Family Resource Management

Section 3
Content 10 – 13
Nature of Money: Terminologies
Functions of money
Means by which money is earned
Principle of money management

People initially used a system of exchange for the goods and services they required, which
involved trading one good or service for another good or service. This system of exchange was
called barter. Barter proved to be complicated when someone could not trade the good or service
he or she had because the other person in the transaction did not require it. This gave way to a
system of exchange that used money as a common denominator. People started using money to
purchase goods and services. The economic status of a family is determined partially by the
amount of money it possesses.

Terminologies
 Money –

An accepted medium of exchange in the form of coins and banknotes, which people use to pay
for goods and services. Further, money is an accepted form of payment almost everywhere,
which makes it easier to deal with hard cash.

 Legal Tender –

Any official medium of payment that is recognised by law to pay off debts, or financial
obligations. The national currency of any sovereign , established country is usually legal tender
in other countries, after providing for the current exchange rate. Cheques, credit cards and other
non-cash forms of payments are not classified as legal tender. The Legal Tender Act governs
the laws and practices related to legal tender in a country.

 Income (gross & net) –

The money received for work done or as interest on investments made. Usually, income is
earned on a regular basis, be it weekly, fortnightly or monthly. Gross income refers to the total
income earned by an individual in a given period of time. Net income refers to the money
received after deductions such as benefits and taxes for National Insurance contributions,
personal and government taxes. Net income is what you get to take home.

 Expenditure (fixed and flexible) –

 The amount of money spent to obtain goods and services. Fixed expenditure refers to those
expenses that remain fixed and do not change over a given period of time. For
example, mortgage , rent, insurances and loan instalments need to be paid regularly
irrespective of the variations in the income levels of families. Flexible expenditure refers to
those expenses that do not remain fixed and vary with time. For example, the amount of money
a family spends on food, travel and entertainment can vary from one month to another.

 Budgeting –

Budgeting is the process of creating a financial plan based on income and expenditure for a
specified period. It allows a family to understand if it has sufficient money to meet all its
expenses for a period and whether any amount will be left over for unexpected expenses or
savings.

Functions of Money
Money is often described in terms of the functions it performs. Some functions of money are
as follows:

 A medium of exchange: The most essential function of money is that it can be used to
purchase goods and services. Money is an important resource because it is accepted
almost everywhere as a medium of payment for most of the other resources needed.

 A measure of standard value: Another function of money is that it can be used as a

common unit to express the value of goods and services. The value of the time you spend
on a part-time job is expressed in terms of money. This gives you a basis for figuring out
the value of many things, therefore, we can express how much our work is worth and
how much we will give for something we want.

 A store of value or wealth: The value of money can be stored over time in the form of
real estate, jewellery, stocks, savings account, shares, bonds and art.
Unlike some goods that may be perishable in nature, money remains relatively stable.
This value is what makes money a universally acceptable medium of exchange.

 A determinant of class in society: A social class is formed by a group of people who

share the same level of wealth and status in society. A family with better financial ability
has capacity to purchase better quality goods and services. Families are said to belong to
upper, middle and lower classes based on their financial abilities and wealth they possess.
The upper class is the most affluent category followed by the middle class and the lower
class.

Ways of Earning Money

Money can be earned or legally acquired in many ways.
  For work done in the form of salaries or wages.

 Inheritance of savings or financial estates from family members.

 Interest and dividends on savings and investment in banks and other financial
institutions, which pay interest on money invested. Alternatively, individuals can also
invest their money in business corporations. Dividend is the interest earned by a
corporate investor. Further, interest may be paid either at regular intervals or at the end of
the period of investment.

 Gifts on occasions such as weddings, birthdays, anniversaries and so on.

 Merchandising through the sale of available goods and/or services

 Rentals of property, cars, tools, equipment, etc.

 Pensions – retirement pension from an employer or old age pension from the government.

 Gratuity, bonuses and commissions from an employer.

 Tips or money from customers who are pleased with the services provided.

Principles on money management

These are a set of guidelines or rules that help an individual make sound financial decisions.
 Consider your financial goals which will help you to spend within your means and
motivate you to reach your target by investing money in these goals regularly.

 Budget your finances by taking into account all possible income and expenditures.
Keeping track of your savings, bank account balances, credit card expenses and other
day-to-day expenses can help you manage money better.

 Limit your spending to less than what you earn. In this way, you will always have cash
left over as savings.

 Invest your money wisely, that is, understand the risks associated with financial
investments to earn interest from those investments. You may take the help of a finance
expert to plan your investments but beware of fraudulent people claiming to be experts.
 Try to avoid borrowing money from other people to meet your requirements. As far as
possible, try to meet your expenses without incurring a debt. If you must take a loan,
ensure that you take it from an authentic source such as banks with proper
documentation.

 Practise frugality in your spending; this will help you save money. For example, compare
the prices of items before purchasing the item you need.