Wednesday, April 27, 2005

The elements of The Financial Fence® - Part 3

Today is the last day before taking a holiday, so I will finish the elements today and be off the air for about a week. This holiday seems to have been a long time coming and I'm looking forward to forgetting about fences and money and just letting the world go by for a week.

In the last two days we have covered the first two elements of The Financial Fence® which were the financial posts and the top rail of the fence called the consumption rail.
Today we're going to cover the bottom rail which for many people is the key to finding there way to financial freedom. It is called the ACCUMULATION rail. The reason why this rail is so important is that to be financially free you need to be in a position where money is working for you rather than you working for money. This is achieved by accumulating the right sort of capital. This is capital which can produce income. Basically there are two types of capital that we can accumulate in our lives. Personal Capital which some people call lifestyle capital. This generally produces more expenses for people. Then there is Investment Capital which generally produces income for people. So on the bottom rail of The Financial Fence® we start with any net income left over from the consumption rail ad deduct from that the cost of any capital that has been accumulated for the period. Think about it for a minute. Could the amount you have left over each week or month add up to buying a property for cash? Likely not and therefore to accumulate capital more quickly you can utilise the leverage capacity of debt. This is why at the end of the accumulation rail we add the activity up and this will show the increase or decrease in a person's debt.
Remember, if you do not accumulate Investment Capital, you will never be able to produce investment income. If you don't produce investment income you will need to continue to sell your time for money to produce personal income. While you may require the use of debt to accumulate more investment capital, provided it is giving you a better rate of return than the cost of the debt, you will in time be working toward your financial freedom. Getting a bigger propoertion of your income as investment income rather than personal income is another measure of how far you are along the journey.

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Tuesday, April 26, 2005

The elements of The Financial Fence® - Part 2

Yesterday we were talking about the financial post and that sometimes we can be fooled into thinking that what we see with our eyes is a good indication of what someone's wealth is all about.
Remember people can be like a duck - Cool calm and collected on the surface and pedalling like hell underneath to keep up.
If you get too much debt and not enough equity, then no matter how much capital you accumulate , life is going to be a struggle keeping up with the debt repayments. best to sell some of your capital and get back to a sensible ratio.

Today I want to talk about the top rail of The Financial Fence®
Just like a standard fence, The Financial Fence® has two rails.
The rails of the fence represent the activity in a business and the posts represent the milestones or achievement points.
The top rail we call the CONSUMPTION rail and there are a few reasons for this.
It contains a person's income and expenses.
It represents the reources that you have received and expended for a period.
Another way of saying this is ; it shows you what you've got left after your activity and in this world of instant gratification, the challenge is to have something left at the end of your consumption rail.
Think about it though; If you have nothing left at the end of your consumption rail, how will you ever begin to accumulate the capital that you require to become financially free. How will you ever get off the treadmill of working hard all the time and never having enough.
Make a decision today that you will make sure you have something left at the end of your conumption rail so that you can begin the journey to financial freedom.

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Monday, April 25, 2005

The elements of The Financial Fence® - Part 1

One of the difficulties that I find is breaking down some of my complex thoughts into bite size pieces so people can understand what it is I'm on about.
The Financial Fence® journey is now four years old and so often I forget that for some people this might be the first time that they have even heard of it.
So over the next couple of days I've dcided to try and go back to basics and look at each of the elements of the fence and put it as simply as possible.
We're going to cover the financial post, and each of the financial rails.

The financial post is actually made up of two pieces:
1. Capital - this is made up of Personal Capital and Investment Capital
2. Funding - this is made up of Net Debt and Equity

In life all we see is the capital. We never see the debt and equity. Think about it. You see someone driving down the road in a Ferrari. First thought - they must be doing well. Then you see someone driving down the road in a Commodore. First thought - they are doing about average.

But let's say for instance the Ferrari has a capital value of $200,000 and the Commodore has a capital value of $40,000

And let's say the person driving the Ferrari has a loan on it of $180,000 and the person driving the Commodore owns it outright.

So who is more wealthy? At a glance everyone would say the Ferrari owner but on more indepth investigation it is the Commodore owner.

The Ferrari owner has Capital $200,000 debt of $180,000 and equity of $20,000
The Commodore owner has Capital of $40,000 debt of zero and equity of $40,000

So don't always look at what's visible. Look at how ALL the pieces are working and remember the formulas for the financial post

Capital = Debt + Equity

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Sunday, April 24, 2005

How do I check the debt on The Fiancial Fence®

"The person who doesn't know where his next dollar is coming from usually doesn't know where his last dollar went." - Unknown Author

Each time you complete The Financial Fence® you should check the debt in the closing post and make sure it agrees with your banking records. You can do this by finding your bank statements, credit card statements and any other borrowings that you have and make sure the total on the fence is the same as the total of all your net borrowings. If not , you have likely understated your expenses for the period and need to adjust them.

