The Flow and The Balance
No this is not a post about yoga, although I am really looking forward to my yoga class this morning. It's about the two concepts in finance that I think are most important for folks to understand.
The Gotham Gal and I went out to dinner with our oldest child Jessica last night. We got into a deep discussion of personal finance and how to manage it. I was talking about the difference between how much you make and spend and how much you have in the bank. I wanted to talk about the P&L and the Balance Sheet but I did not want to use those business concepts. So I called them the flow and the balance.
The flow is how much you make and how much you spend. It is the flow of money in and out of your bank account each day, week, month, year, etc. The balance is how much money you have in the bank (or any other form of account where you can have money on deposit).
We talked about how you could have a balance of $10,000 and because your flow is negative (you spend more than you make), that balance could go to zero over time. And we talked about how you could start with a balance of zero and because your flow is positive (you save money each month), your balance could grow to $10,000 over time.
As we were talking, I was reminded that unless you major in economics or finance, high school and college doesn't prepare you for the world of personal finance. Jessica has most of the tools she needs to manage her finances and she has been doing it for a while because we make our children responsible for their spending as they become young adults. And yet, she found this distinction between flow and balance helpful to understand as she prepares to get out of college and take even more control of her personal finances.
The generation that my kids belong to will have some incredible tools as they start to take control of their own finances. Online banking and web and mobile based personal finance tools that take advantage of the portability of your personal finance data are evolving at a fast and furious rate. But to use these tools, you need to understand and make sense of the data. I think simplifying and demystifying these concepts and this data is key. And I wish that there were more educational resources available to young adults as they enter the working world to help them with this stuff. It's important.
Comments (Archived):
Timely blog for me Fred. My 18 year old is home from college for Thanksgiving and we’ve been talking about what she’s learning at the School of Business at Binghamton Univ. It seems very practical and hands-on information that will help them in their careers and life. I’m very impressed so far with the hands-on learning. She and I talk about stocks, resumes, financial planning. My 16 year old just bought her first stocks last week and has her own brokerage account. She still doesn’t get it, but she’s learning.I see so many parents who “give” to their kids – cash for gasoline, cash for clothes – I hope I’m not stingy (my kids may say otherwise!) but I find it very important that my kids learn how to both spend AND save in a productive way. My 18 year old especially – she tries very hard not to spend a penny…. and I’m trying to show her that’s just as damaging as overspending. It’s a critical set of life lessons and too few children get it either at home or at school. This may not be a good topic for your Monday posts, but it’s certainly important to focus on somewhere….Have fun at yoga… I’m off to the gym!
I agree that it is incumbent on parents not only to provide for our children but maybe more importantly we need to teach them how to provide for themselves
There are two general ways people learn about money. The first, that you hit on in this post directly – is through parents. Unfortunately, many (if not most) Americans don’t have great parents who have strong personal finance skills or put in the effort of teaching their kids what they need to know.The second way is through life experience. The problem here is that you’ve probably already screwed up at this point since you’re learning on the fly.I totally agree that there should be more resources for young adults to get comfortable talking about and dealing with money so they can avoid making mistakes that can hurt them in the long run.
This is such a great concept but so easily misunderstood even by business journalists. You hear comments all the time like – Bill Gates as much money as the GDP of a small African nation. I am always shaking my head and saying “one is a flow an the other is a balance”. Another way to visualize is a river and a lake.
River and lake. Yessss. Even better
And saving is putting up a dam
Yes but we need to think what debt is….diverting part of the river?
Debt is paying Poland Spring to deliver the water because you live in a desert?
I love river and lake, and dam for savings.Debt is a leak. Not quite sure what the ecological term for it would be for a lake. Leaks usually grow though, which can track the difference of first and last payments, amortization and interest/principal ratios.
Great analogy. Debt is a leak in the dam that makes the lake. Some is like a spillway and some undercuts the foundation like credit card debt
now we are getting somewhere. i feel a whole curriculum could come out of this analogy
I agree. You know my favorite engineering class was a systems engineering class where you modeled electricity, water, and mechanical all as the same system.Capacitor=Water Tank=ComplianceResistor=Resistance in Pipe=FrictionVoltage=Pressure=VelocityAmps=FlowRate=ForceInductance=TurbineFlow=MomentumWater is always the easiest to visualize. Its easy to explain that if you took a stream of water and you started a water wheel it would take awhile to spool up and take awhile to spool down after you took away the water. Much harder with electricity.
mine too! i loved systems analysis
Aha! We live on a lake created by damming two streams. What spills over the dam runs into the ocean. That is a very real visual image for my kids — that ought to motivate them to save.
The irrigation system allows you to “borrow” from the lake created by the dam so you can water your fields now and not be at the mercy of the unpredictable rainshowers.The rainshowers come from clouds built by evaporation from the ocean, or from those watered fields, to return back to the earth.Frozen assets are like the glacier in front of a group of thirsty hikers, hemmed in by seawater. (Old survival rule: it costs more in human energy to melt snow in your mouth than you gain from the miniscule amount of water.)
never knew that about snow
a leak in a dam?
Yeah, doesn’t work. There must be an eco thing like a sinkhole to describe this.
No it is a perfect analogy.
Phil, if using ‘dam’ for savings then yes a leak is perfect for debt. My desire was for a natural dam image and natural leak image. I don’t know enough about land to know the terms which would support my image.
You are very right about debt, but it combines time & money, whereas the flow & the bank combine actions & money.Debt is tougher. My favorite debt saying is “if you owe enough, it’s the lenders problem when you can’t pay” – its evil but true.I have not tested it & will not. But, I have a growing respect for those who take risk with large pikes if OPM – they are nervy, or sociopaths ( always so hard to tell ).
From the eighth grade on, I had a job growing up.I also had stumbled onto my Dad’s investment books on investing in stock market, eg Peter Lynch. And my parents also went with me to open a bank account – savings passbook, checkbook and all.Knowing there was something else interesting to do with my money instead of just spending it on an endless upgrade of sneakers was helpful. I probably made few investments but looking at the stock pages was a challenging diversion.And then greater understanding of having an expanding balance sheet (and not just working when there was something cool) gradually followed.This may be harder now as banks and financial institutions get rid of no-fee low balance accounts but it was helpful for me.
