The word finance comes from Old French. The original sense of the word referred to the payment of a debt or even a ransom. The meaning later extended to areas such as taxation and revenue. When we talk about finance on a personal level, what we’re really talking about is how we make our ends meet and how we settle our debts.
Over the years, I’ve noticed that when people talk about their finances, they’re not talking about their inflows and outflows, but rather, what they have, own and possess–which are our assets.
For instance, if you have $2000 in your pocket and it’s not doing anything, it’s an asset that you have in your possession. A highly liquid asset, but an asset nonetheless. So what are you going to do with this $2000? Spend it on a holiday or a nice handbag? Or are you going to take an online course with it? The former could be classified as a consumption and the latter as an investment. Why is the latter an investment? It could potentially bring you more benefits in the future.
How can you, as an individual, best utilise these daily, weekly and monthly inflows and outflows? We’re not talking long-term here. Not yet, at least. We’re talking about all these ‘financial flows’ that we’re making without realising where the inflow comes from and where the outflow is going.
What do your inflows and outflows look like? How many of those do you actually need and how many of those are luxuries? In a consumerism-obsessed culture, the telltale signs of luxury are everywhere. It is meant to convey some vague sense of status. But to me, it always seems to send out an alarming signal of frivolity. This frivolous consumption is detrimental to our long-term financial well-being, and yet, the allure of it is everywhere.
Financial Decision Making
Good financial decision-making is not just something for policymakers to contend with as they haggle with each other and the public over how they’re going to manage, invest and spend large sums of taxpayers money. From entrepreneurs to homemakers, we all make financial decisions everyday regarding where we are going to get our money and where we are going to spend it.
In economics, investment generally refers to spending on assets that provide benefits over a long period of time. This includes both physical and non-physical assets such as: infrastructure, buildings, equipment, scientific research and education. Consumption, on the other hand, refers to other forms of spending — most of which are either consumed promptly or produce value for less than a year.
Whether it is on a macroeconomic level or on a personal level, we should all be making decisions that allow us to consume, invest and reinvest in a way that is in alignment with our long-term financial goals. When it comes to our financial well-being, we’re not talking about the financial foundation of our lives. We’re not talking about the overall structures, the buildings and all that stuff that was there before we arrived on the scene and will still be there when we’re not.
Rather, what I’m specifically referring to are the inflows and outflows that we’re all a part of on a daily basis. It’s about the overall flow and how it all flows or not flows. If there is a blockage or a leak somewhere, you’re sure to feel it.
How do we hone our ability to get what we need from our environment to ensure that we survive financially? One way to do that is to develop a sensitivity to the environment. But before I get into the modern economy, let’s look back at our roots–for that is where it all began.
The Hunter-Gatherer Society
When we we lived as hunter-gatherers, it wasn’t exactly ‘a simple life’ by any means. We would have to know where to go and we would have to know how to survive there. We needed highly-developed complex skills and instinctive abilities to ensure we didn’t become bait while hunting. While gathering, we would need to possess a deep understanding of the plants that were suitable to eat and the ones that could kill us. Our survival needs have always been tied to the resources we are depending on to survive.
We all have certain skills at our disposal. By nature (or even nurture), some of us may be hunters and some of us may be gatherers. In either case, ensuring that we could meet our daily, weekly, monthly and seasonal needs required us discern whether or not this was ‘the place’ where we would be able to meet those needs. When we concluded that it was, we stayed. When ‘a place’ could no longer meet our needs, we moved on.
When a river dried up due to drought or when game was no longer available on that particular territory to provide us with the resources we needed, we would move onto someplace else. That’s how we began migrating out into different territories. The human race has been in a state of constant inflow and outflow since we first emerged on the scene.
If that place never met our needs to begin with, why were we there in the first place? It could be circumstances. You try your luck and things don’t work out. We don’t know why we chose the family that we did before we were born and we cannot fully know what our lives will look like after marriage.
Sometimes, a previously prosperous situation suddenly stops being so. The river could run dry, the land was parched, or the environment was no longer able to provide. We may perhaps not have been able to move on–this is especially so if someone or an organisation had already constructed an edifice and way of life and was limiting the inflows and outflows in someway.
With time, we came to realise that no matter how great ‘the overall conditions’ were, we simply could never meet all of our needs on our own. Part of the reason is because our needs are always changing. Think about yourself in the context of your life. What you needed at age six is probably very different to what you need now. If you still live in the same city that you did at age six, it’s also probably quite a different place from what it was back then.
Not only are we always changing, the environment is always changing as well. Within these changes, long-term and short-term needs emerge. Short-term needs sometimes take our priority; and at other times, long-term needs begin to come to the fore.
