EconoShell

Part two: The EconoShell and EconoClock explained:

WARNING TO READER"

If you have never seen a painting of "The Martyrdom Saint Sebastian," it was a popular subject of 17th-century artists. It can be found in its various styles in museums throughout the world.  

The objective of this book is to learn how to manage your money. So, before you spend your cash or tap your credit card, you should know that much of the material can be read in many books in print. Even more, it is available for free on the internet. My contribution to this theme is based on the EconoShell a word I made up.

The simile to St Sebastian's paintings is mentioned because the objective and some of the details in "Tales From The Vault" are, as noted above, the same as other books or online links on money management. However, Tales From The Vault is my creation and is also different from other books, just as all the paintings of St; Sebastian are different.  

Dear Reader: I did not edit the above paragraph regarding Stephen's warning about spending your money on the book. "Tales from the Vault" never became a book. At least not yet. So you can read it for free at your leisure. 

*Saint Sebastian c. AD 256 – 288):  According to traditional belief, he was killed during the Diocletian Persecution of Christians. He was initially tied to a post or tree and shot with arrows. However, the arrows did not kill him. He is later clubbed to death. I have never seen a painting of St Sebastian being clubbed. The paintings of a body full of arrows are theatrical in form and presentation. I have concluded that painting a body used as a pin cushion has a higher dramatic effect and attracts more paying patrons than a painting of a deadly clubbing.

Counting, Arithmetic and Mathematics

Before I describe how to create your EconoShell you need to refresh your knowledge of numbers. .   

The following is a short review of Counting, Arithmetic, and Math. It is not hard to read. First, you learn to count, then you learn arithmetic and then apply arithmetic to math. Higher math such as algebra, trigonometry, and calculus, is not necessary to create your EconoShell. 

 It is Christmas day and my 6-year-old granddaughter is sitting in my lap. She sees I am wearing my 12 days of Christmas tie and asks what the decorations on the tie are. I said it is my 12 days of Christmas tie, and I always wear it on Christmas Day when I sing at the 9:30 Mass. The decorations on the tie are the gifts that are given over the 12 days of Christmas.

"What are the gifts" she asks. and I say, "Well it is a song about giving gifts. Would you like to learn to sing it? It starts"

“On the first day of Christmas, my true love gave to me."

"A partridge in a pear tree.”

“Oh, I know that song, but what is a partridge?”

“It is a large bird, "I said, " but I do not know why it is in a pear tree.”

So, we began to sing the song together and when we finished, she asks

“How many gifts were given altogether?”

 So, we counted them together because she has not yet studied arithmetic

Going home I realized that my Christmas tie is a perfect way to introduce Counting, Arithmetic, and Mathematic. In addition to the difference between cardinal and ordinal numbers.

Each of the gifts is represented on the tie by a picture of say 5 golden rings Each line of gifts forms a pyramid from one partridge in the middle of the tie to 12 drummers drumming near the bottom of the tie,

So, we get 1 partridge;2 turtle doves, 3 French hens, 4 calling birds, 5 golden rings, 6 Geese a laying,7 Swans a swimming, 8 Maids a milking, Ladies dancing, 10 lords a leaping, 11 flutes a playing , and 12 drummers drumming.  

There are three ways to answer my granddaughters’ question

First, we can count going down counting each picture on each line starting with the one partridge. Like we did,

Second, we could have added the number of each gift in order which would be 1+2+3,,,,12. This would be arithmetic because we are adding not counting, and last we could use math.

Mathematics is used to make getting answers more efficiently and uses formulas to find answers, In XXXXfigured out that to find a total of a series of consecutive numbers the following formula could be used Formula for a sum of a series (Sn) equals N*(a1+a2)/2. 

N =number of groups of numbers here it is 12  a = first number in the series which is 1,the partridge  and 2 equals the last number in the series which is 12, 12 drummers,  So the formula would show Sn=12(1 +12)/2  which is (12+144)/2 which is 156/2  which is 78 gifts  It does not matter if you multiply N times a1 and then N times a2 and add them together or you add a1 to a2 and multiply this total by N.  they both have the same number of steps.

