What is Money?
What is money? Well, pretty simple right? Those slips of paper that we trade with people for various goods and services.
Merriam Webster defines money as:
However, simply defining the word doesn’t fully explain what money really is. Why is a dollar worth $1? How do we measure the value of $1?
Money also comes in a variety of different currencies: dollars, pounds, yen, rubles, euros, etc. Currencies around the world have always had some similarities, being “coins and bills”, but the over the last decade or so cryptocurrencies have brought up another question: What else can be used as “money”?
The more thoroughly you understand money as a concept, not just by definition, the better you can use it as a tool to create the life you want. We’re going to break it down in three ways:
- The characteristics of money
- What money is in society
- What money is to you
The Characteristics of Money
In order for anything to be considered “money”, it must serve these three purposes:
- Unit of account
- A means of keeping tabs on amounts – how much I have, how much you have, etc.
- Store of value
- It has some sort of purchasing power, and therefore value, to the people or society that use said money.
- Medium of exchange
- Something that can be exchanged for goods or services, as described in the dictionary definition.
Or, in other words, anything that can be used as a unit of account, a store of value, and a medium of exchange is considered “money”.
Let’s look at one of the most recognizable examples: the US Dollar.
Is it a unit of account?
Yes. I can quite simply open my wallet and “account” for how much money I have by adding the totals of all the bills in my wallet. Similarly, I can login and see how many dollars are in my checking account. Businesses also account for all of their business operations using dollars.
Is it a store of value?
$1 has the value of, well, $1. Of course, in an economy that uses a fiat currency, how much $1 is really worth is sort of nebulous. It’s not a set amount, but rather a dynamic value based on the stability of the issuing government and the supply and demand of that government’s currency.
All that is to say – yes – it is a store of value. However, we’re not going to deep dive into the macroeconomic principles that cause this value to fluctuate. If you’re interested in learning more on that subject, I suggest the book Money Mischief* by Milton Friedman. He discusses the history of money and how price levels are affected by the different commodities (or lack thereof) that back the value of money.
*Affiliate link: If you make a purchase through this link, Financial Liberty receives a small commission, but at no extra cost to you.
Is it a medium of exchange?
Yes. I can go to a local store and give them $1 in exchange for goods and services. $1 itself can’t buy much, but you get the idea.
So what about something like Bitcoin? Is that money?
Yes. Bitcoin is money too.
- It’s a unit of account. The blockchain stores records of how many bitcoin belong to each wallet address.
- It’s a store of value, albeit a volatile one. (Currently ~$60,000 USD at time of writing.)
- It’s a medium of exchange. More companies and platforms are beginning to accept bitcoin as means of payment.
What Money is in Society
My background is in electrical engineering, so I like to think of money like voltage. Voltage, by definition, is the work needed, per unit of charge, to move a charge between two points. In other words, if there is a voltage, we can cause charges to move. To me, this is similar to how money works. For example, a company can offer me money to do work. It’s not a perfect analogy, but it conveys the main point.
In society, money is a measure of how much work you can cause to be done, or how many goods and services you can acquire. You can use money to hire someone to wash your car. Someone can use money to hire you to cut their grass. And when there’s more money, you can influence more work. A multi-billion dollar company can hire more people than can a small business.
Use this concept to your advantage. You know the old saying:
Make your money work for you instead of working for your money.
What is Money to You?
This is probably the most important question, and it will be different for everyone. For some, money is a means of security – the ability to pay your bills and fulfill your needs. For others, it might be a source of joy. Of course, there’s the old adage that money doesn’t buy happiness, but it can buy you other things that bring joy and content to your life: time off work, memorable experiences, etc. And still, for others, it might just be a game of how much they can acquire.
Understanding what money is to you is an important part of Financial Liberty. For me, money is a means of freedom. If I can acquire enough of it, and put it to work, then I can live my life on my own terms.
For example, right now I have a job that pays really well, but I don’t like it (and that’s an understatement). I have another part time job that I love, but it doesn’t pay enough for me to keep the lights on. I also spend a lot of time with a volunteer group, which obviously doesn’t pay anything. I’m following the ideas I described in my blog post about Rethinking Retirement – building supplemental income so that I can spend more time doing fun work and volunteering for causes I care about.
Technically speaking, money is:
- A unit of account
- A store of value
- A medium of exchange
Anything that meets these criteria can be considered money. Within society, this money can be used to influence and direct work and productivity. You can use this idea to find ways to make your money work for you. It’s also important to not forget what money means to you personally. This part of the definition is more subjective, and may vary throughout your life. However, having a clear understanding of what money is, and what it means to you, will help you use it as a tool to achieve Financial Liberty and create the life you want.