Understanding Money (Part 1)
It has been a challenging March for me. As a financial advisor, managing clients' expectation during economic down turn is a position attracts no envy. During the client meeting process, i was asked a challenging question: "Are all money (currency) the same, and how does money work?" The answer is no. In fact, every country operates its currency quite differently.
Money has three basic functions: as a unit of account, as a medium of exchange and as a store of value.
Let me illustrate further on each of this function. First, money is commonly used in the world as a unit of account. One simple example is we describe our income in dollar value. For example, when Peter needs to impress his potential mom in law, he will say:"I earn $20K per month..." instead of "I earn 3 kg worth of gold per month..." All accounting statements in the world use money as unit of account instead of commodity.
Second, money is used as a medium of exchange. Peter goes to supermarket to buy vegetables and food items. At the cashier counter Peter use money to exchange the appropriate value of the food items. Peter cannot say:"ok these foods cost $200, I have 10 shares of DBS bank, i use that to exchange the food." The cashier will probably call the security guard to entertain Peter. The whole world's trade is done using money as a medium to exchange goods and raw materials.
Third, money is a storage of value. Peter, who is a Malaysian, needs to save for his retirement. He consistently saves $1000 per month in a dependable and favorable currency based on future exchange rate. He choose to park 50% of $1000 in Singapore dollars and 50% in US dollars, because he feels that in future, the value in these two currencies store better value than Malaysian Ringgit. (With all due respect to Malaysia currency, I am describing current common practice amongst Malaysian in Singapore. At the time of this writing, S$1 is about RM$2.3, US$1 is about RM$3)
The first two functions are usually taken for granted by ordinary folks, but they have great implications on the value of the currency. I will write more on this in my next blog entry.
Money has three basic functions: as a unit of account, as a medium of exchange and as a store of value.
Let me illustrate further on each of this function. First, money is commonly used in the world as a unit of account. One simple example is we describe our income in dollar value. For example, when Peter needs to impress his potential mom in law, he will say:"I earn $20K per month..." instead of "I earn 3 kg worth of gold per month..." All accounting statements in the world use money as unit of account instead of commodity.
Second, money is used as a medium of exchange. Peter goes to supermarket to buy vegetables and food items. At the cashier counter Peter use money to exchange the appropriate value of the food items. Peter cannot say:"ok these foods cost $200, I have 10 shares of DBS bank, i use that to exchange the food." The cashier will probably call the security guard to entertain Peter. The whole world's trade is done using money as a medium to exchange goods and raw materials.
Third, money is a storage of value. Peter, who is a Malaysian, needs to save for his retirement. He consistently saves $1000 per month in a dependable and favorable currency based on future exchange rate. He choose to park 50% of $1000 in Singapore dollars and 50% in US dollars, because he feels that in future, the value in these two currencies store better value than Malaysian Ringgit. (With all due respect to Malaysia currency, I am describing current common practice amongst Malaysian in Singapore. At the time of this writing, S$1 is about RM$2.3, US$1 is about RM$3)
The first two functions are usually taken for granted by ordinary folks, but they have great implications on the value of the currency. I will write more on this in my next blog entry.
posted by Allen Lim @ 9:36 PM
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