Before one takes a plunge into the world of money and its management, it becomes necessary to understand first, what Economics really means. Also, without understanding the need to understand the basic principles of Finance and Economics, you are almost sure to lose interest midway (worse, you may not even be reading this!).

Before you begin to wonder why you need to know something as scary sounding as Economics, let me surprise you with the fact that in its very humble beginnings, Economics was meant to assist the common man in planning and managing his household finances. In its broken-down form, the word Economics is composed of two Greek words ‘oikos’, meaning ‘house’ and ‘nomos’, meaning ‘law’. In other words, it is the study of ‘household management’

While there are different sub-streams in the study of Economics, its ultimate goal is clear – to assist different people – men and women, nations, Governments, business houses – in the management of money. It’s like medicine – while it aims at studying the human body, different doctors specialize in the treatment of different parts of the body.

An investment in knowledge pays the best interest.

– Benjamin Franklin

Now that you know what Economics is, a bigger question comes to mind. What is money? Yes, I am serious. I seriously mean to ask you what you think it is. While most of us think of money as the currency notes and coins we keep in our wallets or keep stashed under our pillows, money is a much wider concept.

It refers to a ‘commonly accepted’ medium of exchange. But why do we need such a medium? We need it because we are constantly looking to satisfy our needs and wants, and there are no free lunches! If I want to buy wheat or a camera or consult a health specialist, I need to pay in return for these goods and services, and money helps me pay.  An important characteristic of money is that it must be ‘commonly accepted’ as a medium of exchange, for if it is not, the seller of goods and services may not be willing to accept it in return for the goods he sells or services he provides. No acceptance means no willingness to sell, leading eventually to a complete market breakdown (no sellers willing to sell). Think of this, if you were visiting planet Earth from say, Mars and tried paying in cowrie shells, you may well be boxed under your eye! The problem is that while shells may be valuable in Mars, they are not ‘commonly accepted’ on Earth.

Just like humans, even money has evolved over time. Ages ago, when people had not agreed upon a common source of value which could be universally recognized as currency, the barter system was in place. If you needed a needle and had only shoes to offer, you would have to travel the world in search of a man who not only required shoes but also had a needle to sell. Naturally, this had its own set of problems. Gradually, the idea of accepting something universally as a means of payments began to make sense. Different economies, based on their socio-economic status and availability of goods, came up with their own definitions of money.

Historians have documented the use of articles like cowrie shells, precious metals such as gold and silver, food grains etc. as very early forms of money. As markets developed and economies grew, the idea of paper currency became popular. Today, different countries have their own currencies, or their own internally accepted medium of exchange. For instance, India has the Rupee, U.S., the U.S. Dollar and the like. Thanks to the development of global markets, one country’s currency is readily convertible into that of another, at any point of time, any day of the year. Some extra (may be unwanted too) information – the rate at which the currency of one country is converted to another is referred to the as the exchange rate.

Have you ever heard people discuss inflation or maybe depression in money markets? Don’t worry – I will not talk about it here. All I will say is that inflation and deflation are in fact simple cases of a demand-supply mismatch in money. While demand for money is created by commoners like us who need currency to meet daily payments, the supply of money is something we have relatively little control over. In the U.S., as with most other economies, the supply of money (notes and coins) is managed by the Federal Reserve (the Fed), which is responsible for printing and generation of new currency notes and coins. Based on factors such as foreign exchange dynamics in the world market, the Fed decides how much more money to print. By the way, they can also remove extra money from the market, if they like!

Thanks for reading through. If you think it’s been an overdose, revisit this article before going to bed. I promise that it will lull you to sleep. And for the benefit of those who are still reading this with a smile, let me recapitulate this article for you. The idea was to get you to feel comfortable with money matters and provide you with a perspective of why talking about finances is important for each one of us. This introductory post spoke to you about the meaning of Economics and its ultimate objective – management of household finances. It goes on to discuss the meaning of and need for money. After this general overview of things, the subsequent articles will delve into basic principles of money management – incomes, expenses and savings and how the three inter-relate.

Thanks once again!