Currency is functionally the physical or digital form of money that we use in our everyday transactions.
It's the coins, banknotes, or electronic payments that we rely on to buy goods and services. You know, those dollars, euros, or yen that you use when you go shopping or pay for things online.
But here's the thing about currency: it's just a representation of value.
It doesn't actually have any value in itself. It's simply a medium of exchange that we all agree to use. The government or central authority is responsible for issuing and regulating the currency.
The problem with currency is that it tends to lose value over time.
You might have noticed that the prices of goods and services keep going up. That's because our currency is losing its purchasing power. As more and more units of currency are added into circulation, its value decreases.
So, even if you have a certain amount of currency, let's say $25,000, in the bank for a long time without earning any interest, its purchasing power will be eroded away over time. That same amount of currency won't have the same value it did years ago. The estimated price of a new house 50 years ago was around $25,000. Today, that amount represents less than 10% of the current cost of a house.
Money, on the other hand, is a broader concept...
It includes not only currency but also other financial assets and instruments. Money has intrinsic value. It's not created out of thin air like currency.
Money can hold its purchasing power over a longer period of time. If we want to measure how much money is worth, we cannot do this in terms of currency due to its decline. We must determine money’s value by what it buys.
For example, if you had an ounce of gold 13 years ago, it would still be the same ounce of gold today. Gold has maintained its value over time—it is a true store of value.
This calls for a shift in the way we fundamentally think about money and currency as a whole, but this way of thinking—separating the two from each other—is a key component of savvy investing.