Thanks for this Fred.I agree in intent completely although I think that from my view of the world, this is happening somewhat organically.When I was growing up, lower middle class, I got allowance for food at school and if you wanted anything else, like clothes that weren’t handed down you got a job. Pretty easy street math.I see younger generations in my family using tools like Google docs for projects and using budgets as just data to be shared. Their grasps of concepts as the language for collaboration are so far beyond anything I had that the leap to what you are talking about seems like a short hop.The gist of this ramble is that I think things like you do for your kids and projects do at a school level are closing that gap. This generation just seem more economically, more environmentally and just more aware generally to me. Good stuff IMO.
For people that have trouble with this, try smarteys.com. Chicago start up. Two women that worked on Wall St, got their MBAs decided to try and do something about it.I have a friend that is a microecon prof at UChicago. He says we ought to start teaching economic concepts to kids in kindergarten. It is the most misunderstood concept of our time.
That is awesome!!
Thanks so much for raising this issue, and through personal experience. We are personally committed to solving the issue of personal finance @smarteys for recent grads and our young people. You’re right – kids need the resources to help them understand the data, and that’s what we are aiming to provide. We should chat. I left Wall Street to build a solution to this massive problem. “Flow and balance” are great ways to characterize how one must manage that precious money. It’s not all about what you bring in on your paycheck, but how you manage what you receive from that paycheck. And, as an entrepreneur, this rings true as well.
that’s a good one. thx.
Misunderstood concept for sure as our economy demonstrates.Smarteys.com showed up in the comments a while back — I think through a comment by one of the founders. I thought it was brilliant but then forgot about it. Timing is ripe in my household so much appreciate the reminder.
The smartey site looks real useful. Thanks for the reminder. That’s why comments rock!
check out the tool we launched 6 weeks ago also if you’re in need of personal finance tool that is essentially as this post describes (planwise.com)
Correction @pointsnfigures:disqus — according to gawk.it this is the first mention of Smarteys — must be confusing this with something else. Either way, this looks fantastic and is timely!
It was a comment on gothamgal’s question of the week #5 post…which a general gawk search does return (since that blog also has gawk installed)You get bonus points though for the trust in gawk.it. Thanks!
Do you get a “ding” whenever gawk.it is mentioned somewhere? With your hack capabilities this would not surprise me. 😉
Yes.There is a ‘monitor’ feature avail. within gawk.it (think google alerts, but for blog posts and comments)…you can set it up for any set of keywords or phrases you want and as long as the conversation is monitored by gawk.it (a small but rapidly growing group) you will get an alert (there is a little bit of support for reddit and hacker news as well if you want to keyword monitor the links being posted to either of those).The UI/UX for the monitor feature is not very good right now so it’s a bit clunky to set up, but once you get it set up correctly it works great and is *very* useful. 😉
BTW — I had totally missed that post! So glad to find it. (Sharing it with my daughter — we’ve been having this conversation as she approaches dating age — sigh — not too early to be thinking about this). And must remember to do general gawk.it searches — thanks for the reminder.You so have a marketing gene, Kevin.
Thanks…if you ever looked at my personal bookshelf behind my desk it’s half full with programming books and half full with marketing books…I find them both fascinating arts! 😉
i’m not sure kindergardeners will get it, some still don’t get the idea of negative numbers yet….
might have to use cookies to get them to understand negativity.
it isn’t a cookie thing. It has to do with children getting conservation between stuff before they understand negative. ( http://en.wikipedia.org/wik… ) five year olds aren’t quite there yet in most cases
they can understand trade offs, or be taught opportunity costs.
maybe. I think it might be an uphill battle and it might be easier to teach to a second grader or third grader.
I checked out the Smarteys site and I have several comments. I don’t disagree with your friend that we should be teaching [money] concepts to kids in kindergarten. I wince a little when economics professors get involved.A few weeks ago we had a lot of laughs on a Fun Friday telling jokes. Many of those jokes were at the expense (haha) of economists. Unfortunately, a lot of the laughter was wry because the jokes were funny just because the economists, in their attachment to theory, seem to be overwhelmingly removed from day to day life, as most of us see it.As I looked at Smarteys, I noted that it was designed around the philosophy of the economist Richard Thaler, who is a professor of Economics at the University of Chicago. I did a little digging to learn more about him.Richard Thaler appears to be a traditional fiscal conservative, although he acknowledges, in an interview published in the New Yorker magazine, that he doesn’t know where the economy would be now if not for Obama’s implementation of the stimulus package. (Said in apparent approval of the stimulus.) That alone would make him either credible or not, based on the political views of many people.I am not saying that the Smarteys site is either good or bad. I will say though that even if it is remarkably helpful, as LE has pointed out one size does not fit all. At the very best, I would suggest that this site is a helpful aid for people who already have an idea of what they want in their financial lives, and who know that the values behind this site will serve their goals.I was in Chile just after Pinochet was ousted. Virtually everyone in the street had a negative opinion about “the Chicago Boys,” who were the economists trained at the University of Chicago by people who had the specific intent of affecting the Chilean economy. Apparently there remains a great deal of heated opinion about the role of Milton Friedman and his group as they affected Chile.First, I hope we can educate a significant portion of our population to be able to handle the rudimentary aspects of their financial lives and to be able to make some assessment of their goals and how different economic philosophies will further those goals. THEN, I’d like to see tools that can further those goals, preferably with “content listings” that show the philosophies underlying those tools.
Ask Chile how they feel about the Chicago boys now. They have a decent economy, where most nations don’t. The Chicago boys never endorsed Pinochet’s heavy handedness when it came to dealing with the opposition. But in general, Friedman said economic freedom means or leads to individual freedom. Thaler is a behavioral economist-which is not a classic Chicago School economist. You’ll note Austan Goolsbee is on the faculty at Chicago too-and he is a Keynesian. Smarteys isn’t pursuing any political agenda. It’s trying to solve a problem. It happens to have the top behavioral economist on its advisory board-and since they are trying to solve what is basically a behavioral problem it seems pretty “smart” to have him there.
