All about Money Primer
The Economics of Money
The topic of money brings to mind my favorite episode of the The Simpsons. In "Three Men and a Comic Book," Bart identifies a good he would like to purchase. Unfortunately, he lacks the financial resources to make the purchase. The viewer watches as Bart experiments with all the methods people use to get money. He begs, steals, works, recycles, sells, barters, forms a collective, and relies on random chance. Along his journey, he encounters changes in the purchasing power of money and learns the importance of private property rights when making a purchase. The episode clearly communicates many of the economic and behavioral concepts related to money. Examples from the episode will be used to help explain each point.
There are three main types of money: commodity, representative, and fiat. In "Three Men and a Comic Book," Bart needs $100 in fiat money to purchase the comic Radioactive Man #1. The dealer expects to receive fiat money because this is the official legal tender in Springfield. The dealer would be unlikely to accept other items, or commodities, Bart might have to offer for the comic since it would be more difficult for him to exchange them for goods and services in the future. He prefers to receive fiat money since he knows others will accept it for purchases.
The three types of money are defined below:
Commodity money: Money with intrinsic value of its own. As an example, gold can be used to make jewelry in addition to being used as money.
Money has three main functions: as a medium of exchange, a store of value, and a unit of account. When Bart attempted to buy Radioactive Man #1 for $30, he was trying to use fiat money as a medium of exchange. He failed because the dealer used money as a unit of account to compare the value of the comic to the value Bart was offering. He realized Bart's offer did not equal his perceived value of the comic, so he rejected it. When we use money as a unit of account, we can compare the values of different goods and services. Bart used money as a store of value when he saved his money for the future purchase of "Radioactive Man #1." Because his money retained its value while he earned more, he was eventually able to make the purchase. Bart's activities demonstrate how we do not seek money for the sake of money, but rather for the things money can buy either now or in the future.
The three functions of money are defined below.
Medium of exchange: The use of money to make purchases of goods, services, assets, and factors of production.
Money has five main characteristics: portability, durability, divisibility, acceptability, and stability of value. In "Three Men and a Comic Book," Bart discovers a decorative display of international coins. The coins are portable because he is able to carry them to the bank easily. The coins have lasted a long time in their frame, which shows them to be durable. The bank is happy to accept the coins in exchange for U.S. currency. Unfortunately, the coins do not seem to have retained a stable value since they provide Bart only with three cents. Mrs. Glick, Bart's temporary employer, demonstrates how the U.S. dollar is divisible when she pays Bart two quarters for his week of hard labor. She does not understand that the purchasing power of the quarters has declined since the 1940s.
The five characteristics of money are defined below:
Portability: Money should be easy to transport from one place to another.
There are two definitions of money used by the Federal Reserve when measuring the country's money supply: M1 and M2. In "Three Men and a Comic Book," we see both definitions at play. Bart is using currency and coins to make and receive payments. Currency and coins and demand deposits make up M1. These three forms of money are also included in the M2 definition of money, along with savings deposits and CDs. If Bart had taken his earnings to a bank and deposited them into a savings account instead of keeping them as cash, then we would have had an example of M2 money, excluded from the calculation of M1. Because savings accounts are slightly less liquid than cash and checks, they are counted in M2. Liquidity refers to the ease with which one can use money to make a purchase.
The two definitions of money are defined below:
M1: Includes currency, coins, and demand deposits in the banking system. These assets are all liquid forms of money and are used as a medium of exchange in the economy.
Our Relationship with Money
The purpose of money is spending. Some of us may spend it as quickly as we earn it. Some may save it for years before spending it. Some give it away to charity so the charity can spend it. We all pay taxes so the government can spend it on public goods and services. We may give money away in our wills after we die so our heirs can spend it. Our spending habits play a big role in what we buy and when we buy it.
In "Three Men and a Comic Book," Bart's future spending plans forced him to sacrifice in the short term so he could purchase his comic in the future. He couldn't enjoy the pleasure of shopping for other comic books at the convention. He gave up time he could have used to play and watch TV in order to work for Ms. Glick, recycle bottles, search for lost change, and exchange currency. In the end, despite a period of self-discipline, Bart allows his desire for immediate gratification to prevent him from reaching his long-term spending goal. He chooses instead to participate in co-ownership of the comic with two friends. This choice leads to rivalry issues and the ultimate destruction of the comic. Had Bart been able to curb his desire to spend in the present, he would have enjoyed greater benefits in the future.
The lesson for students is that unplanned, spontaneous purchases can have unpleasant consequences. In one's financial life, it is almost always better to create a spending plan and stick to it. Working toward one's spending goals over time will lead to greater self-respect and personal satisfaction as well as healthier finances.
Economists identify three things people can do with the money they earn. They can pay taxes with it, spend it, and save it. According to the National Bureau of Economic Analysis, people in the United States saved just 4.4 percent of their after-tax income in June 2013. Many financial experts recommend that consumers save at least 10 percent of their income in addition to maintaining a retirement savings account, which should be at least 10 percent.
