Thanks for reading my finance 101 series. This post is the first of a series that will give you a foundational understanding of finance. To do so, we’ll cover an array of sub-topics such as accounting, currency, investing, and much more. Let’s start by providing a brief history of money.
Soon after the development of language, homo sapians began bartering items for trade, and the first economy came to exist. Although we don’t know precisely when this happened, we know it happened. Many scholars have tried, but in 1866, the linguistic society of Paris banned the subject because of a lack of empirical evidence.
As you can imagine, bartering items caused problems. For example, let’s say you had a shovel, and you needed some chicken to feed your family. The chicken farmer already has a shovel and therefore, does not want to trade with you. Meanwhile, there’s another family that does want a shovel, but they can only offer fresh apple pies. You could all meet and make a threeway trade but compound this with more people and items, and it becomes unmanageable. China first took a stab at this by casting a smaller version of popular products out of bronze in 1100BC. It wasn’t for another 500 years until a coin based currency came into existence in Lydia. Below is an infographic I shamelessly stole from The Telegraph which outlines the timing of the introduction of money.
Now that we have money, which in turn has a particular gold value, how did do we manage it? In the early days of currency, it was all done by paper using things like ledgers, balance sheets, and income statements. Although these terms have almost completely disappeared from the personal finance world we know today, the reasons they are essential haven’t changed–to determine the health of a financial entity. I deliberately used the term “financial entity” instead of business because as soon as the word “business” is used, you think it doesn’t apply to personal finance, but it does. Yes, companies have much more complex financial requirements, but the basics remain the same. You have to make sure you have more money coming in than going out while keeping this aligned with your own goals. So why are they essential?
As many researchers have said, “if you can’t measure it, it doesn’t exist.” If you’re not measuring where your money is going, it basically doesn’t exist. Whether that means you’re in debt (i.e. there is no money), you don’t know how much you actually have at a given moment, or simply not knowing how much you’re spending at Starbucks every month, it simply doesn’t exist. These tools existed to help people measure their spend, and many of them predate currency themselves. For example, many farmers would keep a ledger of all the gear they had available to trade so they could go into the market to sell without lugging all of the equipment with them. Would you want to carry 50 shovels to work every day?
So we know we have money, which is backed by gold, and we know we need to track it. What’s the best way of doing that? I’m a massive fan of simplicity, we achieve the most success by keeping our movements limited and value maximized. Meaning that we should make it as easy as possible to track spending while still meeting our goals of tracking our spend. Stay tuned for part 2, which will discuss how I do my budgeting and how it’s gotten me out of debt, saving for retirement, and vacationing more than ever before.
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