I appear to have struck a nerve.Whether you saw it or not, I was trying to be very gentle and diplomatic, while pointing out that the philosophy that drives an economist may or may not be a philosophy that the average person would subscribe to, if they understood it.I maintain that a user of Smarteys should be able to decode the underlying philosophy that drives the financial decisions that are written into the application. I strongly suggest that a user should be able to do this EVEN if the user cannot decipher the algorithms that drive the financial decisions provided by the application.If I happened to go out to dinner with Fred and Joanne and Jessica (and maybe my daughter and son-in-law and AWaldstein to pick the wine, and several other of our common pals here), and the discussion turned to personal finance, I would know something about Fred’s take on personal financial decisions relative to the larger world, and relative to those of us at the table. I may or may not totally agree with him, but I will know his underlying intentions.I mentioned the Chicago Boys, not to be inflammatory, but to point out that economists can have a profound and even devastating effect on human beings who have no clue about the economists’ agenda. (The history of “The Chicago Boys” suggests that there was a deliberate attempt to experiment using Chile as a test case by importing Chilenos and indoctrinating them in Chicago. I won’t judge whether the education was good or bad. I will say, three years after the torture, I saw the permanent bruises on the legs of a man who was crippled from beatings and from spending a month in a telephone-booth sized underground cell, all at the mandate of Pinochet and his economic revolution. This was not the direct fault of Milton Friedman, but it shows how “economic doctrine” can have unexpected side effects.) I can also recommend that you look at the increasing suicide rate in Greece right now, as a result of decisions about the economy. Very recently a Greek pharmacist left behind a suicide note saying that he could not reduce himself to picking through garbage to stay alive.You say Thaler is a behavioral economist, which I find to be an interesting area of study. I have studied behavioral neuropsychology, behavioral therapy, but the following article in Wikipedia will be interesting for anyone wanting to know more about behavioral economics. Please let me know if you learned more than I did by reading this. http://en.wikipedia.org/wik…Several years ago I read the book “Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism” by George Akerlof and Robert Shiller. I spent a number of years working in real estate and real estate financing, and I was not only familiar with Robert Shiller from that context, but I was eager to see this take on the economic upheaval that was happening in 2009. Along with an introduction to the concept of behavioral economics, my big takeaway from the book was the insider’s view that told why all those billions of dollars had to be handed over to the banks as bailout money — by Bush or Obama or whoever. (And, I inferred, correctly, that the banks would use the money as they always have, to further their own interests and not to stimulate the economy in general, prop up the local diner, support the local car dealership while business was in chaos, etc. Sure enough, as we saw, the banks used the money to gobble up other financial interests that were a little weaker, and they stood on the sidelines while many Main Streets in America became ghost towns.The following article shows where Shiller’s attention is going these days. I find this interesting, but I can’t say based on the article whether I agree or disagree with his conclusions. http://www.nytimes.com/2012…Along with politics and religion, I guess I will now add economics to the list of subjects not to be discussed in polite company or at the dinner table.I still wonder about Smarteys, though. What is the driving philosophy behind the service? Would I send my daughter there? Or, if I delved into the application, would I find that the decisions presented were sending me down a road I would never choose on my own as my informed self?
I don’t think the political or economic bent enters into it when it comes to a start up. That’s very different than a dinner with Fred. If startups have politics written into their DNA, they are almost always guaranteed to fail. The best start ups put the power into the hands of the user. In economic terms I guess its very “Coaseian”. when I hear critics of the Chicago School of Economics, they always cite Pinochet. I have studied both schools of economics, Keynes and Schiller-and Keynes as taught by Tobin. I find it to be great on a blackboard and poor when put into actual use-where the Chicago school is better when put into public use. It’s interesting that no one is attributing the suicides and strife in the PIIGS countries from the use of Keynesian economics. Behaviorial Economics is really new. I am a fan of some parts of it, and not a fan of others. It reminds me more of consumer behavior than anything else. For example, I think setting up informational feedback loops are great. A thermostat in your house that tells you how much energy you are using at any given time should be able to allow you to make choices about how much you spend on energy. Since we are all profit maximizing (or utility maximizing), in sum we ought to be able to conserve energy and use less. Cool. But where the behaviorists go is tying that thermostat into a government database. Eventually the government could control who uses how much energy and when. That “nudging” concept goes against the rules of economic freedom in my book. Shiller was far less precise than Erik Hurst on the real estate melt down. I agree with you on the banks-everyone always acts in their own self interest. We should have let them go broke. But, those costs are sunk now. Smarteys sets up an information loop for finance. Each individual allocates where they want their resources to go. It’s a cool site that is still developing.
Thank you for the additional information. I like the idea of a feedback loop. That can certainly help with money management..I also agree with you that I have concern when data exists that “big brother” might try to use in ways he never should.Does Smarteys permit projections and “what ifs”? For example, let’s say I have a goal of paying down debt. But what if I sacrifice my liquidity, and in four months I have to replace the transmission in the car, so I end up getting a high-cost emergency loan, when I would have been ahead if I had paid off debt more slowly.Regarding strife in the PIIGS countries, my guess is that few people have a clue about various economic philosophies, but they feel the pain of the “economic policies.” I fear any type of economist in that arena right now risks being tarred and feathered if his occupation is known. Tough times.Thanks again.
I love Austan Goolsbee! He’s so smart and has the best explanations of economic concepts and policy when he talks to the media. (I should shut up now)
hee hee. you know that i don’t agree with him, and like john cochrane or john taylor instead!
i know. I still respect them. And you. (and actually, my gym reading is now coase because of you…)
Hey Shana, I was just talking about Austan over Thanksgiving with a mutual friend. Fun fact: Austan and I both did extemporaneous speaking at our high school. He went on to compete at the national level, and the rest is history!
