
services between different parties.

Fiat Money and Legal Tender: Fiat money refers to money issued by the government
that is not backed by any commodity. The word legal tender refers to money that is
legally issued by the government. Examples include coins and banknotes like INR, Dollar,
Pound, Euro.

Cryptocurrencies: Cryptocurrencies are an electronic medium of exchange that exists

virtually. Crypto is a peer-to-peer system that runs on the blockchain. In simple terms, it
is an intangible form of currency and has opportunities for international exchange.
Liquidity
Money keeps moving from one person to another and this is possible due to liquifity.
Liquidity is the amount of money that is readily available for investment or saving.

Cash

Bond

Any Other Asset

High Liquidity Low Liquidity Lower Liquidity

Cash and Money Government Bonds,
Fixed Deposits
is Savings Account Real Estate