Imagine you’re in the middle of the desert.
Imagine that when you work, you get paid in water.
The first problem you will bump into will be how to store your water.
Solution?
Use a glass instead of your hands.
Second problem?
The water will evaporate with time, correct?
To solve this you need a canteen with a cap to prevent evaporation.
Great!
The next challenge will be to resolve long term reserves.
This seems like a simple solution; you get multiple canteens and build up your store.
Amazing!
Next problem…
When you lose your strength to work, you will need to start consuming those canteens. Your life expectancy in the desert will be determined by the number of canteens you were able to accumulate during your work life.
Some people in the desert may have accumulated enough to drink during their elder years, some won’t.
Ideal solution?
Own a water well in the desert.
Interpretation of the analogy:
- Water = Money (cash)
- Water in a glass that evaporates = Cash in a bank.
- Water in a canteen = Assets that appreciate with inflation. They maintain their value over time. Some examples are commodities like oil, gold and silver.
- Accumulated water in canteens = Savings in assets.
- Losing strength to work = Retirement.
- Water well = Cash flowing assets.
Lesson of the analogy:
- Money is only a mechanism of exchange that holds a temporary storage of value.
- If you save cash, time will ‘evaporate’ its current value.
- Some assets protect us from monetary volatility. This is specially important in third world countries like my Mexico.
- Accumulating assets may not be enough to guarantee your retirement because you will need to liquidate them to pay for your needs.
- The water well represents cash flowing assets. These assets produce passive income, meaning they produce cash even while you sleep.
To answer your question, how can you improve your personal finances?
One of the best ways to improve your personal finances is by investing intentionally in cash-flowing assets.
The most common are real estate rentals, businesses and royalties.
Your first step is to protect your savings from the external influence of monetary policies that will “evaporate” the value of your hard work.