ECONOMICS OF MONEY

HOW MONEY ORIGINATED?

            Money is neither invented nor discovered. It evolved over years. Several centuries ago, there existed a system named the barter system. The barter system is the system where the goods and services are exchanged with each other. For example, If a person says X sells vegetable to another person Y, then the person Y have to sell fruits to the person X. Thus they exchanged goods between them. As time evolves, yellow metal and paper currency was used by the people. The yellow metal is nothing but gold, silver. In this system, the people used gold and silver to buy goods and commodities. As time evolves, the government has said that no need to use gold metals and they will issue notes, i.e, currencies with the value written on them. The government has ordered everyone to use and accept this. As long as people trust the system introduced by the government, paper currency is available. This is how money evolved over a while. Today, there are multiple forms of money. They are credit cards, debit cards, mobile banking, electronic wallets.

HOW DO WE SPEND MONEY?

            There are five forms of spending. They are needs, wants necessities, comforts, and luxuries.

NEEDS: Needs are the things that you must require at that time. Some of the common needs of a man are food, clothing, shelter, transport, communication, education. For example, as a college student, you need to have a phone since many study materials have been sent to your devices.

WANTS: Wants are the thing that you desire to have. Unlike needs, wants have options to choose from. If you do not have those things, it will not affect you. For example, well-furnished home, time-saving home devices, AC rooms, etc.,

NECESSITIES: Necessities have been categorized into three types: 

  • Necessities for life: This includes the basic things you need to run life on earth. Example: Food, clothing, and shelter.
  • Necessities for efficiency: This includes the bike for college students, a car for a businessman.
  • Conventional necessities: It is a social habit of practicing some habits. For example, people spend more money on wedding receptions.

COMFORTS: Comforts are the things that make life more enjoyable. The examples include a Well-furnished home, AC bedrooms, etc.,

LUXURIES: Luxuries represents the higher strata of spending. For example: Having a BMW car, buying diamonds.

       The important point is that needs and wants change with time. For instance, when you are a college student, having a Macbook pro is want. But when you are in the corporate world, having a Macbook pro becomes the need. Necessities, comforts, and luxuries will also differ from time to time and people to people. In the 1990s having a phone is a luxury, in 2000 having a phone is comfort and now it is a necessity to have a phone.

TAX, SAVINGS, AND INVESTMENT:

TAX: The part of our earnings has to be paid to the government in a form of taxes. The reason why we have to pay the taxes is that the government sets up the environment for our earnings. Taxes enable the government to maintain the city infrastructure by providing good roads, hospitals, and transports. To be a good citizen, we must pay the taxes honestly. The tax rate will be increased if some of the people are not paying their taxes properly. Once we paid the tax, then that money will be the government’s money. There are two types of taxes namely direct tax (income tax) and indirect tax (GST).

SAVINGS: Savings is the money that remains after you spend the money from your earnings. You can put your money in a savings bank account. The money in your account will be safe. The ability to convert them into cash is high. The rate of risk is low in a savings account. If you need money within one year, then put the money in a savings account. The ideal equation is INCOME-SAVINGS=EXPENSE.

INVESTMENT: You can invest the money in bank deposits, mutual funds, equity shares, fixed deposits, gold. The return of the money will be higher or lower. The risk of losing money varies by the investment you made. It is a long-term process generally more than 2 years. The liquidity depends on the type of investment. If you want to need the money a few years later, then invest the money.