I have funny celebrity crushes 🙂
undergrad microecon?
Great sales driven organizations know that while your “commission check” is your P&L your pipeline is your balance sheet.
I’m sure many in the AI world have contemplated this, Dr. J Storrs Hall would like to see the push as we move up the chain in AI abilities to take care of these things. The trust factor is developing due to the accepted use of bank drafts and the physical use of bill pay from home.Taking it up a notch would be the move into investments via the AI Agent enabling a better performance with investment where the person doesn’t have to go thru all of the agonies moving thru early adulthood. IMO, would be the true start of giving the regular folks a fighting chance against the well off who are part of the machine algorithms taking place just outside the trading room floor.
I think this generation is so much savvy about finances then we ever were. But at the same time, they’ve grown up in a world where debt is typical and ‘stupid’ risk is often celebrated in the media.With my company, everyone makes fun of me for how conservative i am — I get a lot of “cheap” jokes. But the truth is, i overspent on everyone’s chairs (we sit on our asses all day after all) and had enough money in the bank when we had a serious cashflow crunch (my continual whine about the Canadian banking system and their acknowledged “gap” in the market when a company is too successful without history)The key to all of it — at 16, or 60 — in my mind is continually evaluating and trying to make the right choices. When to sacrifice, when to risk and when as my bubie used to say, you can’t afford ‘not’ to buy
And to have the right framework to make those choices
Great post. Wanted to share some stuff happening in the government and non-profit sector that I know about. NYC has done some great things to help provide better access to financial education. Its centered around the City’s Financial Empowerment Centers (http://www.nyc.gov/html/ofe…. Its been extremely popular and successful so now Bloomberg Philanthropies is working to expand the program to five more cities by providing a three year, $16.2 million grant (http://mikebloomberg.com/in…. There is also a coalition of cities called the Cities for Financial Empowerment (http://www.cfecoalition.org/) and that site has links to other cities working on this issue and a bit of information on what they are doing.
this is great Jonathan. i will check out these links
the biggest problem is that the powers that be have a strong incentive to sell debt. the idea that everyone needs to own a home, and that taking out a mortgage is awesome, that you are “building equity,” in your home, is complete garbage. buying a home with 20% down is a leveraged trade you need to think very carefully about. most people didnt understand it pre-housing crisis and don’t understand it now. at least now they don’t have the money for a down payment or credit for a mortgage so it’s less of an issue.most schools don’t teach you economics or finance and may in fact give you negative knowledge — i.e. they give you a bunch of crap you have to unlearn. books, youtube videos, a job where you have to work to earn money, and your own bills you have to pay are all you need to learn.there are two 2 books i highly recommend as starting points. both books are written in very simple language, teens and up will most likely have no problem understanding them, and they are pretty short books too.economics in one lesson by henry hazlitthow an economy grows and why it crashes by peter schiffif you understand the simple macro it will be very easy for you to apply the concepts to your personal life and manage your own micro economy.but there is a lot of propaganda they are up against. here is a real ad from japan. bankers own the world and have enslaved us with debt and financed propaganda to make our debt enslavement seem normal and glamorous. i find it bizarre and frightening. people need to wake up.http://www.zerohedge.com/si…
We have been spending a lot of time trying to buy and it is amazing what a crap show it is even post-crisis.The temptation is for people to get unhinged in bidding up to the max that they can “afford” on a monthly basis, leaving little room for error in their personal finances as well as in leaving room for the Benjamin Graham/Warren Buffett concept of “margin of safety,” paying below “intrinsic value” so you leave enough room for asset price downside if there is a downturn or a disaster.We ended up getting outbid for four places in Hoboken; it was extremely hard to stay disciplined particularly with kids on the way.And then Hurricane Sandy happened, and with what happened in Hoboken, we literally avoided a financial disaster.
Debt is the money multiplier that makes the bankers rich and the world go arounduntil it doesn’tso whats the big problem?
Tell the guys behind the counter at the ING cafe that the concept of the physical location works. I opened up ING checking, teen checking, and savings accounts for me and my kids this month.
The best advice I received when I started working was to “live like a university student.”I’ve definitely stepped on the “hedonic” treadmill since then but I still find that piece of advice really useful. A couple of other small rules help as well -1. Track every $. There’s nothing like data. And knowing where I spend my money makes a big difference.2. If it costs more than $300, sleep over it. I realized this after I threw away $350 on an impulse buy..3. Ask myself “do I REALLY need this?”. Wanting and needing are 2 different things and helps me really question the value.
if you haven’t got it you can’t spend it, or as I prefer to think you can’t drink it, because I like the metaphor of water, as rain falling, as reservoir rising and falling, and as river flowing, faster and slower, rising and falling, widening and narrowing, changing course and direction, and hopefully never drying up.
“high school doesn’t prepare you for the world of finance.” There are 4 things that high-school didn’t prepare you for, but in my opinion should be in the curriculum at basic levels:- Personal finance – Nutrition & foods – Social skills & styles – Programming & software
‘preparation’ sometimes narks me. life is not a rehearsal. it comes at you and you go with it. the art of adaptability is very valuable.
maybe “teach” is a better word than prepare?
maybe. ‘learn’ sounds good, but more ‘on the job’, and not so much in theory. you can’t beat experience gained in the white heat of battle.
Learn is good. It’s some basics that we are talking about, – an appreciation of the importance of these.
we got there 🙂 good dialog
How about ‘familiarize’?
Yes. Or in numbers speak, the 101.
Don’t forget the “for dummies’ series. Never used them, but many people say they are great.
Maybe we need a “for kids” series. What you are doing is to educate kids, but for science, right?
I like the ‘for kids’ series. This is my focus in my design work.I am doing a section of biology – plants and animals. The platform I’m building can accommodate other systems being put onto it. Those options are post MVP and testing though.I had not thought about putting finance on that platform, but I could easily design a game to reflect flow and balance, river and lake as has been discussed here. I think in the language of games now, since a few years. I actually designed a game to solve a data problem for another game. It’s my zone, and I’m loving it.I also did a reading series for the alphabet.
