systematic framework for the creation of wealth

© Copyright The Financial Fence Pty Ltd 2005

A SYSTEMATIC FRAMEWORK FOR THE CREATION OF WEALTH


The Truth Is:

One of the biggest issues facing the western world is lack of financial literacy.


•We have developed a mentality of instant gratification

•Buy Now, Pay Later

•Many people have become dependanton credit to satisfy their wants

As a Result…


Everywhere you look you can find people struggling to pay the bills

This problem spans whole generations


How can you overcome this?

The Financial Fence® Systemwas created to help you achieve FINANCIAL FREEDOM, Step by Step


INTRODUCTION TO THE FINANCIAL FENCE®


A New Way of ThinkingThe Financial Fence®Way of Thinking


Why we use a fence?

1. Fences are made of two parts :A. Posts that anchor the fence into the ground at a point AND B. Rails that carry the fence over a distance.

2. Fences incorporate Milestones (Posts) and Activity (Rails) in the same analogy.

3. Financial statements have these two parts :A. “Milestones” - Balance Sheet. B. “Activity” – Income Statement & Cash Flow Statement.

4. Fences provide a boundary and security.


The standard two rail fence

MILESTONE

MILESTONE

ACTIVITY

ACTIVITY



CONSUMPTION RAIL

ACCUMULATION RAIL

CAPITAL

FUNDING


Definitions of terms used in The Financial Fence®

THE FINANCIAL POST (MILESTONE)

• Personal Capital– Family Home, Cars, Boats, Furniture.

• Investment Capital– Capital which produces income such as Rental property, shares, superannuation or a business.



INVESTMENTCAPITAL

PERSONALCAPITAL



THE FINANCIAL POST (MILESTONE)

• Net Debt– all items of an interest bearing naturesuch as mortgages, home equity loans, bank overdraft,lease & hire purchase outstanding, credit cards and cash.

• Equity– the difference between total capital anddebt which is a person’s net accumulated wealth.



EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALCAPITAL


The Financial Freedom Equation

SURPLUS

INCOME

EXPENSES

INVESTMENT CAPITAL

PERSONAL CAPITAL

YOURTIME

InvestmentIncome



THE TOP FINANCIAL RAIL (ACTIVITY)

• Personal Income– Income gained from exchanging your personal time for money. e.g. wages and salary.

• Investment Income– Income gained from your Investment Capital. e.g. Profits on a business, rental on property, dividends on shares.


Consumption Rail

Income

PersonalIncome

InvestmentIncome




• Expenses– all items of cost that have no residual financialvalue. e.g. food, clothing, travel costs, tax.

• Interest – the cost of debt from the financial post usuallycharged on a percentage basis.


Consumption Rail

ExpensesIncome minus

Expenses Interest




• Net Income– Total income minus expenses minus interest.


Consumption RailNet

IncomeExpensesIncome minus equals



THE BOTTOM FINANCIAL RAIL (ACTIVITY)

• Net Income– This is carried forward from the end of the top financial rail.


Accumulation RailNet

Income

NetIncome




• Accumulation of Personal Capital– Positive or negative movements of personal capital items. For an item to be capital it must have some residual financial value at the end of a period. e.g. Renovations to the Family Home, Buying or selling of Motor Vehicles.

• Accumulation of Investment Capital– Positive or negative movements of investment capital items. e.g. investing in a business, buying a rental property, buying or sellingshares.



IncomeAccumulation of

Capitalplus

Accumulation of Personal Capital

Accumulation of Investment

Capital




• Net Cash Flow– Net Income +/- accumulation in personal capital +/- accumulation in investment capital.



IncomeAccumulation of

CapitalNet Cash

Flowplus equals


THE FINANCIAL FENCE ®

EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALCAPITALConsumption Rail

Accumulation Rail

NetIncomeExpensesIncome minus equals

NetIncome

Accumulation of Capital

Net CashFlow

plus equals

EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALCAPITAL


The Financial Freedom Equation

SURPLUS

INCOME

EXPENSES

INVESTMENT CAPITAL

PERSONAL CAPITAL

YOURTIME


EQUITY

DEBT

EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALINCOME

PERSONALCAPITAL

NETINCOME

INVESTMENT

INCOMEEXPENSES INTEREST

NETINCOME

INVESTMENTCAPITAL

PERSONALCAPITAL

CHANGE INPERSONAL

CAPITAL

CHANGE ININVESTMENT

CAPITAL

NETCASHFLOW

BALANCE SHEET“AS AT”


NET INCOME STATEMENT“FOR THE PERIOD”

CASH FLOW STATEMENT“FOR THE PERIOD”


CONTROL CHECKS1. TOTAL CAPITAL = DEBT + EQUITY

How The Financial Fence® locks together


EQUITY

DEBT

EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALINCOME

PERSONALCAPITAL

NETINCOME

INVESTMENT


NETINCOME

INVESTMENTCAPITAL

PERSONALCAPITAL

CHANGE INPERSONAL

CAPITAL

CHANGE ININVESTMENT

CAPITAL

NETCASHFLOW






CONTROL CHECKS1. TOTAL CAPITAL = DEBT + EQUITY2. OPENING EQUITY + NET INCOME = CLOSING EQUITY



EQUITY

DEBT

EQUITY

DEBT

INVESTMENTCAPITAL

PERSONALINCOME

PERSONALCAPITAL

NETINCOME

INVESTMENT


NETINCOME

INVESTMENTCAPITAL

PERSONALCAPITAL

CHANGE INPERSONAL

CAPITAL

CHANGE ININVESTMENT

CAPITAL

NETCASHFLOW






CONTROL CHECKS1. TOTAL CAPITAL = DEBT + EQUITY2. OPENING EQUITY + NET INCOME = CLOSING EQUITY3. OPENING DEBT + NET CASH FLOW = CLOSING DEBT



The Financial Fence® helps you to:

•Make decisions in context•Make better decisions which leads to better financial results•See how all the pieces of your financial world fit together•See that not all payments are equal•See how you can use leverage to work for you rather than against you.

Benefits of a systematic framework


Contact usEmail: [email protected]

www.thefinancialfence.comwww.onesherpa.com

systematic framework for the creation of wealth

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