Updated: 5 days ago
Sometimes even the most seemingly complex subject, like money, can be simplified to follow the laws of nature.
I'd like to take a Zen approach to visualize the concepts of a balanced budget. I call this "The Waterwheel of Money and Happiness".
Imagine a lake at the foot of a mountain. The lake is glacier-fed by pure snow which falls on the mountain. At one end is a gate to a canal, which you control by turning a crank attached to a gear which opens or closes the gate and controls how much water leaves the lake and fills the canal.
The canal leads to a divide at a waterwheel and waterfall. The water going over the waterfall continues down the canal. On the other side is a waterwheel, where the canal feeds through, spinning the waterwheel and generates energy for your house. After passing your house, the canal spills into a small river, which curves down the countryside.
The mountain is your level of ownership.
The snowfall in the mountain is your income created by ownership.
The mountain lake is your cash.
The canal is your spending.
The gate, controlled by a crank, is your spending level.
The canal leading to the waterwheel at your house is spending needed for happiness.
The canal leading to the waterfall is spending not needed for happiness.
When you spend money, you are either opening or closing the canal gate based on your spending level. You need to spend a minimum amount to be happy and meet your basic needs. The waterwheel takes care of your home, utility, transport, health and grocery bills at the very minimum.
If you open it too much, you'll spend too much money and the lake drains away completely. Now you can't even keep the waterwheel going and your house goes dark until you wait long enough for the glacier to melt enough to start filling up the lake again, up to the point where it begins filling the canal.
If you open it too little, you spend too little money and the water wheel can't turn fast enough to keep the lights on in the house.
The balanced budget for happiness is to spend enough money to keep the waterwheel turning, but not so much that it's wasted by sending too much over the waterfall. If the amount flowing out is more than what is flowing in, it drains the mountain lake.
What if you do this right, and fill up the mountain lake completely? Here's the twist: you can then upgrade your mountain (ownership) by investing the money. The bigger mountain now generates more snowfall (income) and fills up your mountain lake even faster than before.
Debt and The Waterwheel
How does debt relate to this visualization? Debt puts a drain hole at the bottom of your mountain lake. The higher the payments, the bigger the hole. If your debt payments are too high relative to your income, the hole will become too big for your income to even fill up. The drain hole, not surprisingly, is piped underground to fill the debt owner's lake.
This is why even wealthy celebrities with high incomes who try to chase happiness beyond their spending abilities are putting a huge drain hole in the bottom of the lake, while at the same time opening up the canal lock completely. This is clearly unsustainable.
The path of least resistance is to not pay the debt, but this amounts to plugging the drain. If the debt drain hole isn't paid off each month and you avoid it, the drain hole gets bigger. Once it's unblocked, it drains even faster than before you plugged it.
The other temptation is to borrow from your retirement. That's like mining off the top of the mountains just to get the snow faster instead of waiting for it to melt. It ultimately costs much more income the long run. It’s killing the Golden Goose to try and get the gold inside, only to find that you've destroyed your future golden eggs.
To get rid of the drain hole, you have a few options. You can close the canal lock to focus only on spending needed for happiness, add more snowfall (income), and change out to a smaller drain hole of debt if you can.
How Much does Happiness Cost?
The reality behind this visualization is that it takes an understanding of happiness itself to know how to change a lifestyle to keep from sending too much of your precious time, traded for money, over the waterfall. However, economists' studies have long shown that you don't have to be wealthy, and certainly not living a fancy lifestyle.
Cost of living and culture may vary, but these studies show that happiness requires enough to cover your cost of living and a middle-class lifestyle. Beyond this point, extra spending does not improve your happiness.
Not only that, but having the stress of financial difficulties removed by filling up the lake gives you the flexibility to operate your lives without the worry of imminent bankruptcy. Investing this money creates consistent snowfall income which acts as a safety net, which boosts happiness significantly.
In fact, you’ll find that the countries often ranked as the happiest (see the World Happiness Report) provide the freedom for their citizens to build ownership and have a safety net simultaneously. Because we generally don’t live in the top-ranked countries, we should invest and create ownership to fund the “happiness shortfall” ourselves.
If you enjoyed this article, please subscribe, share, chat with us in the Forums, or leave your thoughts in the comments below. Join our Golden Goose Guide community!
-Golden Goose Guy
Previous Article: House Sitting at a Magnificent English Estate