The role of cash (2024)

FAQs

The role of cash? ›

It is a store of value. Cash is more than just a payment instrument. It allows people to hold money for saving purposes, without default risks.

Cash is legal tender that can be used to exchange goods, debt, or services. The term "cash" can sometimes also include the value of assets that can be converted into cash immediately. Cash has been used for as long as goods and services have been traded.

Cash allows you to keep closer control of your spending, for example by preventing you from overspending. It's fast. Banknotes and coins settle a payment instantly. It's secure.

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange.

Money serves four basic functions: it is a unit of account, it's a store of value, it is a medium of exchange and finally, it is a standard of deferred payment.

Some people still prefer to use cash, perhaps because they like the tactile nature of physical currency or because it provides confidentiality in transactions. But digital payments, made with the swipe of a card or a few taps on a cellphone, are fast becoming the norm.

In some ways, the value of money is simple to understand. Since money is just a medium of exchange, it's worth whatever you can exchange it for. In other words, money is worth what it will buy. Given economic factors like inflation, interest rates, and others, money's value can also be complex.

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.

Most of the money in our economy is created by banks, in the form of bank deposits – the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today exists as bank deposits, whilst just 3% is physical cash.

Store of value is an asset that can retain its purchasing power into the future and can be retrieved to be used again at a later time. Money has a store of value because it is an asset that can be invested, stored in a bank, left in a safe at home, and then later used to purchase something in the future.

What are the 3 types of money? ›

Economists differentiate among three different types of money: commodity money, fiat money, and bank money. Commodity money is a good whose value serves as the value of money. Gold coins are an example of commodity money. In most countries, commodity money has been replaced with fiat money.

Money is a medium of exchange with a recognized value that was adopted to make it easier for people to trade products and services with each other. The history of money crisscrosses the world as various cultures recognized the need to simplify trade by introducing a single, portable token of value into the process.

Manage unexpected expenses without stress, for example, if equipment needs unexpected repairs, cash is available without the need for financing. Minimize the risk of any market fluctuations, changes in interest rates or the need to borrow.