Block out your Finances.

As a visual learner, I skip text and go straight for the pictures visuals, diagrams, and graphs. Recently, a chain of bloggers created Sankey diagrams as a tool to help visualize money flow through our accounts.  Sankey diagrams have such a logical format that explanation is hardly necessary.

Another effective way to visualize finances uses blocks drawn to scale representing income, assets, and debts.

The block method can create helpful representations using graph paper, a straight edge, and a calculator.  

I’ve read many times that personal finance is personal, and this format is flexible. I’ve created my own block diagram as an example.  My graph paper drawing was a little sloppy, and I spent some time creating a computer generated diagram.

1 block = _____$

Each block represents a set amount of money.  Large shapes are more valuable or costly than small shapes.  Once an appropriate block to money ratio is chosen, everything fits onto a single sheet.  If blocks are valued too high the paper will look empty, but too low a value per block will cause assets or debts to run off the page.

After several attempts, I chose a value per box that worked for me, and wrote it onto the graph paper.  In my case, a block is equal to a paycheck.  Mrs. JumpStart and I get paid twice per month for 10 months.

Assets and debts.

The solid horizontal line makes an important distinction.  Blocks above the line are positive representations of income and assets, while everything below it represents debt.

The format is flexible, and the horizontal line could be shifted.  A recent graduate with student loans may shift the line higher to make room for debt.  Someone close to FIRE through minimalism might put their line near the bottom.

Income and accumulation.

Everything on the left of the dashed vertical line is yearly income. Everything to the right has been accumulated in the past.

For my situation, I consider 529’s, tuition money, and summer savings to be already spent, and therefore did not include it. Our cars wouldn’t have been more than a few blocks, and I left them off as well.  I did not include credit card bills, because they are paid in full each month, in our household.

Even though we’ve got a solid estimate on our pension values (thanks Actuary on Fire), I slid it off to the side.  The pensions are not guaranteed yet, and they will never have a sale value, but they drastically affect our financial situation.

Questions.

Constructing the diagram is a little tedious, but once completed it places scale on our financial picture, and produces questions.  My mind immediately begins shuffling the positive blocks into the holes attempting to cancel the negative blocks.

What if I sell the townhouse and pay most of the home mortgage off?

Some real estate bloggers who would recommend refinancing the beach townhouse, cashing in some equity, and leveraging a second rental property.  Should I?

After 23 years, my taxable investment account looks small compared to the real estate.  Should I be disappointed with our progress?

Some of the questions have concrete answers after some calculations.

How many blocks are being saved per year? Currently only 3 blocks.

How many blocks are sent to Radford University?  9 blocks.

How many blocks added with an 8% stock market increase this year? 10 blocks.

What about a 25% stock market correction? 33 blocks destroyed.

Our monthly mortgage payment is less than half a block, but only a third of that reduces the principal.  How many blocks are reduced by a year of mortgage payments? 3 blocks.

Possible enhancements.

It would be easy to go crazy with color-coding.

The income blocks could be colored to represent money required for fixed bills like mortgage payments.

Add a time equivalent to block ratio equation.  It takes about 9 work days for me to earn a block.

Whenever loans for a large purchases are being considered, they could be added to the diagram.

Some people only need a spreadsheet with a bottom line to make conclusions, but I found this visual aid helpful.  Let me know what you think in the comments.

 

Posted in Family finances.

7 Comments

  1. This has been a cool trend to watch. If I saw numbers trending comparatively positively in comparison to what I thought was my primary goal, I’d probably just focus more efforts on the thing that’s going well while still remaining diversified.

Leave a Reply