Try with 1+2+3 which you can easily calculate as 6 sn=3(1+3)/2=12/12=6 

Of course, using math also requires you to count and to use arithmetic so using the formula for 1+2+3 is more trouble than it is worth. But what if my granddaughter asked how many gifts were given after 5 golden rings but before 12 drummers drumming, well we could count from six geese a laying through 11 flutes a playing or using Arithmetic 6+7+8+9+10+11=51 or use the formula Sn=6(6+11)/2  =(36 +66)/2=102/2=51.   Here it is a push between Arithmetic and Mathematics, but suppose it is a series of numbers from 23 to 56. Now the formula is more efficient and with a calculator to do the multiplication and dividing is very fast.

The application of mathematics, e.g. the use of formulas, is used extensively in Accounting, Finance, and Economics. It will also be useful when you create a budget from your Econoshell.

Terms in the sequence were stated in a formula by the French-born mathematician Albert Girard in 1634: u n + 2 = u n + 1 + u n, in which u represents the term and the subscript its rank in the sequence. The mathematician Robert Simson at the University of Glasgow in 1753 noted that, as the numbers increased in magnitude, the ratio between succeeding numbers approached the number α, the golden ratio, …

THE ECONOSHELL MODEL:

Your “EconoShell” is a word I made up.

Why I created the word "Econoshell"

 During my banking career, I discovered that many of my business clients, sophisticated in applying financial formulas, seemed to have difficulty in budgeting their resources. For most, it was not that they did not know how to budget but rather they failed to see the relevance.  If at the end of the day they had more than they did at the beginning of the day they were satisfied..

Of course, their definition of “day” was determined by their accounting cycle. An accounting cycle is some designated time that starts on say January 1st and ends at some future date. . The ending date could be a month, every ninety days or even a whole year. Because there are 52 weeks in a year some businesses prefer a 13-week cycle because there are four 13 one-week periods in a year.

It does not take a degree in higher math to realize that the longer the cycle the higher the probability of error. U.S. banks are required to balance their cash at the end of each day. This means management must know how much cash came in and how much went out that day. If banks determined how much cash they had on January 2nd, and waited until December 31st of the same year, to calculate how much cash came in and went out during the year, they would have one hell of a time finding an embezzler.

Business accounting is well-known to most professionals who deal with money. But almost everybody, not in business, is familiar with some form of accounting. 

Your pay stub is an accounting document.  Your State and Federal tax returns are accounting documents. Your bank statement and credit card statements are also accounting documents. The receipt you obtain from the gas pump (unless you must go into the mini-mart to get it; but you do not want to) and your deposit and withdrawal from an ATM are likewise, accounting documents. 

 Even if you do not know how to balance your checkbook you know how to read the balance on your bank statement. However, unless you get this information from the ATM, which shows a real balance in real-time, your bank statement may or may not show what you have, Not knowing what you have is why you need to have a system of control. But more importantly, what you have is reduced by what you owe to others.

A simple example; if you buy a new car for $30,000 and finance $25,000 of the cost, you have to put down $5,000.  If just before you bought the car you had $6,000 in cash, after the purchase you only have $1,000 left. 

To keep the example simple, I am not including tax license or insurance costs. The minute you take possession and drive off the lot the car is now used and the value falls $2,000. Your car is now worth $28,000 and you still owe $25,000. So, at the beginning of the day, you had $6,000 in assets with no debt and at the end of the day, you have $29,000 in assets and a $25,000 debt. You lost $2,000 from your EconoShell

An EconoShell is another way of introducing accounting without all the accounting jargon. Believe it or not, the structure of your EconoShell, described below, is identical to the most sophisticated financial statements.

“Nothing Happens until something moves” Albert Einstein.

Before I describe the EconoShell Model, you must understand how to measure anything that moves. You need a beginning point, a passage of time, and an ending point. It will be necessary to apply this concept to understand how money works.