We can conclude that the changing nature of our needs is what propelled us to trade, to conquer foreign territories or to look for something new. Sometimes we didn’t even know what that ‘something new’ was. But we knew we were looking for ‘something’ that we just couldn’t get where we were at.
The ability to trade or the viability of a conquest required that either we, or someone else or someplace else, had something–be it a skill or a resource–that we either needed or valued at the time. This required us to learn to rely on people who can meet the needs we were unable to meet at that point in time.
We had to learn to trust. We had to relinquish some control, because if we did have control to begin with, we wouldn’t have had that need that we couldn’t meet on our own. If we could perfectly meet all our needs, we never would have needed to trade. We would have stayed where we were if that need had not arose–no matter how temporarily.
As we started to trade–especially with different creeds and cultures–we encountered many ‘unknowns’. The transaction was not as simple as trading what we had a surplus in. We had to figure out if our present needs would be met. The truth is, we don’t always know walking in whether or not they will be. But as long as the need was there and remained unsatisfied, we knew we were in need.
If our needs were not being met, we can stick it out for a little bit and see if things will work out. But after multiple attempts, if things still weren’t working out, then we would probably move on again. It was only through testing and trial-and-error that we discovered what our true needs were to begin with.
More often than not, after our needs are met, we realise we don’t want it or need it anymore. Imagine you have a need for a wonderful wedding ring from your husband. He bought something simple for you. You could either: tell him you want something nicer or you could keep quiet if you don’t want to hurt his feelings. Maybe the need will go away on its own, in its own time. But maybe you never stopped wanting that wedding ring.
Let’s say you decide to tell him. He could either: get you the ring you want or tell you he wasn’t going to do it. For simplicity’s sake (and because I don’t want to talk about couples quarrelling), I’m going to say, he bought it for you.
Let’s say the very next day you were to meet a guy who offered to buy you the same ring. You may well tell him, “No. I’m engaged. But that was nice of you.” Why did you turn it down? Your need had already been met. And you probably didn’t want to make your future husband upset or angry. Like I said, best case scenarios here, no need to talk about couples quarrelling.
Once our needs have been met, we may not go running around looking to get them met again. And also–no matter how wonderful the scenario, no situation or person is ‘wonderful’ forever. It’s not that we can’t rely on anyone or anything provide us with our needs. We just can’t expect that person or place to do it indefinitely.
We all have subconscious thought patterns in our psyche. What are your needs? What have you been getting for what you are giving and vice versa?
This is where the consumption vs investment equation should really come to the fore. It is an investment if you held it for more than a year and it is a consumption if its shelf life was very short. There is nothing wrong with going out there and trying to meet a short-term need that you had at the time. But it may not translate into a long-term investment–no matter how much you put into it.
The whole idea of trade is that you are giving up something in exchange for something else. Why did you choose to enter into this transaction or trade? What benefits did you foresee that it would bring you? Was it a short-term thing or did it have the potential to grow into something more?
A few days ago, I read something about the Burmese python. It’s a massively long yellow snake. In Southeast Asia, where it is from, it is an endangered species. In Florida, however, where it was brought over as an exotic pet, the python is now considered an invasive species.
Apparently, it eats a lot and will eat most things. This has led to a destruction and degradation of the environment. But before we blame the snake and call it evil, perhaps we should have a chat with the pet owners who decided to buy it as a cute and cuddly thing (which I am certain it is not) and then releasing it into the wild when they no longer wanted it. They never wanted it to be a long-term thing. But without realising it, that’s what they ended up with.
The fact remains that the Burmese python can consume and consume and consume. It does this with little knowledge or understanding of what it is doing to the environment. We, the onlookers and perpetrators, are the ones who are suffering the consequences of a faulty decision-making process.
Resources can dry up, the best people in the world can mess up and fail and external unforeseeable wildcards (not going to mention the coronavirus) can show up out of nowhere and turn everything upside down. So how can we factor ‘trust’ into the equation when we are dealing with so many unknowns?
A simple example–say you bought a computer–are you actually going to use it or is it an indulgence? Secondly, what value will it bring to your business if you invested a bit more in purchasing something that would later bring about a lot more value? And now, let’s add insurance to the equation. What is the grand total?
And lastly, how long are you expecting the computer to last? 4 years or 8 years? The latter is unlikely. Even if it’s still working, the performance will start to decline. So now divide it over 4 years. How much was your investment per year? How much value did it bring it?
Did this whole equation run through your mind when you were making the decision? Probably not. You probably had a need. A need you were looking to get met. And given our current culture, it was probably a short-term need.
The inflow happens when there is a need or an urge. The outflow also happens when there is a need or an urge. If the terrain is dry, what would you do? If there is a blockage somewhere, how would you fix it?
Don’t tell me you’ll call a plumber…