Wednesday, May 18, 2005

The elements of The Financial Fence® - Part 1

One of the difficulties that I find is breaking down some of my complex thoughts into bite size pieces so people can understand what it is I'm on about. The Financial Fence® journey is now four years old and so often I forget that for some people this might be the first time that they have even heard of it. So over the next couple of days I've dcided to try and go back to basics and look at each of the elements of the fence and put it as simply as possible. We're going to cover the financial post, and each of the financial rails. The financial post is actually made up of two pieces: 1. Capital - this is made up of Personal Capital and Investment Capital 2. Funding - this is made up of Net Debt and Equity In life all we see is the capital. We never see the debt and equity. Think about it. You see someone driving down the road in a Ferrari. First thought - they must be doing well. Then you see someone driving down the road in a Commodore. First thought - they are doing about average. But let's say for instance the Ferrari has a capital value of $200,000 and the Commodore has a capital value of $40,000 And let's say the person driving the Ferrari has a loan on it of $180,000 and the person driving the Commodore owns it outright. So who is more wealthy? At a glance everyone would say the Ferrari owner but on more indepth investigation it is the Commodore owner. The Ferrari owner has Capital $200,000 debt of $180,000 and equity of $20,000 The Commodore owner has Capital of $40,000 debt of zero and equity of $40,000 So don't always look at what's visible. Look at how ALL the pieces are working and remember the formulas for the financial post Capital = Debt + Equity

http://www.financialperception.com

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