The Flow of Money

Liquidity is a term used to describe how easily an asset can be converted to cash. Flow, as in cash flow, describes the direction and exchange of money for goods. Interesting how these money terms are related to water and its motion. When money was invented, it was not meant to be still, it was meant to move. I want your loaves of bread, but you don’t want my scarves. Another person wants my scarves, but I don’t want their baskets. And so instead of one massive exchange process to try and make everyone’s possessions move to the right person while receiving equal and desired items, we use the go-between of money to represent an agreed upon value.

When I would create my brewery’s monthly cash flow spreadsheet, I took all the transactions on our credit cards and banks statements and split them by category. Then the categories were organized, starting with money flowing in, and followed by money flowing out. The goal, of course, was to have a larger wave flowing in than out each month, creating a positive cash flow. These repetitive waves began to create patterns in our seasonal business. During the summer the waves of money flowing in was greater, and in winter the waves of money flowing out was greater. The seasonality became an annual change that we survived by planning ahead and keeping enough savings to last through the winters.

Let’s continue this analogy of “money as water” as we look at personal finances. While my cash flow did not have the same degree of seasonality as my business did, there were months when more would flow in and months when more would flow out. Imagine with me that the money I have held onto, through various asset locations, fills up a lake. I imagine my lake of money in the Cascade Mountains, surrounded by granite rocks and pine trees covered in moss. My income is the money filling the lake and my expenses is the money flowing down a river. While I worked, I was spending my days carrying buckets of water upstream and dumping them in the lake, so the river can keep flowing and the lake stays filled. I also spent time carving out paths in the mountains above my lake, so money could flow in naturally through passive income streams. As with rainfall or snow melt, the rate of returns of passive investment streams is not consistent. Perhaps it’s a drought year, hopefully it’s an El Niño year, but either way the lake needs to stay full enough that my river will not run dry. I also need to make sure my river of expenses isn’t too wide or deep and draining my lake too quickly. The river will naturally erode slowly and widen its banks due to inflation, which is out of my control. But I can’t also let it be dug deeper because of lifestyle creep, lest the flow increase beyond the replenishment rate.

The goal of reaching financial independence is to be able to stop carrying buckets of money upstream to keep the river of expenses flowing. Either you have filled your upstream lake with enough money that it can slowly drain and never run dry in your lifetime, or you have large enough cash flow streams coming into your lake to match the river of expenses flowing out. And then when you are able to stop carrying that bucket, you can flip it over, take a seat, and just enjoy the beauty around you.