This is Lesson 1 in the Authentically Ash basic bookkeeping series, a free online bookkeeping course to help you manage your household books, or the day to day basic bookkeeping of your small business. For an index of the links to all the lessons, please visit the Free Online Bookkeeping Course index page.
Most adults spend a considerable amount of their time doing some kind of work. Many of these adults work to earn an income, or money. Money is used to buy goods and services that they need in order to live.
Maslow’s hierarchy of needs places the various human needs in a hierarchy. The theory is that the basic human needs must be met before a person starts trying to work on the next level of needs.
Why do I mention the Maslow Hierarchy here? I feel it gives a person a guideline to tell the difference between a need and a want. Here it is:
- Physiological Needs: breathing, food, water, reproduction, sleep, homeostatis, excretion
- Safety Needs: security of body, of employement, of resources, of morality, of the family, of health, of property.
- Love/Belonging Needs: friendship, family, romantic relationship
- Esteem Needs: self-esteem, confidence, achievement, respect of others, respect by others.
- Self-Actualization Needs: morality, creativity, spontaneity, problem solving, lack of prejudice, acceptance of facts – basically, this is being able to achieve one’s full potential, including creative activities.
So as you look at the above list of needs, it makes sense that a person should prioritize spending money on food and water, before spending money on a social gathering with friends.
Why profit should be your motive
Whether you are running a business or running a household, the primary purpose is to make a profit. In a business the profit can be used to expand the business, and in a household a profit can be used to improve the quality of life.
A profit is the difference between income and expenses. For example, if you earn $1000 in a month and only spend $800, then you have made a profit of $200.
It is good to focus on the “profit motive” when managing the money of your business or of your household. Even if you hate money, it is a system that is in place and unless you find a way to live without ever using money, it would be wise to learn how to use money to the best of your ability.
Having a profit motive doesn’t mean that you cheat others, or become a cheap-scape, it just means that you are using the money you get wisely so that every month you will have used less than you received. This allows you to save for the bad months.
Money in our current system
As I mentioned earlier, it doesn’t matter if you hate money or love money. Everyone who lives on this planet will have to use money at some point in their lives, so it is wise to learn to work with it.
In our world, money is used as:
- A means of exchange – We exchange money for goods or services. If you work for an organization, they are exchanging money for your time and skills. If you run a business, your client exchanges money for your products or services. If you buy something at a shop, you are exchanging your money for the item you bought. Money is simply the system our world has in place to make barter easier. Which brings me to point 2:
- Money represents a value – Money has no value, what we buy has value. Money is the mechanism in place to indicate the value of what we buy. Can you imagine how difficult it would be to make exchanges if we didn’t have money? For example, a Pineapple has the same value as 20 strawberries or 5 banana’s. Or you could exchange 5 pineapples for a movie ticket. You can see how complicated this could become. Therefore money is a helpful standardization for value.
- Store of value – Because money is a representation of value, you are able to store that value over time. Where a banana goes rotten after a week or two, in a healthy economy the value of the banana in money format does not loose it’s value. Granted, money does loose it’s value over long periods of time, for example, $10 today doesn’t buy as much as it did in the 1950’s, but over the short term money retains it’s value.
- Standard of postponed payments – Sometimes, a person will buy something on account, or with a credit card. This means that you don’t have the money available at the time of buying the goods, but you have promised to pay the person when you have the money available. In the case of a credit card, the bank is gathering all your debts together into the account you have with them. You usually agree to repay your debt with the bank at a rate of interest within a certain time frame (assuming a western world monetary system).
In Conclusion to the Introduction to Basic Bookkeeping
After reading this introduction you should have a good benchmark on how to prioritize needs, why it is important to focus on profit and money’s role in our current system. Money is necessary until a better solution presents itself, and since we need to use money it is best that we learn to work with it wisely.
In future lessons I will be covering the basic bookkeeping that you will need to track the daily finances of your business or household and appropriately manage your money.