I got the third
And you’re married to someone who seems to have the second pretty well figured out.
that is for sure. she has been watching what she eats since I met her. she starts every day thinking about losing weight.
As a course or naturally?
Not sure if you would consider this as part of #3, but relationships (with a significant other and how to avoid making the wrong marital decisions) is extremely important.
yes! but that would get complicated because it covers sex in the US.
I’d add negotiation and mediation skills. The ability to understand competing points of view, recognize opportunities for mutual gain, and win when there is no alternative to a zero sum game are essential to navigating life, yet they are lessons woefully lacking in most schools.
All of these important items missing from the curriculum are flaws in our educational system, but I’ve recently learned of a group that defines their system as “Humane Education”, and the network of schools embracing this approach is growing. Humane Education focuses on teaching true cost and value to instill children with better decision-making apparatus. At least from an economic standpoint, this seems like it will be fruitful — introducing kids to the idea of investment alongside the idea of simple purchase is only one aspect of this educational approach that I’ve come to respect.The first novella I edited was written by Xernona Woods, a Chicago author and entrepreneur whose first (children’s) book “Save That Penny for a Rainy Day” is a great tool for teaching kids about investment. More recently she’s been appending the content of the book with lesson plans and additional materials to bring this into the classroom.P.S. It’s fantastic that a post on instilling our children with sound economic ideas devolved into porn and gambling analogies. Love it.– Rachel Kowalczyk, Managing Editor, Amble Resorts
I am going to pass this concept onto my 16 yr old nephew. He works hard but savings bit not there yet.
This should be required reading for everyone in Congress!
My dad used to say: “The math of money is simple…earn more than you spend.”
Hi five! Great terminology.The guy with the lottery win has a balance but no flow. He’ll be at zero soon enough if he doesn’t figure out how to create flow with his new working capital or manage the balance so it covers the rest of his life. This was the fundamental problem for people who could continue to refinance and refinance their homes, drawing out big checks each time as the property escalated in appraised value. No concept that this was NOT flow!I would add that the concept of “working capital” helps with knowing when and how to spend. If my crew spent all their working days on their butts, I’d “overspend” on the chairs, too. It’s a sign of appreciation that goes even further than the dollars. The company president who uses the new infusion of investor money to upgrade to a RR Phantom, deserves a cold, steely look. However if he trades in his Yugo for a Toyota Avalon, I’d give him a pass.
Yes, and worse than not understanding the cash they received was not flow, they didn’t pay attention to the fees that were taken by the banks which ratcheted up the balance as well. People have a really hard time understanding debt.Which by the way causes some huge issues in the entrepreneur/vc relationship. I’m not going to use personal expenses, but rather company ones. You spend huge on conference sponsorships, booth’s, parties, or other stuff without worrying about the return. You are paying that money back, every cent plus interest.
I agree with you in many ways, but I caution about focusing on one issue at the the expense of others.”fees that were taken by the banks … “Over the past 10 years, mortgage interest rates have changed so much, and mortgage instruments as well, that a bank fee “cost” of $5000 for a refinance might have easily translated into real savings that would recover the cost in 12 to 18 months.What does is mean if a refinance pays off the dental bill about to go to judgment, several credit cards that got the family through a period of unemployment, and reduces the overall minimum monthly payments by $1000 per month?Few people have the knowledge to make those kinds of calculations, even those folks who are in the business of financial services.I also object to those sweeping proclamations that one can “save over $150,000 by paying your mortgage off early!!!”That type of statement is only true if one is calculating the savings of a specific mortgage instrument if paid off early versus paying it off over a 30-yr period. The typical family/homeowner will “pay the mortgage off” through the sale of the house to someone else within about 5 years. On average people move every 5 yrs, due to job relocation, bigger house, smaller house, etc.Paying down the mortgage — and simultaneously reducing the tax-deductible interest payment — may be very expensive when compared to the emotional costs of putting the family into a false state of martyrdom through unnecessary belt-tightening measures. And that rush to pay down debt can also leave people vulnerable to predatory lenders if they are without savings and forced to take expensive short-term loans (payday loans, appliance loans, etc.) to deal with inevitable emergencies.Yep, one day you’ll be paying it all back, but, as they say, there are easy ways and hard ways.
you and jlm will definitely get along….
This is a good first step. The next step is to teach her the term “cash is king.” The problem with balance is that you can put yourself into a position where the balance is not attainable and thus not helpful if the flow comes up short. In business, of course, this is a short-term liquidity problem. It’s not good enough to have one balance. It needs to be divided between long-term and short- term balances.
we will get there. i have learned that lesson the hard way and i hope i can pass it on to my children so they will not have to
These are not innate learnings. I agree that teaching one step at a time makes sense at an early age. I hope you will update us on progress. There are so many facets here: cash bank accounts, long-term savings, the role and risk of credit cards, how to handle a checking account, planning for long-term and short-term bills.
Great point Elia. Saving for the long-term is also a staple of good financial habits. But that likely kicks-in more seriously when you get a full-time job after graduation.
That depends on how college is financed. I paid most of my own so had to learn early on that I needed to save some of my high school job earnings for the long-term college expenses. Even at an early age, learning to “save up for” desired clothing or tech gear is a good way to teach the differences.
I have similar posts over at the Gotham Gal’s site re: importance of learning about flows & balance with your children.Sounds like this required learning for your whole family
very much so
Personally I have been using Mint.com to track my finances. It does most of what I deem important for me and I need not think about my money too much. There is an opportunity cost to spend too much time managing my money and while I’ve been minorly interested in finance for a while I would prefer to not think about it. I dipped into the stock market a little just for the learning experience and it was educational but not necessarily profitable.As a young attorney I think the most confusing things to deal with are student loans and insurance. My student loans sit with a series of different servicers that have different terms and due dates. I was offered something called consolidation at one point but when I met with the financial aid expert at my school they advised against it because you lose the flexibility of paying off higher interest loans early and keeping the lower interest ones alive. The websites are not that helpful and I could not at this moment tell you what my total monthly payment will be or would be once my grace period ends. I will have to sit down and try to decipher this one afternoon.
