The Flow and The Balance

No this is not a post about yoga, although I am really looking forward to my yoga class this morning. It's about the two concepts in finance that I think are most important for folks to understand.

The Gotham Gal and I went out to dinner with our oldest child Jessica last night. We got into a deep discussion of personal finance and how to manage it. I was talking about the difference between how much you make and spend and how much you have in the bank. I wanted to talk about the P&L and the Balance Sheet but I did not want to use those business concepts. So I called them the flow and the balance.

The flow is how much you make and how much you spend. It is the flow of money in and out of your bank account each day, week, month, year, etc. The balance is how much money you have in the bank (or any other form of account where you can have money on deposit).

We talked about how you could have a balance of $10,000 and because your flow is negative (you spend more than you make), that balance could go to zero over time. And we talked about how you could start with a balance of zero and because your flow is positive (you save money each month), your balance could grow to $10,000 over time.

As we were talking, I was reminded that unless you major in economics or finance, high school and college doesn't prepare you for the world of personal finance. Jessica has most of the tools she needs to manage her finances and she has been doing it for a while because we make our children responsible for their spending as they become young adults. And yet, she found this distinction between flow and balance helpful to understand as she prepares to get out of college and take even more control of her personal finances.

The generation that my kids belong to will have some incredible tools as they start to take control of their own finances. Online banking and web and mobile based personal finance tools that take advantage of the portability of your personal finance data are evolving at a fast and furious rate. But to use these tools, you need to understand and make sense of the data. I think simplifying and demystifying these concepts and this data is key. And I wish that there were more educational resources available to young adults as they enter the working world to help them with this stuff. It's important.