One of the things I get used to get paid for on a daily basis is was to sit and stare at large amounts of numbers and try to make sense of them. The thing that has repeatedly helped me understand those numbers is to develop some way of visualizing these numbers. It is not a popular method because it requires some initial investment of building an analysis tool. However, it is amazing how well the eyes can process large amounts of information (I hope I never go blind) compared to mentally processing lists like 27.45, 27.43, 26.99, … Even looking at one-dimensional y=f(x) diagrams does less for one’s understanding compared to diagrams that are based on what is being modeled.

I think this approach can be applied to stock market data (work in progress).

I also think it can be applied to personal finance, although that might be overkill. However, I saw some more complex cash flow diagrams from Frugal Retirement that gave me the idea to develop this idea further. You can read more about cash flow diagrams here.

We will proceed in three steps.

  1. First, draw a box for “you”, “job” (more boxes if you have more than one job), “investments” (things that actually pay you money, your house doesn’t count unless you’re renting out a room), “activities” (such as commuting, watching TV, blogging or other hobbies, eating, exercising, sleeping), also draw a box for “housing” (that could include insurance).
  2. Next, draw lines representing the money flows. Try to make the thickness representative of the money that flows between two boxes. For instance, money probably flows from your “job” to “housing” and that is typically represented by a big fat line. Money probably also flows from the “job” to “commuting”.
  3. Now using a dashed line, draw the flows of time. There is probably big dashed lines going from “you” to your “job” and to “sleeping”. There’s also a line going from “you” to “commuting” – however, if you’re a cab driver, there might be a line from “job” to “commuting” instead if you can pick up passengers on your way home.
  4. Finally, use a dotted line to draw the flow of health. For instance, money and time may flow from “you” to “exercise” and health would flow back. If you bike to work, time would flow from “you” to “commuting” and “health” would flow from “commuting” to “you”. If you drive, time and money would flow from “you”.

The challenge here is to devise the categories. They can’t be too specialized, but they can’t be too general either. You want to achieve just the right amount of categorizing and abstracting, where “right” means representative of the underlying reality. Money (representing interactions with other people), time (representing your energy/life) and health (representing your well being) are useful measures. However, many people would probably be tempted to use ‘fun’ instead of ‘health’ for one of their flows.

Budgets are sooo old-fashioned, so start being creative 😉

Much thanks to ML for the $10 donation.

Originally posted 2008-07-07 09:57:32.