6 Simple Financial Tools | The Wisdom Journal

In physics, there are 6 simple machines that help accomplish work through the application of a single force. I was struck by how different financial tools nest quite nicely with the same line of thought. Here are the 6 simple machines and how they apply to our finances:

The inclined plane is a flat surface with end points at different heights. The inclined plane allows movement of an object up a gradual surface rather than completely vertically. The amount of force needed is greatly reduced at the expense of increasing the distance the object must travel.

How it ties to our finances: The inclined plane is the overall goal of our accumulation of net worth. We start at the thin end and seek to move ourselves up to the higher end. If we start young, it’s a much easier incline to navigate, but if we wait too long, the incline becomes very difficult, the force required multiplies, and we may give up or find that it is impossible to achieve.

The key to using the inclined plane is to start early. Waiting too long means you will have to exert much more force up a steep incline.

The wheel and axle consists of either a wheel turning on an axle, or an axle that attaches to and turns a wheel. It allows users to move objects with little effort since there is a “mechanical advantage” with a small axle and a much larger wheel.

How it ties to our finances:The wheel and axle are like the magical effect of compounding. Once you set the object on to the wheel and axle, little effort is required to move it along your chosen path. The larger the wheel, the easier it is to move.

The key to using the wheel and axle in your finances is to load as much as you can onto the wagon and to think of the size of the wheel as your interest rate. You could also think of the wheel and axle as passive investing. Passive income should have a place in every portfolio. Since little effort is required to keep the wagon moving, you can use your time and energy on other things.

The lever is a rigid object that is used in conjunction with a fulcrum to raise objects through a multiplication of force. With the proper lever and fulcrum, you could pick up an object that weighs 1000 tons.

How it ties to our finances: I see the lever as debt, wise debt. By the proper use of debt, I was able to buy my home and finance my undergrad and graduate school education. Others have wisely used debt to get businesses started. Companies optimize their returns by mixing debt with equity to raise needed capital for expansion.

The key to using the lever in your finances is to make sure you use debt for appreciating assets as much as possible and to never allow yourself to rest while holding that lever. I once saw a lever pop out of a man’s hands and hit him in the mouth, breaking several teeth and severely injuring him. Debt can do that to you as well, if you let your guard down.

The pulley is a wheel with a rope or cable looped over it. Pulleys are used to change the direction of an applied force. You pull down on a pulley and the load goes up. Sometimes several pulleys are used in conjunction with one another and the force needed is greatly reduced. These pulleys are called blocks.

How it ties to our finances: Pulleys are like income streams, the more you use in conjunction with one another, the less force you need to lift an object off the ground. Multiple income streams reduce the amount of capital or force you need to get your financial life where you want it to be.

The key to using the pulley in your finances is to develop as many income streams as possible. Don’t just depend on your job because if you lose it, your pulley just broke. Multiple income streams don’t all have to be huge either. Little things matter and snowflakes make snowballs which can turn into avalanches. Never overlook the importance of those snowflakes!

The wedge is a portable inclined plane and can be used to separate two objects, lift an object, or hold an object in place.

How it ties to our finances: The wedge helps separate you from that one thing that’s holding you back. It might be a car payment that’s too high for your budget. The wedge sells the car to free up monthly income. The wedge is what sells all your unused things on Ebay and uses the money to pay off that doctor bill that’s about to go into collections. The wedge is your part-time job that pays off your first 4 bills to free up monthly income. The wedge is the blogging income you use to take your wife on a romantic 3 day weekend in the mountains.

The key to using the wedge in your finances is to actually use it. Don’t just look at it and think, “Some day …” Sometimes wedges must be pounded in by a sledge hammer.

The screw
is a helical inclined plane. It’s what credit card companies do to you…especially Discover.

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