A real-life event that demonstrates this concept is a 100-meter dash, with several runners at the starting line. A photograph of the runners in their starting positions is taken when the gun sounds. This sets a fixed point in time. Also, at the sound of the start gun, a movie camera begins to record the race. When the lead runner crosses the finish line another photo is taken and the video stops recording. So we have the location of the runners at two fixed points of time and a record of their location between these two fixed points of time.

This is a good analogy for one time period, * but not for two consecutive periods. An analogy for two consecutive is like the foot race example only I will use an auto race. 

The cars all line up in their start positions. Just before the red light turns green, a photo of all the cars’ locations is taken. Then again, the video camera begins to roll, the same as the foot race.  After 20 minutes an accident occurs and the warning flag instructs drivers to hold their positions. At that moment, a photo of the cars in their respective position is taken. This is the first period created at the 20-minute mark.

 As soon as the go sign is lifted, another photo is taken of all the cars in their respective positions. If nobody cheats the positions of the cars in the second photo should match. This is also the beginning of the second period.  At this instant, a second video begins and continues until the winner crosses the line. The video stops and a third photo is taken documenting the position of each car at the end of the race. This example shows two consecutive periods and three fixed points in time.

The EconoShell uses the word” duration” to mean the passage of a defined period.

The big picture.

One of my favorite bedtime stories was the parable of the Grasshopper and the Ant. If you read it or had it read to you, you may remember that the ant worked hard gathering food and stored some of it away for the winter.

The Grasshopper lived off the food that was currently available. Instead of storing food, the Grasshopper chided the ant for not lounging around in the beautiful sunshine.

The Grasshopper did not think about food scarcity during the winter and died of starvation. You do not often get death in a parable, so it must be an essential lesson. Later we will revisit this parable but will update it to the year 2010.

Money can usually be converted to food or any other product. Although we can store food like the ant, we are more likely to hold money. On the other hand, the Grasshopper spends all its money and saves nothing for a rainy day.

Not in the parable is the invention of the credit card. What would the Grasshopper do if a credit card was available?

I have found that success in managing money is a function of four significant variables. Further, each of these four variables is subject to various levels of variance. *

The first variable is our ability to generate income. The second is the ability to recognize our limitations and an acceptance of living within these limitations. The third is the level of effort and skill in accounting for our finances. The fourth is our attitude in dealing with luck, whether good or bad—each of these impacts other variables, determining our financial status over time.

Link Variables and Variance.

*Before I discuss each of the above variables, I would like to first talk about variance.

. In its simplest form, variance is different from what we expect. If we receive a 10% bonus every year for five years, then receiving a 5% bonus in year six would be a negative variance from our expectations. Variance can range from small to large. Be positive or negative and range from infrequent to frequent. Although most people know what variance is in financial matters, it is not paid much attention in the planning process. It is essential to realize that even though you cannot predict the effects of variance, they should not be ignored. It is not a sign of a negative personality to ask, "what is the worst that could happen?" It is a characteristic of a good money manager.

I include the concept of variance in the discussion of the four variables because variance usually impacts what happens to you, and you need to plan for it. Variance also has a precise statistical meaning, which can be a powerful tool in managing your finances. But statistical formulas are beyond the scope of this forum. For those interested, I suggest you read one of the many books on how to manage risk. (See Bibliography)

In capitalistic societies, the ability to generate income is a significant component of who we are. For some people, it is the only way they measure themselves and others. Because of this, thousands of self-help books will provide bromides that will "make you rich, thin, or beautiful" The critical point here is that we all have limitations. Many of these are reflected in our ability to generate income. 

The ability to generate income sets the upper limit on what we can buy. When we go beyond this upper limit, the only thing that can save us from financial ruin is good luck. It should be pointed out that inherited money or trust fund babies are subject to the limitations of the funds available. Although this is not income in the ordinary sense, it is income to them.

Determining this upper limit will be the starting point of your financial lesson.

Recognizing our limitations and accepting them as our limit is a two-edged sword. Many of us have been told we can do whatever we want if we work hard enough and stay diligent. We want to believe that we can always do better and will eventually be rewarded. These are admirable qualities that, unfortunately, were lost on the Grasshopper.

