Wednesday, October 30, 2013

The Water Tower of Wealth Pt 1- A framework for thinking about basic personal finance

Water Tower of Wealth Pt 1

Hello everyone this is my very first blog post and I wanted to take the chance to discuss a basic framework that I use to think about my family’s personal finances. Although I did graduate with a degree in Finance from WSU (Go Cougs) and enjoy reading all sorts of financial blogs and literature (get a life right?) I still tend to think of financial questions in very simple, graphical terms.  You see, for the average person, there is no real need to understand Net Present Value analysis, what “duration” means in bond analysis, and the Black Scholes method for valuing derivatives/options.  No, what we need is a quick and easy way to envision our personal finances that allows us to make basically correct decisions quickly and easily, and perhaps even get us excited about these decisions!

With that I would like to introduce you to the Water Tower of Wealth ®.  (Just kidding it’s not really a registered trademark….yet).  Without further ado:

                Deep stuff right?  Well much like the classic Steve Martin SNL skit on personal finance “Don’t buy things you can’t afford”, personal finance is pretty basic.  The key is to have a simple framework that we can think of that we can then expand to new situations that might pop up in life. 

                Let’s get into the graphic.  As you can see it has 4 basic components, the tower itself, the pipe coming in with our income, the pipe going out with our expenses, and the balance of water in the tank which is our wealth.  Easy right?  Well as always, the devil is in the details.  On my next post we’re going to delve into how we can use the Water Tower of Wealth simple graphical thought process to start making correct and empowering life decisions about personal finance, which over time can make us extremely wealthy.

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