Thursday, 15 June 2017

The Working Capital Robot.

How do we know where we stand in life financially? Do we navigate by net worth? By cash or by some other measure?

I think we should adopt a new approach. Once we understand the working capital of our life then everything becomes simple. One way or another the benefits are for life.

The problem with measuring our progress through net worth is that it includes items that we cannot spend (such as our home) and it includes inputs that are not of our own doing. If our home rises in value we appear to be doing well but this is an illusion and we may in fact be stagnating or going backwards.

If we restrict ourselves to the cash in our current account we are also misled. Most of the money there has already been committed to bills that will arise during the month and so the money is not truly ours. If we use cash as our measure we will always be in the red at the end of the month.

A compromise is working capital- this is money that is available in a deposit account but that is not committed to a specific purpose. This is the money available to invest and is the only truly useful measure.

I will post my working capital to the right of the website.

No comments:

Post a Comment

I moderate the comments for spam but welcome contrary viewpoints.