Click Here to Watch: WHAT IS MONEY? Video
I've been a financial planner for 31 years, and I was a Certified Public Accountant before that.
Over my entire career I've been asked about how to grow their money, how to save money, how to invest it, and of course how to not lose it.
When I'm talking to anyone about their "money", the first question I ask them is: What is “Money”?
Is this money? Is this ? How about this?
Those things are not money - by definition. The notes and coins above are totally different – they are CURRENCY.
Currency is a "means of exchange". It was created to make it easier to buy or sell, to keep a farmer from bringing a truckload of oranges to the car dealership to buy a car.
MONEY is defined as PURCHASING POWER. It is how much, at any moment in time, the currency you own can purchase.
AND if you kept any cash in your pocket over the last few years... ...and you just went to the grocery store...
Has your grocery bill just about doubled? Does that $100 dollar bill buy about half of what it used to buy?
If so, that cash in your pocket shows you just lost half your money
So - how do you make your "money" actually grow, over your lifetime? How do you build real wealth, after inflation, so that your money outlives you and you don't outlive your money?
Stay tuned and we'll cover that soon.
Inflation, throughout human history, reduces your purchasing power and shrinks your money.
At a 3% rate of inflation over an average 30-year joint retirement, you will need about $240 in your last year of retirement to buy what $100 buys today.
So, looking forward, reduction of purchasing power, or having your money shrink, is the greatest risk to anyone on a fixed income or retired, over their lifetime.
Per Wikipedia:
Money is fundamentally understood as purchasing power, which refers to the quantity of goods and services that can be acquired with a specific currency unit. This definition emphasizes the ability of money to facilitate exchange and trade, allowing individuals and businesses to acquire the goods and services they need or desire.
Here are some key points to illustrate this concept:
- Value in terms of goods and services: Purchasing power is the value of money expressed in terms of the number of goods or services that one unit of currency can buy.
- Inflation’s impact: As prices rise due to inflation, the purchasing power of money decreases, meaning that the same amount of currency can buy fewer goods and services.
- Constant prices: To account for inflation’s effects, economists use constant prices, which adjust for the inflationary trend, allowing for a more accurate measurement of economic activity.
- Consumer Price Index: The Consumer Price Index (CPI) is a widely used indicator to approximate inflation (or deflation), providing insight into changes in purchasing power over time.
In summary, money’s definition as purchasing power highlights its role in facilitating exchange and trade, emphasizing its ability to acquire goods and services. This concept is essential for understanding economic trends, inflation, and the value of money over time.
Sources: Investopedia, https://www.wallstreetmojo.com/money-vs-currency/