Bart Simpson has long been viewed as the quintessential underachiever. It is fitting then to use him as an icon for American underachievement in savings. Bart sets his savings goal of $100 to buy the comic. When he discovers how hard earning and saving are, he gives up. The easy way out is attractive because it allows him instant gratification. Just like Bart, many Americans take what appears to be the easy way out by borrowing instead of saving. In the end, Bart finds the easy way is ultimately painful and unsatisfying. Rather than enjoying the return on his investment of time and hard work, he is left with nothing. Similarly, Americans who are financing their lifestyles on credit often find that life gets increasingly painful and less satisfying as they struggle to pay in the future.
The lesson for students is that earning and saving is hard, but worth it in the long run. Being financially wise is mostly about behaviors, not just knowledge. Bart knew he needed to save for his goal, but allowed his impulsive desire to ruin his plan. Students should not only learn about personal finance, they must practice it over time. Only then will they employ these strategies outside of the classroom.
Developing and adhering to a sound financial plan is one of the most important and most difficult parts of adult life. A Gallup poll in April 2013 indicated only 32 percent of American households create monthly budgets and only 30 percent have a long-term savings and investment plan. It did not say how many of those households actually stuck to their monthly budgets and savings goals. One of the first things financial managers and debt counselors tell people to do is write down exactly how much they earn, exactly where all of their money goes, and exactly how much they owe. Many people find this first step too frightening and allow it to paralyze their planning.
In "Three Men and a Comic Book," we do not see Bart making a financial plan or writing down his income and expenses. Had Bart kept written records of his progress toward his goal, he may have had more strength to fight his impulse to take shortcuts toward his goals. Like Bart, most of us want to be responsible and successful. Having a written document outlining our goals and our plans for reaching them give us an objective measurement for our progress and help us stay on course.
The lesson for students is you are never too young to start practicing good financial management behaviors. If students have a spending goal, ask them to write it down. Have them write down the steps they will take to reach the goal. Ask them to monitor their progress weekly or monthly and adjust their plan as their goals, incomes, or expenses change. Emphasize how doing this now, every month, will develop into a lifelong practice. Young people who practice these skills and develop these behaviors may be spared from the frightening and paralyzing specter of a high debt-to-income ratio.
According to the National Bureau of Economic Analysis, the average U.S. household debt-to-income ratio was hovering around 100 percent in 2012, while the average percentage of income going to service household debt in 2012 was about 65 percent. Although avoiding debt is a noble aim, many people would not be able to attend college, purchase a home, or buy a car without it. The key is making debt choices wisely. Many financial planners recommend that you spend 36 percent or less of your gross monthly salary or wages on servicing your debt. Choosing colleges, homes, and cars within one's financial means will have long-term financial benefits.
Fortunately, Bart does not accumulate debt in "Three Men and a Comic Book." He pursues his financial goals primarily through income from work and entrepreneurship. (Note: Through his business, he sells Homer's property, so theoretically he should pay the cost of this inventory back to Homer. This could be viewed as a business debt.) The show's perennial wastrel, Barney, is the only character who requests credit. His credit request targets a luxury good and emphasizes his unwillingness to live within his means. When Bart chooses to own the comic collectively with Martin and Milhouse, the viewer understands the pitfalls of co-ownership as a way to avoid debt accumulation.
The lesson for students is to make debt decisions wisely. One of the most important debt avoidance strategies middle school students can pursue is to earn good grades. As they leave middle school, students can commit themselves to achieving good grades in high school. There are many examples of students who overcame seemingly insurmountable odds, including homelessness, to win scholarships for academic achievement. Regularly reminding students that grades are often within their control through hard work and tenacity can lead to a big payoff.
The average household student loan debt in the United States is $53,000. The public policy organization Demos estimates that households headed by people with four-year degrees who carry the average household student loan debt will sacrifice more than $200,000 of household net worth compared to households without student loan debt.
Resources to Use with Students
A comprehensive list of free resources for grades five to eight is available from the Federal Reserve Education website. We also have specific suggestions for the topic of money. The Federal Reserve Bank of San Francisco has the American Currency Exhibit on its website. Here, you can explore American money from the colonial period to the 21st century. The Federal Reserve Bank of Philadelphia provides a lesson plan called Why Money? with multiple suggestions for teaching the topics referenced in this primer. The online game Escape from Barter Islands teaches students how important money is to facilitating exchange between people. Through the recently updated Katrina's Classroom video, lessons, and interactive whiteboards, the Federal Reserve Bank of Atlanta can help you teach your students how to be financially prepared. The Federal Reserve Bank of Dallas offers an engaging curriculum called Building Wealth for teaching all of the spending, saving, planning, and debt management concepts discussed in the article.
Bureau of Printing and Engraving Resources
The Bureau of Printing and Engraving has a variety of free online lesson plans and print materials about the history and features of U.S. paper currency.
U.S. Mint Resources
The U.S. Mint provides many lesson plans connecting all subject areas, from kindergarten through eighth grade, to ancient coins.
U.S. Government Personal Finance Resources
This site serves as a clearinghouse for lessons and activities from many government agencies. The site has resources targeted at students and includes teaching and financial tools for educators.
By Sherilyn Narker, economic and financial education specialist at the Federal Reserve Bank of Atlanta
September 30, 2013