As we have argued in the first post of this “In Search of Simplicity” series, complexity in Finance is often deployed to obfuscate the underlying simplicity, or for rent extraction. We believe that simpler is better, for your own personal financial health, and for society as a whole. So please allow us to break down Personal Finance into the basic building blocks, the “jobs to be done”.
Jobs to be done is a concept developed by Professor Clay Christensen in his book “Competing Against Luck”, and defines the “job” that your customers would “hire” your product to do. In his most entertaining example, Christensen argues that the job a milkshake is hired for by a commuter in the morning is fundamentally different from the job a dad hires the milkshake for when going out with his daughter in the afternoon. In the former case, the commuter is looking for something to keep herself entertained for the duration of the drive, and provide enough energy until lunch, in the latter case, it is about spending previous family time, and possibly a more affordable reward instead of buying new toys. But please listen to the master explaining the concept himself:
To reduce Finance, and in particular Personal Finance, to the essentials, we argue that there are only two avenues, namely sources and uses of money (and money, as is well established, functions as a medium of exchange, a store of value, or a unit of account). One sources money by earning or borrowing it, and one uses money by spending or saving/investing it. It is as simple as that.
Often, these four basic building blocks go hand-in-hand with the concept of time. Quite literally, “time is money” when you rent out your labor to get a paycheck, or even when you are an entrepreneur investing “sweat equity” into your startup. A temporal transformation, or an arbitrage of time, sets in when one does not have enough money to meet current spending and needs to borrow (moving forward consumption), or one has surplus cash to save/invest, thus deferring consumption to a later point in time. Also, returns on capital compound over time.
Generally, the less friction and complexity there is across these four components, the less cost for the individual, and the better off we are. However, not all friction is bad, and as it often does, it depends on one’s personal circumstances. But that will be the topic for Part III.
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