“There is an opportunity cost”Excellent. Exactly what you want to do. Focus on the down side. Not just the upside. And there is absolutely a down side both in time and in mistakes made where you can loose money.”I dipped into the stock market a little just for the learning experience and it was educational but not necessarily profitable. As a young attorney”Concentrate on making money by being the best you can be at what you do that others can’t. Law. Don’t waste time on maximizing making investment interest or gains on what ever money you have made already. Or worrying about retirement (once again, at your age). Certainly not in the stock market. Not at your (“young”) age.”
student loans are a mess. My school also met with me, and lucky for me I think I only have two providers and will be paying off early (I think)There are definitely times you should consolidate, but it is hard to figure out when.
mint is great. i encourage my kids to use it too. and you are right about student loans. we need a better consolidation product in the market.
try alltuition.com
Its a great way to look at it if you have no debt. You can look at debt like a negative balance but just like negative numbers its a hard one for most to visualize.My kids are still fairly young, but the thing I struggle with is the pressure to get this or buy that, it comes from literally everywhere. That and I’ll agree here with the Kid, there is the same pressure with debt.I was shopping for a new bed for our guest room with my daughter, she was so proud that she found an advertisement where you didn’t pay for a year. I got out the poker chips and showed her the true terms of the deal. Now she doesn’t trust ads which is a bit sad. I know I’ll get heckled but poker, cribbage, backgammon, craps, and blackjack are great ways to teach risk, bank, and flow. You do get some strange looks when your kindergartener is calling for the hard eight however.
Sounds good to me, Phil. But I would love the instruction manual for how to apply the concepts.
No manual needed. The chips are all you need. You get a really nice set of casino chips, you issue the bank, play the game. Kids know…they know how to press when they are the big stack, they realize how to conserve if they are the short stack. They see there is some luck involved but skill is more important in the long term. Play with kids for a couple of hours, I play with mine and others, they get it really quick.
Basic stud?
I am from Texas. Texas Hold’em only.
“she was so proud that she found an advertisement where you didn’t pay for a year.”Most of those deals role over to high interest rates after the free period ends on the assumption that people will not pay off the debt. Either because they can’t or because they forget. Some even say that if you don’t pay off you pay the interest due from the start. Was that the case with this one? I’m almost always a defender of business and making a buck but it’s amazing how many places prey on people. (Thinking of all those people streaming through Wal-Mart impulse buying things they need or the food companies as one example..)
It was the classic, 18+% interest deferred until the 13th period, then all applied.I am all for making a buck, I don’t mind gambling which statistics say 25% here think is abhorrent, I think its entertainment.We were at a party and a guy from MBNA told me he thought gambling was a dirty business. Before I could speak my partner said the difference between gambling and credit cards was that casinos want all the money that is in your wallet today, credit card companies want all the money in your wallet forever.
“I don’t mind gambling which statistics say 25% here think is abhorrent”I see gambling as entertainment as well. Also it’s important to realize that until recently there was significant friction in people gambling since in order to gamble you had to either go to Vegas or AC.The friction is important. Look what happened with porn? Kids today would probably laugh at the Playboys hidden in the room from mom. In a way it kinda kept things in check? Not today. That’s the direction that gambling is headed in. No friction. And unfortunately there is much more of a cost to gambling then there is to porn.That said when I had to move my office from PA to Jersey I did quite well because a casino opened in the same township! So I was able to sell for way more than the value without that development. How lucky can you get! And I have a (small) place down the Jersey shore that if I ever want to rent out no problem plenty of casino workers that need a place. (Side story about business risk. My dad bought a place down the shore in the 70’s – he was sure that a casino would want the land to build on it. So far, that hasn’t happened. Meanwhile he passed on buying property in another area of the island that appreciated greatly in value in all those years.)Anyway gambling, lotteries all entertainment. Agree. Definitely a down side to some (like with any vice) but I haven’t really read any studies (nor do I plan to) on the gross effects to society. And it doesn’t matter anyway. The casinos are open and they are only going to close because of lack of customers it’s not going to be because of government that’s for sure.
well, if you pay it off before then, then what?
Nothing. Yup seems great but make one mistake and that bed cost 20%++ more than you thought. That’s a bookie rate of vigorish
true, but if you pay off first, you did save money (in terms of amount spent for said object). Might be worth it if you have the money saved already for that purchase.
What is the current interest rate of a money market fund?They should be totally safe. None has “broken the buck”. Right?
ok ok I get it. And no, one did break the buck. I remember that day, because as soon as I heard that, I remember thinking “I am never going to buy a house”
Nice to know you married way over your head Phil!
It was my business partner, I’m a traditionalist, my wife is my wife. But she’s a great example. She is totally self made nurse practioner. One that the credit card companies absolutely love (they’ve told me so, nurses and teachers they have stable jobs and income, feel the pressure not just to walk away)You get the school debt, then you get the car payment, add on the house. Things are going to be tight, but you want to live like your peers. Then you start a little balance on the credit card, soon that’s maxed out. Refi the house and pay it down, repeat, until that ends. You’re not working to live your living to work. We got married very late. I think she would still be on that treadmill. I know of many of her peers that at age of 50 or 60 have a house under water, car loan under water, and five figures of credit card debt.You have to get to the concept of paying yourself every month.Don’t even get me started on the payday loan thing. Being in Delaware we had an office right next to one of the really big ones. I see the Montel commercials and just wince. I was good friends with the CIO, and got to know the model. They lose serious money on every new loan origination, they were paying Google $100k a month (you think Google doesn’t have field sales reps?? BS, I met one), they were paying Montel’s company even more, they had a great IT systems with huge monitors on the wall that showed live stats, what the current bid was for Google, Montel, etc, they ran all three credit scores which cost less than $1 because of the volume, it was impressive, That all cost big bucks. We drive nice cars, they drove kick ass cars. They loved low level government employees, think postal worker.Where they made money is when you had to originate a new one to pay off the old one. Which on average you do for more than a year, its called a payday loan because it comes due on your payday, which is usually every two weeks. (25 times) Its not like a credit card where you just pay the interest rate, you have to originate a new loan if you can’t pay it off.You take out a loan for $500 to fix your car. As Montel says there are checks you just have to write. You sign paperwork that allows them to take out $525 directly from your bank account in two weeks. (at the corner office that is a post-dated check) Now instead of just paying interest in two weeks, you have to originate a new loan if you don’t have the money. Ouch. They would point out overdraft is $35, they are a bargain.We were glad they expanded and moved, we were always worried somebody was going to find them and go postal.
