Why Do We Need Money?
Money can’t buy happiness, but it can buy security and safety for you and your loved ones. Human beings need money to pay for all the things that make your life possible, such as shelter, food, healthcare bills, and a good education. You don’t necessarily need to be Bill Gates or have a lot of money to pay for these things, but you will need some money until the day you die.
Because money is necessary for obtaining the goods and services you need to survive, an understanding of personal finance is essential. You need to be responsible with the money you earn and save enough for the future to ensure you will still have enough leftover when you can no longer trade your labor for money.
The sooner you start saving your money, the more likely it is that you’ll never face a lack of money or financial stress. In fact, if you save enough and invest wisely, you could even become financially free — which happens when you have enough money to live on for the rest of your life.
Money is a Universal Medium of Exchange
One reason so many people profess not to care about money is that the love of money has been described as “the root of all evil.”
It’s true, materialistic people can let an obsession with money drive them to do bad things for their own financial gain. But in reality, money is nothing more than a medium of exchange.
Money makes it easier to trade your labor for a diverse set of goods and services. The following are some things to consider when it comes to the value of money and why money is important.
- Without money, if you wanted food, you’d need to find someone who had food who was willing to trade it in exchange for a service you could directly provide, or for a product you could produce. Bartering transactions like this are cumbersome and inefficient, not to mention a less reliable means of getting the things you need.
- Thanks to money, you don’t have to hope someone wants to give you something you need in exchange for something you have available to trade. Everyone recognizes that money has value, so you can trade it for whatever goods or services you desire. This increases market liquidity, which refers to how easily assets can be purchased or sold.
- Of course, this works only in situations where money actually has a stable value — and it derives this value from the fact that it is a scarce commodity. If everyone could obtain as much money as they wanted by printing it, it would no longer have any value.
- To guard the true value of money, a central authority needs to make sure the supply of money remains limited. In many cases, a central bank like the U.S. Federal Reserve controls the money supply and makes sure we don’t end up with so much money that it is no longer seen as valuable — a process called inflation.
Benefits of Money
The existence of money allows you to trade your labor for things that you value. There are many major benefits of money including the following:
- Money gives you freedom. When you have enough money, you can live where you want, take care of your needs, and indulge in your hobbies. If you are able to become financially independent and have the financial resources necessary to live on without working, you’ll enjoy even more freedom since you will be able to do what you want with your time.
- Money gives you the power to pursue your dreams. Having money makes it possible for you to start a business, build a dream home, pay the costs associated with having a family, or accomplish other goals you believe will help you live a better life.
- Money gives you security. When you have enough money in the bank, you’ll never need to worry about having a roof over your head or about having enough to eat or about being able to see a doctor when you’re sick. This doesn’t mean you’ll be able to afford everything you want, but you’ll be able to enjoy a stable middle-class life.
Although money can’t buy happiness, freedom, security, and the power to pursue your dreams can go a long way towards making you happy. That’s why it’s so important to work hard, earn money, and learn how to save and invest it. When you start to invest your money, it starts to work for you and help you produce more — and eventually, you should have enough that you can retire.
Downsides of Money
Of course, there are some definite disadvantages of money too, including:
- Obsession with money, or a love of money, can create a host of problems. Trying to acquire money at all costs, or constantly trying to acquire as much money as you can, could lead you to unethical or even criminal behavior, such as theft or scamming others. It could also cause you and your family problems if you focus too much on money or material things at the expense of other people and things in your life. If all you have is money, but you have no one to share your life with and nothing to enjoy, you’re unlikely to be happy.
- Money can lead to disagreements: When you and your partner or family members don’t agree on what should be done with money, this can cause substantial friction in your life. In fact, money is one of the leading causes of divorce for American couples.
Most of these cons relate not to money itself, but to the way people interact with money and the attitudes people have about money. You can take a responsible approach towards acquiring and saving money without allowing it to cause you problems in your life.
Planning for the Future
Since money is something you will always need, it’s important that you make plans as early as possible to ensure you will always have enough.
Sometimes, you’ll need lots of money to accomplish major goals — like buying a home or paying for college. To make sure you have enough money to do these things, you should set clear financial goals and work towards achieving them.
You need to plan for the day when you can’t earn any more money through your labor because you become too old or sick to work. Saving money in tax-advantaged retirement accounts such as a 401(k) or IRA can be the best way to do that. If you save money in a tax-advantaged account, it costs you less to put the money aside since you aren’t being taxed on it. And, if you invest it, it can start earning good returns.
When your money is invested, the invested funds produce more money — called a return. The mechanism by which money earns more money — and the amount it earns — will vary depending upon the investment. When you buy bonds, for example, your investment earns money because your money is lent to someone (like a government or corporation) that pays you back with interest. When you invest in stock, your investment can earn money because you have a small ownership interest in a company, which may be growing and generating revenue.
If you save enough money, you can acquire things like a home or a college degree can that help you earn a good income. And, you can live off the returns your money earns so you won’t have to trade your labor anymore. In this case, you have the ultimate in flexibility because you can do what you want in life and your needs will still be met.
The sooner you begin saving money, the more your money can work for you — especially if you are taking advantage of compound interest. Compound interest occurs when you earn a return on invested funds, and you then earn a return on that return. It can help your money to grow quickly. If you invest when you’re young, compound interest over many years can turn a small investment into a substantial sum.
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