 It could be argued that to accept our limitations is to give up. I do not agree with this philosophy; however, I do not believe that a homeless alcoholic can turn his life around and go to Harvard Medical School. I do think he can turn his life around and become self-sufficient. I think getting into Harvard Medical is easier than escaping from alcohol addiction. The point here is there are limits.

You are not giving up by knowing your limits because limits are one of the things that are subject to variance. Ask any weekend golfer who finally breaks par if he plans to go on tour.

It is this variable where most of our financial troubles begin. Because most people do not know other people's income, they can only establish a financial identity by showing other people what they have. I know you know what is coming, so here it is. Most of us get in financial trouble because we borrow money to enhance our financial identity before we have earned it.

You have undoubtedly heard the saying "We spend money. We don't have to buy things we don't need to impress people we do not know." But the allure of perceived success is powerful stuff, and unsolicited credit cards flooding the economy make lifestyles of the rich and famous available for all. The scary thing is that once you start spending the money you did not earn, it is hard to give up the image it creates because you believe that this is your real financial identity.

When reality(winter) comes, you are looking at financial death

One of the characteristics of being rich is the ability to make everyday purchases without even considering if there is money to cover. A rich person can buy the most expensive low-end items like Godiva Chocolates or fly first class.

Wealth usually has little impact on anyone's financial future. However, the ability to mimic this behavior is made possible by using credit cards. Just flip out the card and spend $50 on a box of chocolates. Thus you can behave just like a rich person. The problem is that these purchases begin to mount in total. The credit card companies count on this behavior. In the module where I discuss the adverse effects of debt and credit cards, you will see that the banks have included your default in their business model.

You are probably unaware of how much money you will need to earn to pay for the chocolates.

MATH Example here:

As a game, I encourage you to complete the following instructions and by the end of the chapter, you will see that it is not too difficult to learn accounting if you wish.

You do not need to learn accounting, however, to create a system to manage your money. But to effectively manage your money you need to have the desire to create and the perseverance to maintain a budget. 

Put Letter to John Here

So Let’s start

Draw a square.  This is your EconoShell and will be unique to you. Your Econoshell represents your economic life and begins when you are born and disappears when you die. The only constant that affects your EconoShell is time.  Although every individual is given a different amount of time, the rate of time passing is the same for everyone. The element of time will play a major role in your success in managing your money. I will eventually debunk the often-quoted phrase “time is money”, NOT

Now back to the model:

Next, divide the square into 9 equal boxes.

Above the First 3 boxes on the left write the word Alpha, Above the middle 3 boxes write the words Alpha Omega, and above the three boxes on the right write the Word Omega.   Now label each of the 9 boxes starting with the upper left-hand box as Zones 1 through 9 as Shown

 Alpha       Alpha -Omega         Omega

  Zone 1              Zone 4                  Zone 7

  Zone 2              Zone 5                  Zone 8

  Zone 3             Zone 6                   Zone 9

To repeat: The structure of the Econoshell

THE THREE vertically stacked BOXES ON THE LEFT LABELED zones ONE, TWO AND THREE ARE TOGETHER CALLED THE ALPHASTACK

THE THREE vertically sacked boxes IN THE MIDDLE-LABELED zones FOUR, FIVE AND SIX ARE TOGETHER CALLED THE ALPHA OMEGA STACK

Lastly, THE THREE Vertically stacked boxes ON THE RIGHT labeled zones SEVEN, EIGHT, AND NINE are THE OMEGA STACK

I used the word Alpha as the label at the top of the Alpha Stack because Alpha is the first letter in the Greek Alphabet.

I used the word Omega as the label for the Omega Stack.  It is the last letter of the Greek Alphabet.

In the Bible it is written I am the Alpha and the Omega which means “I am  the beginning and the end”

But what about the AlphaOmega Stack between Alpha and Omega? This is the most important Stack in your EconoShell. It has duration, it is the designated period between Alpha, (the beginning) and Omega (the end) It is not part of the Bible quote probably because the end has not yet occurred.

Now that the EconoShell and its 9 boxes have been labeled Zones 1 through 9 what do the Zones do?

Things you OWN are in zone 1.

Anything you OWE is in zone 2.