Google actually sends me mail to use adwords. I always found that funny
great points about debt. it’s a huge issue for our younger generation, starting with their college loans. my kids are fortunate that they have no debt and hopefully never will.
Even if and while you master balance and flow, two other topics that are hard to transition into as an adult are taxes and housing and other living costs.As a kid, even when you work, your income is almost all discretionary because your tax base is so low and someone else is paying the rent/mortgage/utilities.It’s a shock when you first realize that even when you make a good salary, you need to plan for the reality that a big chunk is going into taxes and basic living costs. You need to spend your paycheck on that basis, so you don’t quickly go off the rails financially.
agreed
The same goes for investing. This generation is not going to settle for plugging random ideas into a Schwab account. They want a personalized way to make intelligent decisions, be in control, and a push notification when it’s time to adjust things.
+1 Betterment, Covestor, Wealthfront, eToro, Stocktwits all good examples of tools available now.
All of those are great tools. Some for generating ideas, others for execution, and others are just doing the advisor model online.I think there’s a big missing piece though – turning investing ideas into an actionable portfolio that fits you and keeps you invested over the long run.That’s what advisors do for you, but we need a better way to help people get from $10K to $250K.
Like, um, Riskalyze.com?
It’s a good start. 🙂
I’ve never heard it described (taught) like that – good stuff.
“The Gotham Gal and I went out to dinner with our oldest child Jessica last night. We got into a deep discussion of personal finance and how to manage it.”The advice that I would give to, Jessica, or anyone would also depend greatly on how much risk they could take given their parents circumstances or any other safety net that they had.Think of it as a “gas tank” analogy. You are going to take less of a chance with letting the gas needle get to “E” if you are riding through the desert,then you are if you are on Route 1 South of New Brunswick headed to Princeton where there is a gas station every mile. That density of petroleum is a safety net that allows you to take more chances. Likewise, a child who has upper middle class or rich parents can definitely afford to take bigger risks with spending money (and that is not to say wasting money) then someone who has no safety net and comes from a poor background.Jessica could buy an apartment in NYC after getting her first job if she could “afford” it on a cash flow basis. And if she made the wrong decision the truth is she could always live with you -or- you would help her out with the payments most likely. Or, as I like to say “Of 100 Jessica’s in that position, 95 parents of those Jessica’s would bail her out”. (Economist have a way of saying something like “behave “as if”” to describe behavior I’ve read).Not the same for a person whose parents are lower middle class and would not be in a position to bail them out of any bad decisions. Or someone who might have to help parents or other family members.Risk that you can take is directly related to what you can afford to loose which is of course relative to how much you have. One size or school of thought does not fit all.
I totally agree. One size or school definitely does not fit all.And, for those who have been paying attention, especially the last five or six years, the “rules” of money management that operated for almost 80 years have been turned into pretzels.
“We got into a deep discussion of personal finance and how to manage it.”The starting point is being present enough for this to happen. It’s easy to give books and point to websites, but to actually have the relationship and mutual respect to be able to have a discussion with your young adult child like the one you described…well, that’s just good parenting.I have been thinking that the concepts of investment apply to all of life.
we went out for sushi and talked this over. nothing like a dinner with just one of our kids to bring focus and presence to the moment
It seems kids learn small pieces about finances in ways that are never optimally tied together to create the whole picture, like the river and lake mentioned here. The lemonade stand is one piece, allowance, even buying things in apps with virtual money. Would be nice to see that solved in some fun games and math projects in a holistic way.
I think simplifying and demystifying ALL concepts and ALL data is keyJargon is significant in finance, IT, SEO, Energy managerment, Physics, Politics and sociology. Yet all the concepts are accessible by people born as babies, who cant eat, speak, walk or even clean up for themselves.Making it mystical does not show you are smart – Just that you are insecure in your smartness.WORD – @FRED
“Tis the gift to be simple …http://en.wikipedia.org/wik…
Great post Nice and simple analog to help frame an important discussion. A conversation close to my heart and mind as well. I have 2 young boys 8 and 11. I am also a co-founder/CEO of Tykoon – NYC based start-up 6 months into public beta. We’re aiming to reach tweens on being “money-smart” and are continually looking for interesting and meaningful analogs to complement the UI/UX to get our kid users to learn through positive reinforcement and everyday experiences.
Hi Mark — This looks interesting. I want to try this with my 11 y.o. and am glad to see that you have an iPhone app. I’m on android which is not supported (and makes sense since many more kids in your target range are on iPhone) — can I use this with my son on an app and me interfacing via PC?
Yes. Tykoon allows parent and child users to access the platform and their individual experience from any device. You can also log into your account from his iOS device. We’ve not hit android yet as we’re refining mobile product given first 6 months of use. Thanks for the response and feedback.
how about getting them to use a bank and a debit card?
Legal implications. Some banks have age restrictions. Might give a kid an account linked to a parent, so the parent carries responsibility. But, what if the kid loses the debit card?I watched someone put this into place, and suffer the consequences. Ouch.
We’re working on integrating with stored value re-loadable debit card. In the US there are many restrictions for under 13 year old users. That being said we are in early discussions with several US banks to solve for this and wary of predecessors per Wavelengths point below.
