=Intro bookend=

Hi. 

In this video, we will discuss the basics of personal money flows.

=Learning objectives=

After this lesson, I hope you will be able to do the following:

* Describe the main structure of personal money flows
* Explain saving and borrowing

and

* Distinguish between good and bad debt

=Money flows=

From a high-level view, money flows are very simple.
You have some money coming in as income, you also have some money going out, as expenditures.

At the end of the day, if you have some money left over, you have a surplus, to do with as you please.
If you have spent more than you had coming in, you must have taken some extra money from somewhere else.

That's all there is to it. Now, let's dig into some more details.

=Inflows=

First, let's talk about inflows.

Your inflows, or income, is money that you generate via some kind of productive activity during the period. Often when talking about income, we talk about monthly or annual income.

Common sources of income are:
First, trading your time for money - that's when you trade your time and skills to someone in exchange for a wage or salary.
Second, entrepreneurial activity - that's when you run your own business operation and generate a profit. 
The main difference between the two is that your compensation in the first case is usually rather fixed, in that no matter how productive you are, you generally don't make much more or much less. In the second case, you keep as much profit as you generate, but also bear the risk of not generating very much or even any money.

Finally, you can generate income via passive investments - that's when you offer your money to someone else in exchange for an expectation of even more money later. 
You can either lend money in exchange for some bounded fee, interest, or become part-owner of a business enterprise and get proportional share in future profits, as dividends.

Again, this is a very high-level overview, there is a lot more to be said about all of these, but this will suffice for the moment.

=Outflows=

The outflows from your income can be broken down into these three major groups:
Taxes - this is money that you pay as a fraction of your income to pay for various government services and activities
Current spending - money that you spend for all kinds of stuff - food, shelter, entertainment, health maintenance, and so on.
Past spending - money that you spend to pay for stuff that you have consumed in the past, but have not paid for yet, because you borrowed someone else's money to pay for it earlier.

=Surplus/shortage=

So what happens if you end up with a surplus for the month or year? 
Good for you! You have extra money to do with as you please. 
You can just put it in a safe place for future use, 
you can invest it - that is, buy some productive assets that you expect to generate a return of even more money,
and of course you can just give it away, if you are feeling generous.

If you end up spending more than you had coming in, you must make up the shortfall somehow. 
Either you have to dip into a previously-saved pile of money from your earlier surpluses,
or you have to borrow money from someone else - and promise to pay it back with a little extra, later.
You can also hope for someone to just give you free money - but don't count on it.

=Money flows=

For the visual thinkers, let's put this into a flow chart.

Here you are, and you are getting some money as income. 
You can use your income to buy all kinds of stuff. If you spend exactly as much as you earn, that's the end of the story. And you better hope you have some more income in later periods, or you'll go hungry.

If you spend more than you earn, you have to rely on borrowing money to finance your current spending, thus accumulating debt.
Debt has to be repaid later, with interest, so some of your future income will have to go toward debt repayment, before you can use the rest of it to buy stuff. In essence, you have traded away some of your future income to other people. Other people thank you.

Alternatively, maybe you spend less than you earn. Then you can use your surplus income and invest into productive assets. In future periods, then, these assets will generate a return and give you more income. In this case, other people are in effect giving you their money. Be sure to thank them.

I hope you can see that all else equal, having debt is undesirable, because you in essence let other people siphon away some of your future income.
On the other hand, having assets is quite desirable, because you get to claim some extra income from other people.

And this is personal money flows in a nutshell.

This graphic is only a snapshot in time. Let us now look explicitly at the time dimension.

=Present and future=

Let's say you anticipate a steady 100 dollars per year of income over the next 10 years.

If you spend exactly what you earn, you get to consume 100 dollars worth of stuff every year. This is our baseline.

Now, let's imagine that in the first year, you decide that you want to spend more than 100 dollars, so you borrow another 90 dollars, and spend 190. 
You get to have a pretty good time in the first year, but because debt has to be repaid, you have effectively sacrificed your future spending power. Assuming you repay the debt in equal chunks over the next 9 years, you only have 90 dollars left every year hereafter to do with as you please.
In reality, it is even worse, because nobody would lend you 90 dollars and ask you to just give them the same 90 dollars back. They will want some extra money on top of the original 90, to make it worth their while. So your total future consumable money will go down by more than the 90 dollars you consumed today.

On the other hand, if you decide to consume less than 100, maybe saving and investing 50, your available cash will go up in subsequent years. In reality, this will be even better, because the investment returns your savings generates will further increase your future cashflows.

You can see that when you borrow money for present consumption, you are essentially stealing it from your future self, and your future self will have less money left for him or her self.

Does that mean that all debt is bad? Not necessarily. 

If you borrow money to invest in producive assets, assets that improve your future productivity, you can actually come out ahead in the future, even after repaying the debt with interest.
What are some examples of productive borrowing?
Maybe you borrow money to invest in a college education that increases your future earning capacity, 
or a car that enables you to search for a job in a larger geographic area, 
or a cooking class, that enables you to spend less money on food.

=Quiz 1=

Now, consider this question. Which of the following seem like good reasons to borrow money?
Choose all that apply.

=Quiz 1 - answer=

None of these are necessarily black and white - one needs more detailed information to really decide whether these items are "good" or "bad" reasons for debt. 
But speaking in generalities - education to improve future earnings, assuming sufficient improvement to justify the cost, is generally a net positive.
Investing money in a computing device, if you don't have one, is also generally very helpful and improves productive capacity.
Borrowing money to replace your existing functional car with a newer model is probably a waste, and your future self won't thank you for it.
Paying for a house to reduce your future housing expenses could also be a net positive for you, assuming that future savings are sufficient to justify the cost.

=Good vs bad debt=

To sum up, then, borrowing money for present consumption is generally bad for your long term financial health.
Borrowing money to invest into improving future productivity, to generate future savings or income, generally pays off, assuming future improvements are commensurate with the initial cost.

=Additional reading=

This was the nuts and bolts of personal money flows. So far we've talked mostly in general terms, in the next video, we will look in detail at paycheck deductions and budgeting.

For more interesting reading, try doing a search for "avoiding debt" on your favorite search engine.

=Attributions=