Finance 101: Part 1 – Patience

Thanks to Terri for the idea of Finance 101.  I like teaching people about finance (seeing as I’m completely wrapped up in the area), so going through basics will probably help everyone…including yours truly.

I plan to use no formal textbooks or other for the basis.  Just working through a concept at a time, in a way that I think works.  If you’ve objections, or topics to address, please voice them!

Patience

Before talking through any ‘proper’ personal finance concepts, I’d like to talk through the key reason people bother with finance at all (in my opinion): patience, or lack thereof.

At the most basic level, personal finance revolves around the idea one should give up consumption (goods & services) today, for the chance of consumption later.  Two main factors tie into this decision, off the top of my head:

1. How much you have today: if I have more (goods, money) today than I would like to consume, I’ll tuck the excess away until I’m ready for them.  Ah, what a nice problem to have.  Turning this on its head, perhaps I need to consume something now which I don’t have.  I’ll need to get this from somewhere (if it exists).
2. How patient you are: maybe I could consume more of what I have right now, but actually I’d rather wait until later.  On the flip side, maybe I can never wait for consuming things – I’m always devouring what I can get my hands on.

So on one side we have the most patient, well-endowed (careful…) person, who stashes away his/her excess and leads a minimalist lifestyle.  On the other we have the Epicurean, who attends (others’) parties and consumes constantly, ‘…for tomorrow we die.’

Clearly the Epicurean doesn’t care about the future, so spends his/her day begging/borrowing from others; he’s not very interested in personal finance, so long as he’s not paying for drinks.  The monastic lifestyle of the well-endowed character means he/she will likely never run out of resources, so doesn’t really care about personal finance either.

Fortunately or unfortunately, everyone else fits somewhere in between: we have a genuine trade-off between enjoyment today versus tomorrow.  That is where finance can help: how do we choose how much to consume today, given the opportunities available to us for postponing consumption.

Hence why learning finance is a good idea: if we know what our choices are, we can at least have comfort that we know why we are choosing to do what we do.