What is cash?

Woah, back up. You’re probably reading this thinking, “Really, Jesse?” I know what cash is.

My thing is, like… Do you though?

Most people have a general understanding of cash. It’s our money! The term cash is commonly used to describe money I can hold in my hand, particularly paper money. You wouldn’t look at a pile of coins and think, “Wow, that’s a lot of cash!” Even though technically, it is.

These days, most of us don’t keep our cash in jars, under the mattress, or buried in the backyard. We keep it in the bank, in a checking account. We use a checking account to let the bank know “Hey! This is my money and I want to access it whenever I want to!”

Cash then isn’t necessarily paper money, but money that’s available to you to spend or do business with. Technically speaking, my cash is a bunch of 1’s and 0’s on my bank’s server that I really hope doesn’t get hacked or erased.

Quick Terminology Lesson!

  • Asset: Anything that you own.
  • Debt: Anything that you owe.

Almost everything in personal finance falls into one of those two categories. You’ll see posts on the site categorized this way too. Assets are measured in Liquidity, or how quickly you can turn it into cash. Something that is very liquid can very easily be turned into cash, such as a check. Some financial instruments are so liquid that they’re even called “cash equivalents”. An illiquid item would take time to turn it into cash, such as a stock or bond you’d have to sell to get cash from, which often is subject to transaction fees. (I promise to explain what stocks and bonds are). Yay banks!

Back to our question What is cash?

How do we know how much value cash money is worth? Once upon a time, currencies were held to the gold standard. Gold was considered rare, scarce, and therefore valuable. Having money backed by gold meant that you could literally go to the bank and trade your money for a fixed amount of gold. The gold system was particularly useful for determining how valuable one currency is compared to another. If you were converting British Pounds to United States Dollars, you could see how much each one was worth in gold and convert the amount that way. Alas, Great Britain got rid of the gold standard in 1931 and the US followed suit in 1933¹. Now our money is worth … the fact that our government says it’s money. This is why I’m of the belief that in any true anarchical zombie apocalypse, paper money will immediately become worthless. I challenge you to fight me on this.

These days, currencies are valued based on how much they’re worth compared to each other. Many businesses try to “hedge” against currency fluctuations so they can do business in multiple currencies and keep making the same amount of “money”. This lead to some very smart people figuring out that they can make money by betting on one currency vs another. This is far beyond basic finance but it still blows my mind that it’s entirely legal and manipulates the economy on a global level. The former is called currency hedging and the latter is called forex trading, for any particularly eager readers.

So, is your head ready to explode yet? Or are you simply ready to pull all of your money out of the bank and bury it in the backyard? Don’t forget about the zombies!