Money is like… electricity

Another way to think about personal finance

One important factor in personal finance is how you think about money, your attitude towards it, and your financial habits.

I find it very useful to think about things from a different angle sometimes, and yesterday it occurred to me that money is in fact quite a lot like electricity.

Bear with me on this one 😉

Electricity is fairly simple

1. Electricity for its own sake is pointless -it is useful because it helps you do things
2. You can’t use more electricity than you have
3. You can store electricity in a battery to use it later
4. You can buy things that generate electricity like solar panels, windmills, or exercise bikes
5. The fewer appliances you need to run, the less electricity you need
6. You only need to store enough electricity to meet your emergency needs (a few days maybe)
7. It is safer to have several sources of electricity, so that you can generate your own in the case of a blackout or natural disaster and your battery can see you through emergencies

Money is like electricity

1. Money for its own sake is pointless -it is useful because it helps you do things
2. You can’t use more money than you have*
3. You can store money in a bank to use it later
4. You can buy things that generate money like stocks, bonds, or real estate
5. The fewer things you need to spend money on, the less money you need
6. You only need to store enough money to meet your emergency needs (a few months maybe)
7. It is safer to have several sources of money, so that you can generate your own in the case of an illness or job loss and your bank account can see you through emergencies

* well, you can, but nothing good will come of that

The blueprint to financial health

This simple simile gives us a number of clues to help us make our finances more resilient and efficient. These are the big ones that many people aren’t doing:

• Have an emergency fund in an accessible bank account large enough to cover emergency spending. This should be a few months’ worth of food, rent, etc and should never be touched unless for a genuine unanticipated emergency. If you use it your priority is then to replace the funds.
• Buy future sources of income/wealth. The easiest way to do this is by buying low-cost mutual funds with spare cash. Even better is to set up regular automatic purchases each month. The best is to do so in tax-advantaged accounts like iDeCo and NISA.
• Reduce your fixed expenses. Fixed expenses are things you have to pay regularly, including rent, utilities, subscriptions, loan repayments, insurance, fees, etc. Reducing them can have a large effect on your finances because you save all the future payments too. Moving to a cheaper place, getting rid of a car, cancelling Netflix, finding a cheap market to buy vegetables at, getting a better deal on insurance are all ways to do this.

The challenge

So after reading this article, is there anything you can do to improve your finances?

• If you don’t have an emergency fund, open a new bank account, decide how much you need, and how much you are going to pay in each month.
• If you aren’t currently buying future income/wealth each month, figure out what kind of account you will use and set up some automatic payments.
• If you have done both of those then take a look at all your fixed expenses and see if you can reduce or eliminate any of them. I will be doing this too this week 🙂

Good luck! Let us know how you get on by commenting below or on the forum.