Friday, February 8, 2013

Money personal framework

An heavy purse quickly empties without golden stream to refill it.

Popular culture shows us people living as stars thanks to a big number there is on their bank account.
And money become only what is inside a bank account for people.

I have a different vision.

Money only exists as flow. The actual money amount on an (bank) account is insurance, to keep it alives in case of unexpected events. For this reason, I will call it "reserve".
The only reason to keep an account alives, is so money can continue to flow through it.

A flow is a transfer of money in a channel between two accounts.
A channel can be leaky, which means that money on the destination account might be way less than the money on the source account.
And there can be multiple channel between the same two accounts.
A channel has fluidity : You can't flow too much money at the same time in it.

Why is it leaky ? that is a fiscal, and law problems that can only be answered depending on the channel. The framework I am using don't respond to these question.

It means that a sound financial planning, for me, is to build a system where you are free to move money where you want it with minimal loss and maximum fluidity.
In case of exceptional catastrophe, the only goal of money amount in an account is to keep it alives enough time so other flow fill its gap.
A reserve buy time to adapt, nothing else.

What this framework clarifies ?

Financial security of an account depends on the source streams first.
Reserve buys you time to adapt to source stream changes.

If the set of account in your sphere on influence is a system that can also be represented by an account inside a larger system. :

The financial security of your system depends on the source streams.
Reserve buys you time to adapt to source stream changes.

Thus a system and a bank account obeys to the same laws, both will be called "account".

One account with multiple small source streams needs less reserve than an account with a big source stream.

Why ? because there is more chance to loose 1 big source than 100 small one at the same time.

During this time money will flow out of the account, how much time the adaptation can take ?
It depends on the reserve there is, it depends on the source stream that was taken down, and it depends if you can afford to bring down the fluidity of destination channels (that will also impact their reserve).

An account can multiply sources, so reserve can be minimal.
Well managed account is an account with the right reserve.
More money than needed in a reserve is sign of bad money management.
How much enough reserve is ? Take this formula :
Burn rate * time to restore the biggest catastrophe = reserve
Burn rate is the sum of amount of money going to destination accounts for an unit of time.

Currently popular culture is pushing us to fill personal accounts for no reason, and through the most leaky channel. (Salary)
Given that framework, it is clearly the dumbest move.
Why ? Because the personal account is not the only one you can profit. And less leaky channel exists.

You can profit of everything in the system of your sphere of influence. Law can place obstacles, and you will have more question to ask to spend... but that's what make life interesting.

That way of thinking is most likely "innate" for finance experts, but some apply the principle only for their employers, and not for themselves.

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