Money concepts – What is money and what it means to us
Key topic
This lesson explains basic money concepts such as what money is, where it comes from and what it means to us. In addition, we will go over money responsibility and why it is important for young people to have a basic financial education early on in life.
Learning objectives
- Understand the importance of financial education from an early age
- Create awareness of basic money concepts
- Learn what money really is and how to be responsible with it
- Discover the importance of not allowing money to rule your life
What is money
We all know what money is. Even though you are young, you do get a bit of money yourselves; pocket money, birthday money, money for doing chores, etc. So where does money come from? Usually, people get their money by earning it through work which is known as their income and it is theirs to spend in whatever way they like. Money earned from work or from a business is called active income meaning you have to do something to earn it, to put both time and effort.
Of course, money may come from a family inheritance or through investments like when you rent a property you own to someone else, or profits from investing it somewhere. Money which is not earned by working is called passive income which means you have your assets or money resources working for you and you do not really have to put in the work yourself. This is called financial independence! Being financially independent means that you have enough assets working for you so that you do not have to actually work for your money!
You can see that it is important to build up assets and have them working for you instead of always depending on working either on a job or on your business to earn money. Since you are very young and because you are given the opportunity to learn about money early in life, you can set up your financial game plan early enough, so that you can become financially independent much earlier in life.
Now, let’s watch an 8-minute video on the differences of being rich and being wealthy.
Why The Rich End Up Poor But The Wealthy Enjoy Life
Action Steps – Exercise 1 (10 minutes)
- What is the difference between being rich and being wealthy?
- Do you want to become rich or wealthy and why?
Money concepts
Right now, your basic knowledge about money is most probably limited. You know that your money usually comes from your parents and grandparents and most likely you also know how to spend it on things that make you happy! But let’s get into a bit of detail and see if what you know already is enough.
We live in a world that revolves around money. We use it to buy or rent our home, pay for school, travel, and communicate using our cell phones. People also use it to buy a car, have fun and for hundreds of different things. By definition, money is a tool that we use to buy goods and services.
In the past, people would use commodities (products, types of produce, materials, etc), instead of money as an exchange medium for goods and services. These commodities had a value in themselves, such as gold, copper, silver, precious stones, or even consumer products such as food, alcohol etc. In the 1800s it was common in some places in America to use alcohol to pay for something instead of money. Nowadays, people are using money instead of commodities and money these days comes in new shapes and forms. But let’s not complicate things for now. Money has three main functions:
- It acts as a medium of exchange, meaning it enables exchanges in the economy. Simply put, when you go to the store to get your favorite shoes, you give them money and they give you the shoes in return.
- It is a unit of account, which we use to measure the value of various goods and services in an economy. It serves as a standard of value; to express value.
- It acts as a store of value, in the sense that if you save money, you store value to be used at a later point; just like when you save your allowance to reach a certain amount to buy something of higher value.
What is money used for?
For some people money translates into power, as they feel that money gives them the ability to do what they want and the strength to control their life; others think that money is happiness, because it can help them solve problems, or have assets or substitute the absence of feelings with money; for others, money is security, it makes them feel safe; for others, money may be a tool to attract relationships and love in life, or even as a way to get respect from others.
Well, the truth is that money can rarely buys happiness, love or respect. It can help with security and independence, but money should never be considered as your ultimate goal in life. Money should be viewed for what it is, a medium and a facilitator. Money is a tool to achieve your independence and to build a financially-sound future. It is not an object that you can always control, nor is it something you can rely on for your entire life to help you achieve all of your goals.
Through time, people have developed several perspectives to deal with money and utilize it to their advantage. People developed the banking system, where you can store your money and use the bank’s services to facilitate your transactions. Banks have, in turn, created services that can satisfy people’s needs, but at the same time make a profit for the bank. Therefore, banks can loan people money, can store money for you, can help you invest your money, or finance your business and so on. All these services come with charges and interest, which is the way that banks make money. We will discuss the banking system in detail at a later lesson. With the use of money, people also created the stock market and the ability to trade, buy shares, buy commodities of value (gold for example), with the end goal being again the increase of worth and wealth.
Even though you think it is beneath your age, you should be reminded of how money is made. People have to give up something to obtain money. In most cases, just like your parents, you have to work to earn money. Your teachers and coaches do too, they are working on educating you. These people have to give up their time, their presence in the house and playing with their children, or relaxing, taking a trip or just simply having fun. In other cases, you have to give up something equally valuable such an asset. You sell your asset (your car, your home, your business) to get money in return. It’s a must-learn fact that money doesn’t come around on its own or without effort. You have to work hard for it.
Because money has to be earned and usually it’s hard-fought, you should learn the concept of saving money. This doesn’t mean that you avoid spending money altogether, but instead you should realize that not all the money you have, needs to be spent. Every time you have money in your hands, whether it’s your allowance, or a gift for your birthday or a prize you won somehow, you should make sure you put part of that money aside and save it. Saving money helps you deal with an unfortunate turn of events, or helps you buy something very useful that you could not afford in the past; it also helps you ensure that you can have a spending allowance even if your parents have to reduce the amount of money they usually give you.
Having an allowance means you have to learn the concept of budgeting, which is basically the ability to plan and control your expenses and your earning, over a pre-set time frame. At your age, your earnings represent your allowance and the time-frame is usually a whole week. Well, your ability to allocate your spending throughout the entire week on the things you need to do, or for fun and also save a bit for later, is what we call the ability to budget. In other words, you have made a decision on what to save, how much to spend each day, you have made a choice where and how to spend your money within a week and you did it all without running out of money and having to ask for more, or worse having to go by in the absence of any money until your next allowance comes up.