I think that this is dead-on, as I believe a fundamental stagnation point in society is our simple-minded focus on attributes over outcomes, actions over applications.I see two fundamental paradoxes, though. One is that schools already struggle to provide the basics, and anything that changes the measures and metrics, has huge vested interests fighting against (such changes).Second, is more fundamental, I think. We look to our “captains” of industry, and see in fields like finance, tech, media, real estate, etc. that operating within flow and balance is NOT the path to success. It is financial engineering, creating economic moats and buying market share through subsidization, on the premise of future liquidity events, that are the success stories our kids see.As a tech entrepreneur and as a parent, it’s heavily paradoxical to manage such dualities.
Jobs and Zuckerberg and Gates did not succeed with financial engineering and they are the captains of industry my kids know and look up to
related: really smart book, “first national bank of dad,” for teaching kids the value of money. things like, paying little ones 300000% interest if they let you put their birthday present money in the bank vs spending it. i will give you 100 dollars more if you put the 50 that cousin so-and-so sent in the bank, and you will have 150 in the bank, or you can spend the 50, your choice. the argument is that savings accounts pay so little that for kids there’s no incentive at all to save.the smartest thing in the book: when you go on a trip with little ones, instead of having them ask every second to buy this or buy that, give them a bank and say that’s what you can spend, you decide. suddenly, they become much more cautious.
thanks. i will check it out. i am a huge fan of giving allowances and then letting the kids make the spending decisions instead of buying things for them
One of the best tricks I picked up for teaching my little ones about money came from my Aunt (who has kids about the same age as me actually)…for any trip, each kid gets a roll of quarters at the start of the trip.They can use the money on anything they want, but it’s also used for ‘trouble’…so when they are acting up, not listening, etc. it costs them a quarter.Amazing how quickly they grep the concept of money, saving, and consequences…
heh. perfect.
I think it should be manditory in schools to teach children personal finances.
The true paradox. The push has always been those with math gift move thru algebra, geometry, trig, calc and at same time the other stuff. Those without math gift take courses filling numbers in ledgers sticking with add/subtract though they are hardly proficient in that. Until we agree that enabling cognitive to gifted and not gifted, we will have this same discussion always.
I love the idea of flow and balance – and why can’t we apply them to startups? in the initial stages is makes more sense to talk about them in terms of flow and balance rather than big company metrics. They don’t have histories to speak of :)Also, fyi, just because you major in finance or economics doesn’t mean you understand flow and balance. Sometimes both are used as tools to obfuscate the obvious.And you’re definitely right about people my age and costs 🙂
I love this post. I teach personal finance at companies as an employee benefit and this concept resonates. Most of our participants make <$100K/year and, sometimes, substantially less. For them, flow is critical but often trivialized. It’s all that matters. If we can get them to track flow on a daily basis (income and expenses), we’ve changed their lives. Most want to talk about debt, credit, retirement, investing, etc…the standard financial topics. But, we’re adamant about flow.The analogy we use if fuel for you car. No point in asking for directions if you don’t have gas. Same holds true in personal finance. If you can’t spend less than you make each month, everything else is irrelevant.I grew up in an immigrant family where my parents knew very little about the US financial system. They did, however, understand flow. Now, they’re the millionaires next door….with very little from investment gains.
would love to have a chat to you about how this works (what you do) – we’re keen to offer our tool as an employee benefit. It could complement your education benefit
Would love to hear more about your tool.
great! get me on twitter at @vinaeco or [email protected]
i might want to start teaching a course like this on skillshare. can you share your curriculum?
Sure. I teach the SmartPath System (http://blog.smartpathonline…. It’s like Weight Watchers for your financial life. Courses are generally 6-12 sessions where we cover major financial topics within the overarching System. Let me know how I can be helpful.
thanks
I am interested in working on this if you decide to go forward (even as a second reader or other support role); I think that this is important literacy for us to share with our kids and their kids behind them…
thanks. i just need to clear some time for it
My wife said – regarding our kids & money – they need to know how to make it, how to spend it & how to manage it. The third one is the trick.Tools are great – knowledge & judgement are better.
Fred, please check out our tool (www.planwise.com) – it starts with your balance.. and then you enter your flow, both current flow and any future flows… Launched 6 weeks ago, we’re rolling out 10+ partners a month and seeing some nice engagement metrics also.. and yes, mainly Gen Y users 🙂
does it connect with your bank, brokerage, and credit cards to automatically pull in the numbers?
It’s the next thing on our dev roadmap, but we wont be simply mimicking how it’s been done in the market to date.. we have other ideas for purposing this data
Junior Achievement addresses this in schools…
We use YNAB (You need a budget). http://www.youneedabudget.comSimple, great UI, easy to grok, and solid method for managing flow. Plus, the plucky little crew building it is great, too.
awesome! i will check it out
What about saving?Somehow the ability to plan for tomorrow has been lost or not taught or ignored.
This is exactly the mission we have at BudgetSimple.com . There’s no reason for personal finance to seem to complicated, and yet people have a hard time understanding the simple thing you’re describing about inflows and outflows. It’s free to create a budget if your daughter wants to see a quick visualization, and I’d love to get her feedback or yours on how it could be more helpful.
While I sat in my hotel room reading this yesterday, my college senior was working the front desk and my sophomore visiting from San Diego State was lying across the bed (it was great to be together at Thanksgiving, but a drag to be away from home); what a great chance for me to share the “flow and balance” model as a way to reinforce their (what seem to be) good habits… Discussed with the soph (she is already on mint.com) at breakfast to “yeah, thanks makes sense” and with her older sister after she got off work. I am grateful that you wrote this and even more so that I read and shared it with the kids…
:))))
Check out BudgetSimple.com we’ve had quite a few people say it’s changed their whole financial outlook: http://www.budgetsimple.com… . I know quite a few people have sent their kids off to college with it 🙂 (Apologies if this double posted…)
Great post! I am addressing this issue with the launch of Next Step Academy. It’s an online school that teaches young people about life skills. Financial literacy is a big part of what we do.
that’s fantastic
yes indeed