"Challenges are what make life interesting; overcoming them is what makes life meaningful." - Joshua J. Marine

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Saturday, April 23, 2005

What is the Investment Income to Investment Capital ratio all about?

"If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability." - Henry Ford

The key to all investing is risk and return. Taking measured risk is fine only if it gives you what you consider an adequate return.
This ratio is a measure of how much RETURN (Investment Income) you received from your investment capital.
One strategy would be to invest all of your money in a bank and receive a low rate of interest. Investing in other forms of capital is more risky and therefore should give you a greater return.
As a ‘rule of thumb’ compare this ratio to the interest you can get from a bank and then decide if the additional risk is giving you the additional return you think is necessary.

"Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all." - Dale Carnegie

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Friday, April 22, 2005

Is it more important to earn more income or have less expense?

"Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give." - William A. Ward

Ever used the words ‘I can’t afford it’?
This means that you are coming from a paradigm of having limited income and therefore not enough to go around.
Why not use the words ‘How can I afford it’? This puts your focus on producing income rather than controlling expenses.
At the end of the day releasing more income into the equation gives far more opportunities and I have found it is more enjoyable.
So in my opinion the light blue squares on the top financial rail should receive more focus than the orange ones!

"Don't be afraid your life will end; be afraid that it will never begin." - Grace Hansen

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Thursday, April 21, 2005

What is the Personal Capital to Personal Income ratio all about?

"The good life, as I conceive it, is a happy life. I do not mean that if you are good you will be happy; I mean that if you are happy you will be good." - Bertrand Russell

One day many people will decide that they no longer want to exchange their time for money. This is often referred to as retirement when they are hoping to live a comfortable existence after working for most of their life.
This ratio is a measure of how much WORK (Personal Income) you have tied up in your lifestyle capital (Personal Capital)
As an example if you had a $400,000 family home and an income of $80,000 there would be 5 times your income in your personal capital or a ratio of 500%.
While working it is important to keep some kind of lid on the accumulation of personal capital so that you can put your hard earned income into income producing capital called investment capital.

"Accept challenges, so that you may feel the exhilaration of victory." - George Patton

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Wednesday, April 20, 2005

The Financial Fence® - a unique strategic planning tool

The Financial Fence® is unique because it is a strategic planning, budgeting and reporting tool which shows exactly what happens to your hard earned income and what you are doing about building your financial wealth. It shows a picture of how ALL the pieces of your financial puzzle fit together.

“Imagine pouring water into a sieve and wondering why you never had any left for a cool drink on a hot day. Yet this is exactly what many people do with their weekly or monthly income.”

In your lifetime you will most likely consume more than you invest. I think of investing simply as putting your hard earned income into something that will produce income in the future. In other words into investment capital as I have defined it above

Have you ever heard of the person who made a little out of a lot?
They likely had a great job, lived a great life, but never seemed to have anything to show for it. In the end they had to keep working hard so that they could support their lifestyle.
Then there is a person who makes a lot out of a little. They never seemed to have a lot of income but what they did have they used wisely and in time ended up with a great lifestyle.

Many people waste as much money as they make. It’s not a matter of earning more income but using what you have earned more effectively.

The Financial Fence® is a simple elegant way of visually setting financial goals and allowing you to understand what to do to achieve them.

Imagine being able to confidently put in place the building blocks required to achieve financial wealth and prosperity before you went to a financial planner.

If that makes you feel good imagine the added bonus of being able to monitor your progress along the way to financial success using exactly the same tool. Yes that’s right! The Financial Fence® is not only a brilliant planning tool; it is also a simple monitoring tool as well. You can plan and monitor which means you can confidently move towards financial success with guaranteed peace of mind.

You will know exactly where you are on your financial journey. As situations change, you can upgrade your goals accordingly and then monitor your progress without having to refer to expensive professional advice.

http://www.wheresthemoneygone.com/demo.html

Tuesday, April 19, 2005

The 7 benefits of using The Financial Fence®

The Financial Fence® is unique because it is a strategic planning, budgeting and reporting tool which shows exactly what happens to your hard earned income and what you are doing about building your financial wealth. It shows a picture of how ALL the pieces of your financial puzzle fit together.

