In IT, there is a concept called data streams and data lakes. Data streams are movement of data between sources and destinations. Data lakes are where data stays in large quantities for further use. I haven’t heard of anyone speak of money streams and money lakes. It makes sense to think of money flows the same way. The words to describe moving water are evolved and numerous.
Our current predicament
Due to our Model 3 being totaled, health expenses, hospital expenses, doctor expenses and rental expenses have piled up on credit cards. Last month, the payments were manageable and paid in full. This month is a bit more and and we have the down payment on the new Model 3 coming soon. We need to make some tough choices until we get reimbursed by the other insurance company.
We have our jobs, providing a clear, blue stream of monthly income flowing into savings. We have our beautiful, blue, emergency savings, which is a lake of accumulated monthly savings. Below the blue lake of emergency savings sits 3 piles of rancid, muddy lake water, our credit card debts. These debt lakes need to be paid off from ongoing savings, new income sources, or existing savings. Imagine each debt lake increasing in size based on how much you owe. Imagine your emergency savings lake getting drained to pay off these debts. The vivid picture would cause me sleepless nights.
Stock / flow analysis
Experts will tell you you should have x months of emergency savings. I have never seen anyone tell you how much to tap to pay off your debt lakes, and how much to keep in your emergency savings lakes for other emergencies. Paying too much from your emergency savings lake may make it too easy to enlarge your debt lake if another catastrophe strikes. Paying too little may allow your debt lake to grow from accumulated interest charges flowing into the debt lake. There’s a fine balance. The stock / flow ratio measures your emergency savings lake level (the stock of savings) to how fast you can replenish your emergency savings lake with monthly income flow.
What have we learned? Choose the amount of savings and debt payment that allows you to sleep at night. Millennials have racked up a historic rate of debt of any age group since 2019. They owe $3.8 trillion in debt, according to Fortune. If smilingdad can help millennials reduce their debt, save more, and sleep better, we’ll do it.
Example #1
Your flow of monthly income allows you to save 100 units a month. Your emergency savings lake is 3000 units. A debt lake of 1000 units exists. How do you pay off the debt lake?
If you pay it off in full, you will have 2000 units in your emergency lake. With a replenishment of 100 units a month, you will have 20 months of savings remaining, and it will take you 10 months to replenish. You decide to pay the debt lake in full.
Example #2
Your flow of monthly income allows you to save 500 units a month. Your emergency savings lake is 3000 units. A debt lake of 1000 units exists. How do you pay off the debt lake?
Here, it may make more sense to use one month of savings and 500 units from your emergency savings lake to pay off the debt lake. You will have 2500 units in your emergency savings lake, which is 5 months of savings.
Example #3
Your flow of monthly income allows you to save 100 units a month. Your emergency savings lake is 3000 units. A debt lake of 4000 units exists. How do you pay off the debt lake?
This is tougher. It doesn’t make sense to use all 3000 of your emergency savings lake to pay off your debt lake. Your stock / flow ratio will be 0 (0 / 100). Perhaps 1500 to 2000 units makes sense. That leaves you with 1500 units in your emergency lake, a stock to flow ratio of 15, and 2500 left in your debt lake. You should find additional income flows to help you and reduce expense flows to help you pay off the debt lake faster.
Example #4
Your flow of monthly income allows you to save 300 units a month. Your emergency savings lake is 0 units. A debt lake of 2000 units exists. How do you increase your emergency savings late and pay off the debt lake?
We’ve been in this situation too. It may make sense to get a personal loan or low interest balance transfer to minimize the flow into the debt lake. Make the minimum payment on the debt lake, increase your emergency savings lake to 900 after 3 months, and use 600 to send a large flow of money to your debt lake. You make steady progress on your debt lake. Building up your emergency savings lake minimizes the chance of a future debt lake.
Conclusion
The idea of money, streams flowing in and out, and lakes of pooled money is relatable compared to abstract concepts like income, expenses, savings, assets, and liabilities. We hope the idea of streams flowing, and accumulated lakes for savings and debt allows you to visualize your money flows and make better decisions. How does your current stock / flow ratio look? Any debts you are paying off? Let us know in the comments.
Sincerely yours,
smilingdad
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