Another thing you should know about money is that the government has a system in place through which it gets money from your money. It’s not just your government, but all countries’ governments and the money is used to pay for the needs of the country and meet the demands of running the country. This is what we call taxes. A tax is a compulsory contribution to state revenue, imposed by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions. Examples are income tax, sales tax on goods and services, city council tax, luxury tax for special goods, etc.
We will discuss all these concepts in more detail and with more examples throughout this course. For the time being, just remember that money is a tool, that money needs to be handled wisely and that good preparation is essential for you to enjoy benefits that come with having money.
Money facts
Let’s go over some money facts, a few of which are quite interesting:
- Money usually takes the form of banknotes and coins.
- Money is used to store value.
- Money is used to measure value
- Money is portable and durable
- We use money to pay for goods and services.
- There are multiple currencies used in the different countries and blocs of countries around the world.
- It is believed that coins first appeared around 2,500 years ago, while paper money was first used in China approximately 1,000 ago.
- Most countries have their own currency, while some share one with other countries. Such is the case in the European Union where France, Germany, Italy and others share the Euro.
- The currency most traded around the world is the United States dollar. Other highly sought currencies include the Euro and the British Sterling.
- It is believed that products such as livestock and grain were used to exchange goods and services – known as barter– without the use of money. In fact, barter was used in certain remote areas of the US up until 200 years ago.
- The original value of the sterling was equal to a pound (in weight) of silver, hence the name British pound.
- There are many currencies in the world including the US that used the “$” as their currency’s symbol.
- US dollar notes feature former presidents such as George Washington ($1 bill), Abraham Lincoln ($5 bill) and Andrew Jackson ($20 bill), but also some of the founding fathers such as first US treasury secretary Alexander Hamilton ($10) and Benjamin Franklin ($100 bill).
The importance of financial education and money responsibility
Financial literacy, or financial education, is an awareness of how money should be spent and managed and how it can be used in ways that would make a person more financially secure in the future. Learning about it has a huge impact, because it equips you with the knowledge and skills you need to manage money effectively.
Financial literacy helps you understand the value of money, so you can handle your finances more responsibly and better, in the future. Being financially literate, will teach you the importance of budgeting and saving, therefore you won’t just waste money on expensive gadgets, clothes, cars, bags, shoes and other things you may not need. This way you will also learn and better understand the difference between your wants and your needs and you can prioritize things. Moreover, financial literacy will keep you from getting into too much debt in the future, which can put you in deep trouble. If you can determine how much you can afford to repay on a loan, if you can understand the impact of having bills for mortgages and insurance, on top of your usual monthly bills and budgeted bills, you will be better equipped to handle your finances responsibly in the future.
Financial literacy will also help you prepare better during times of an emergency. There will be times where you will be in need of cash or a large amount of money to survive, or overcome a big obstacle, or pay for an important health-related treatment. In times like that, being financially educated will mean that you are better prepared for such an event and having done the preparatory work will save you the trouble of borrowing money that will just bring more problems.
In addition, if you are financially educated, you will be in better condition to invest some money and create additional income for you and your family. Relying on just one source of income is usually not enough and will keep you in a situation where you always just make ends meet and/or extremely dependent upon that source of income. Creating different income sources will give you a better life and the chance to have a secure and comfortable financial future.
Yet, it’s not only about you. If you are financially educated you will be able to help others too. You can help through educating others, such as your children in the future. You will also be able to offer community service if you are able and willing to donate to your community. Even better, if you invest in a company and you help create jobs, you are helping other people and also boosting the overall country economy.
In your case, financial literacy is a lot more than just the above. You being an athlete, means you will spend a lot of your time to practice and play your game. As you grow up, sports will become more serious and take up more of your free time, provided of course it is something you want to do. If sport takes you to the great journey of a professional career, then you will need these skills to successfully manage the money you will earn in the period of time you will be an athlete. If, for whatever reason, sport doesn’t end up being your professional career, then the financial skills you will have learned will help you set up the next stage of your life. Your learned financial skills will lead to financial responsibility which can be summed up as follows:
- Willingness to work to earn money
- Use your money wisely by saving, investing, spending and giving
- Always live within your means
What money really means to people
Money is a need. It is necessary for survival and comfort. The comfort and luxury come only when you have more money than you need for surviving. It’s okay to want a new car, a new house, cool clothes and shoes and lots of gadgets but first you have to make sure that you have a roof over your head, and food on the table. Just make sure you can distinguish between what you need and what you want, and balance them.
Money is a tool. It helps you serve your needs and the needs of your family and allows you to live a good life, away from financial problems. It cannot guarantee anything else than simply the safety of being able to take care of yourself.
Money is about balancing the survival and comfort factors in your life, without sacrificing a good life, but on the other hand without also losing control due to greed, money lust and power. It is important to remember that social expectations or societal norms cannot and should not drive your money decisions; life these days tends to be highly influenced by consumption and a society that mistakenly views wealth as an indication of self-worth.
Those who dream to make a lot of money and become famous and powerful, need to realize that money cannot be a substitute for anything else in your life or an indication of who you are. You need to be smart about money to reach a certain level of comfort, yes, but it is not necessary that you dream only of dollars and cents; you should have other goals in life too. It is easy to become a slave to money, especially when it can open gates of luxury and comfort for you. Consumerism, which means buying a lot of things we don’t need, is a tricky spider, which can trap you in its web. Money is all about being in control and using that control to reach your goals and make your dreams come true.
Lesson wrap-up
Today we had our first lesson in financial education. Naturally, we began with money which is the first thing that comes to mind when the word ‘financial’ comes up. We explained what money is, its basic functions and how they relate to other parts of the economy such as the banks. Moreover, we explained what money means to people and the importance of financial education.
At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!