Using The Financial Fence® will give you the following benefits:
1. Help you plan your financial goals
2. Help you monitor your own progress towards them
3. Give you a dynamic environment where you can alter your plans as situations change without having to enlist expensive professional advice.
4. Help you make the most of the income you have NOW.
5. Empower you with confidence when dealing with your own financial situation.
6. Avoid financial disaster by allowing you to know EXACTLY where you are on your financial journey.
7. Gives you peace of mind and prevents the stress caused by worrying if you are making it financially or if you might run out of money.

http://www.wheresthemoneygone.com/demo.html

Monday, April 18, 2005

INTRODUCTION TO THE FINANCIAL FENCE®

The Financial Fence® is a simple elegant way of visually setting financial goals and allowing you to understand what to do to achieve them.

Imagine being able to confidently put in place the building blocks required to achieve financial wealth and prosperity before you went to a financial planner.

If that makes you feel good imagine the added bonus of being able to monitor your progress along the way to financial success using exactly the same tool. Yes that’s right! The Financial Fence® is not only a brilliant planning tool; it is also a simple monitoring tool as well. You can plan and monitor which means you can confidently move towards financial success with guaranteed peace of mind.

You will know exactly where you are on your financial journey. As situations change, you can upgrade your goals accordingly and then monitor your progress without having to refer to expensive professional advice.

We all need professional advice along the way so when you do require the services of financial advisor, you will be in the driving seat with the ability to ask the questions rather than always being on the back foot and bamboozled by numbers and language you find difficult to grasp and fully understand.

You will feel financially empowered and be able to speak to your friends and family and surprise them with your knowledge and confidence in dealing with both your family and business finances.

http://www.wheresthemoneygone.com/demo.html

Sunday, April 17, 2005

Why use a fence to explain financial statements?

So why use a fence?
1. Fences are made of two parts :
A. Posts that anchor the fence into the ground at a point AND
B. Rails that carry the fence over a distance.

2. Fences incorporate Milestones (Posts) and Activity (Rails) in the same analogy.

3. Financial statements have these two parts :
A. “Milestones” - Balance Sheet.
B. “Activity” – Net Income Statement & Cash Flow Statement.

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Saturday, April 16, 2005

Why I developed The Financial Fence®

Let me give you some background as to why I have developed The Financial Fence® which is an incredibly simple yet powerful tool to assist people around the world to understand their business and personal finances. In many cases giving them real clarity for the very first time in their lives.

•Many people have great difficulty understanding and communicating the money issues in their lives.

•Traditional financial advisors do not have a simple communication methodology.

•Debt is a growing part of many people’s financial world.

•How equity and debt actually work is a mystery to most non financial people.

•There is a communication gap between most financial professionals and the general population. Leaving many people in ignorance about how money works which in turn leads to frustration particularly when people who are working very hard still make little progress toward achieving financial security.

http://www.wheresthemoneygone.com/demo.html

Friday, April 15, 2005

How do I get my debt down?

"It's just as easy to be happy with a lot of money as with a little." - Marvin Traub

The only way to DECREASE debt is to have a NEGATIVE number at the end of the bottom financial rail.
Start by making sure you have more income than expenses!
Remember the end of the top rail is the start of the bottom rail.
SELL some of your capital that is not giving adequate returns or capital you don’t need! This will also create a negative on the bottom rail which will DEDUCT from your debt
Many people buy capital hoping it will give a great return only to find that the interest on debt used to buy the capital consumes most of the income.

"Never be afraid to do something new. Remember, amateurs built the ark; professionals built the titanic." - Unknown Author

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Thursday, April 14, 2005

What is the Interest Cover ratio all about?

"Our lives improve only when we take chances - and the first and most difficult risk we can take is to be honest with ourselves." - Walter Anderson

Creating wealth is about risk taking.
But what kind of risk are you prepared to make?
Depending on your adventurous spirit you may take more than the average amount of risk for a particular venture.
The Interest Cover ratio is a measure of the debt risk you are taking. It measures how many times your interest is COVERED by your income.
For example if your total net income is $100 and your interest is $20, the interest cover is 5 times.
The number of times cover is a measure of the risk you are prepared to take with the fact that income can vary over time. The lower the cover, the higher the risk.

"Be not afraid of growing slowly, be afraid only of standing still." - Chinese proverb

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Wednesday, April 13, 2005

Why does the sign change for Net Income on each rail?

"Money never starts an idea; it is the idea that starts the money." - W. J. Cameron

The top rail is the income rail. It tells you how much net income you have achieved for a particular period by subtracting all your expenses from you income.
The bottom rail is a cash flow rail and is measured from a debt perspective.
i.e. will the amounts ADD to debt or SUBTRACT from debt.
When you make Net Income it will subtract from debt which is why the sign changes when the figures move onto the bottom rail.

" Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover." - Mark Twain

http://www.wheresthemoneygone.com/demo.html

Why does the sign change for Net Income on each rail?

"Money never starts an idea; it is the idea that starts the money." -W. J. Cameron

The top rail is the income rail. It tells you how much net income you have achieved for a particular period by subtracting all your expenses from you income.
The bottom rail is a cash flow rail and is measured from a debt perspective.
i.e. will the amounts ADD to debt or SUBTRACT from debt.
When you make Net Income it will subtract from debt which is why the sign changes when the figures move onto the bottom rail.

"Twenty years from now you will be more disappointed by the things you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover." - Mark Twain

http://www.wheresthemoneygone.com/demo.html

Tuesday, April 12, 2005

What is the Investment Capital to Personal Capital ratio all about?

"Make no mistake, my friend, it takes more than money to make men rich." A. P. Gouthey

Part of the journey to financial freedom is to accumulate investment capital which can produce income without personal exertion. Some people call this passive income.
There is a tendency to accumulate more personal capital, often referred to as lifestyle capital, which does not produce ‘cash’ income unless it is sold.
This ratio measures the proportions of investment capital to personal capital. The aim is to get more investment capital than personal capital while creating your own version of enjoyable living.

" The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and then starting on the first one." Mark Twain

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Monday, April 11, 2005

How do the rails connect to the posts?

"Money is like an arm or leg - use it or lose it." - Henry Ford

The numbers from the end of the top rail (Net income) are added to EQUITY on the post and the numbers from the bottom rail (Net cash Flow) are added to DEBT on the post.

i.e. Opening Equity + Net Income = Closing Equity
Opening Debt + Net Cash Flow = Closing Debt

The rails show the activity (Net Income & Cash Flow) which connects each milestone (post) to the next milestone (post).

"You're alive. Do something. The directive in life, the moral imperative was so uncomplicated. It could be expressed in single words, not complete sentences. It sounded like this: Look. Listen. Choose. Act." - Barbara Hall

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Sunday, April 10, 2005

My Birthday

Today is my birthday and a chance to reflect what's happened in the last year. It has been a great year of development. During the year I have developed the website www.wheresthemoneygone.com and also invented, developed and manufactured a board game called Where's the Money Gone? In the year ahead it remains to be seen how many people value what we have produced as we take both of the products to market and allow people to experience the thrill of finding out that financial literacy is not as diffiicult as it seems. A solid analogy and picture, along with colours and a simple methodology can help most of the population become empowered in a whole new way. I hope that people come on the journey with us to create a Where's the Money Gone community where people can share, learn, and discuss their money issues and track what they are doing in their financial world. It amazes me how many people are a little bit insane when it comes to their finances as they do exactly the same thing with them week in week out , month in month out and just hope that things are going to change for the better. Do yourself a favour. Do something different today. When was the last time you did something for the first time? And a piece of advice. Never be afraid of making mistakes. People who make no mistakes ususally make nothing! http://www.wheresthemoneygone.com/home.html

What is the Debt/Equity ratio all about?

"Money never made a man happy yet, nor will it. There is nothing in its nature to produce happiness. The more a man has, the more he wants. Instead of filling a vacuum, it makes one." Benjamin Franklin

Remember that Debt and Equity are part of the financial post and therefore this must be a ratio about how much wealth you have accumulated.
The Debt to Equity ratio measures how much of your capital that YOU own and how much the FINANCIAL INSTITUTIONS own! You may have a great house but only own a fraction of it!

"The ultimate measure of a person is not where they stand in moments of comfort and convenience, but where the stand in times of challenge and controversy."
Martin Luther King, Jr.

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Saturday, April 09, 2005

What's in the financial post?

"Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort." Franklin D. Roosevelt

Remember that the Financial Post is made up of two parts:
CAPITAL (Personal & Investment) and FUNDING (Debt & Equity)

It also shows you what’s LEFT after all of your activity and not what you’ve DONE.
When all the dust settles from your activity, look at your Financial Post and you’ll know how much wealth you’ve accumulated.


"Only those who will risk going too far can possibly find out how far one can go." T. S. Eliot

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Friday, April 08, 2005

What's The Financial Fence®

The Financial Fence® is a simple yet elegeant tool for working out where your money has gone.
You can use it for both your Business and Personal Life and it brings ALL your finances onto one chart so you can easily see the BIG picture and not have to worry about whether anything is missing.

You can view a picture of it by doing the demo at www.wheresthemoneygone.com/demo.html

http://www.wheresthemoneygone.com/home.html