Money, Banking, Saving, and Investing

How should you spend, save, and invest your money?

Summary

Money serves many functions in a modern economy. People spend money to meet their daily needs. They also save and invest money to meet their future goals.

What makes money ... money? Money serves as a medium of exchange, a standard of value, and a store of value. To fulfill these functions well, what we use as money should have six characteristics: acceptability, scarcity, portability, durability, divisibility, and uniformity. Over time, money has evolved from commodity money to commodity-backed money to fiat money. Our money supply today, known as M1, is made up of currency, checkable deposits, and traveler’s checks.

How does the banking system work? As financial intermediaries, banks receive deposits and turn them into loans. Banks make a profit by charging borrowers more interest than they pay to depositors. The Federal Reserve determines the fraction of deposits that banks must keep in reserve. The Fed also provides services to banks, oversees and regulates banks, and controls the money supply.

Why is saving important to the economy — and to you? Savings provide money for loans that help businesses and the economy grow. Personal saving can also help you reach in1portant financial goals, weather hard times, and fund your retirement. Creating a budget that includes regular saving can help you gain control of your finances.

How do Americans invest their savings? Americans invest in a variety of financial assets, including savings accounts, government bonds, corporate bonds, stocks, and mutual funds. Each has its own level of risk and expected reward. Diversifying to balance risk and reward in a portfolio can be accomplished through asset allocation.