Understanding why managing money doesn’t come naturally

Humans have been exchanging things for items of perceived value for tens of thousands of years.  According to theconverstaion.com, the earliest known form of currency, the Mesopotamian shekel, emerged nearly 5,000 years ago. Coinage has obvious advantages over exchanging things like cows.

But once we started relying on coins there also arose an opportunity for someone to make them. This then led to someone controlling them and with that scarcity was created for others while they created wealth for themselves.

Managing money is not a natural concept, even though we think it should be

Early humans didn’t exchange money for their basic needs – they hunted and gathered, and built their own shelters, or used naturally occurring shelters like caves.  In the modern age, if you want food or shelter, you need money to pay for it.

This has simplified the exchange process for goods or services but creates the new problem of how you get more money.  You can no longer simply breed a new cow or grow some more grain (unless you are a farmer and that’s how you make your living).

For most people, managing money isn’t a natural process.  Studies of winners of big lotteries have shown that the same 5% of people who managed their money well before their win are the same 5% of people who still have money 5-10 years after their win.  The rest have returned to their former money position, or worse, because they have developed new, big spending habits. They go on to maintain these habits that they can’t meet. The cycle of money overwhelm and mismanagement continues.

Most of us have never been taught to manage money well

The first place we learn to manage money is at home, from our parents or other carers.  If they don’t manage money well, you probably won’t either.  It is not a given that you’ll be like the first people who showed you about how to relate to money, but frequently we pick up our money habits unconsciously and just live them without thinking, even when things are not working for us. We also pick up the habits and the fears and attitudes towards money that come from our money role models as children.

The other challenge is managing money is not regularly taught in schools.  There may be programs run by banks that claim to teach money management, but often they are just collecting information so they can offer the student a credit card as soon as they are legally old enough to have one.  This is how I got my first credit card around 18.

My money story

My mother talked to me about money.  I knew her mother used the envelope system, to put money aside for each important purpose, such as rent, food and electricity.  I love that I get to teach the modern way of the envelope system to motivated business owners.

I also knew my grandfather took a third of his pay to feed his 60 cigarette per day habit and my grandmother had to manage on what was left.  I also knew how much this upset my mother!  But they put their four children through tertiary education on a bus driver’s wage, which was an amazing achievement for the time.

I also learnt about my parents’ business – they were both GPs and ran their own medical practice.  I knew that it ran at 60% expenses and every time the bank manager was happy that they had nearly cleared the overdraft, the tax bill would come in and they would be straight back up to the limit.  These days most GPs work in group practices because of the economies of scale.

It’s not surprising then, that when I first read “Profit First”, the book by Mike Michalowicz, that it made so much sense to me.  It’s about setting up bank accounts as the new envelopes, for every important purpose in your business, and allocating a percentage of income to each purpose.  That allows you to easily observe the patterns in your business, identify the areas that most need attention, and gradually adjust the percentages to create a more profitable business.

If you would like to receive the first two chapters of Mike’s book, “Profit First”, click here or click the button below)

If you’d like to access my free guide The Profitable Business Plan for Creative Thinkers to support you to gain clarity about how to build a thriving relationship with money you can access your free copy, click here or click the button below.

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