Zone three is nothing more than what you Own in Zone 1 less what you Owe in Zone two.

Using the car purchase example at the beginning of the day your Zone One owned  $6,000 in cash and Zone 2 owed nothing. Before the day was over Zone 1 had $1,000 in cash, a $30,000 car for a total of $31,000 and Zone 2 owed $25,000.

Since Zone 3 is Zone one minus Zone 2 Zone 3 is still $6,000 ($31,000 minus $25,000.

Of course you are going to ask about the $2,000 loss.  We will get to that in a moment.

Because we have not set a period of time the AlphaOmegaStack has no entries

So there is nothing in Zones 4 and 5. Or 6

Also because we have no ending period Zones 7 ,8 and 9 does not exist yet.

In order to have a complete picture of the EconoShell we need to create a bigging date, a fixed duration of time and an ending date.

Assume on June 1st, 2010 you get your first job. You own nothing and you owe nothing So  AllphaStack zones 1,  2 and 3 are blank.

To create and develop an EconoShell we are going to assume three consecutive AlphaOmega durations each lasting 7 days.

We will also make the work economy very simple.  You work a five day week in a pear orchard. You get paid ½ of a pear per hour for an 8 hour day, During the first week you earn 20 pears and consume 14

The Zones in your AlphaStack on June 1, 2010 will be the same as your Zones in your OmegaStack on May31,2010. Both will have no entries in Zones 1, 2 and 3.

This is the 9 box EconoShell for the first week

During the Second week you work overtime and earn 4 extra pears

But you leave 5 pears in your car and they go rotten.

This is your EconoShell for the Second Week

During the Third week you buy a hat to keep the sun off your head. It will cost 9 pears

But you do not want to spend 9 of you 11 pears to buy a hat. Since you

Will be earning more pears in the future you decide to spend 4 pairs and borrow 5 pairs from your employer. He does not charge interest because he feels the hat will help you pick more pears. You earn and consume the same as the first week except you donate 2 pears to a local charity. .

Alpha        AlphaOmega  Omega Stack

 11 Pears

  20 Pears

So at the end of the 3rd week, you have a net worth in Zone 9 of 6 pears and one hat.

If the hat has a value of 9 pears, what you paid by both a loan and pears, you could say you have a net worth of 15 pears.

20 pears in Zone 1 and 5 pears in zone two for a total of 15 pears.20 pears you own less 5 pears you owe.

However, is the hat really worth 9 pears. This is where an understanding of value and how to account for it becomes more complicated.  Remember you lost $2,000 when you drove the car off the lot. This is the same problem.  If you assume that the hat has no value after you buy it then you have a choice on how to account for it. You can expense it over time at say one pear a week for 9 weeks or you can write off the whole hat as an expense in the 3rd week. All entries will be in zone 5.It is easy to calculate the effect on the OmegaStack in week 3 if you expense the full cost of the hat in the  3rd AlphaOmega duration

This is the foundation of the EconoShell, Zone 1 is what you own at the beginning of the First AlphaOmega Duration. 

Zone 2 Is what you owe at the beginning of the first Alpha Omega Duration

Zone 3 is the total of Zone One minus zone 2

Zone 4 is what you obtain and own during the entire AlphaOmega duration

Zone 5 is where you enter a reduction of Zone 1 or an increase in Zone2,  to acquire, a hat, or pay for food,

Zone 6 is either an increase, (gain)  or a decrease (loss)  and is calculated by subtracting Zone 5 from Zone 4.

At the of the Alpha Omega duration Zones 4 and 5 are zeroed out, the gain or loss is recognized as an increase or decrease of Zone 9.

Alpha        AlphaOmega  Omega Stack

 11 Pears

  20 Pears

6

Pears

 Empty

 14 Pears

2 pears

9 Pears

 5 Pears

  11 Pears

 Minus 5 Pears

1 pear

If you believe the hat has no value then during the 3rd week the net worth of Zone 9 goes from 15 pears to 1 pear because you have a 5-pear loss and you still owe 5 pears to your employer. Here is how you calculate the loss. You earned 20 pears, you consumed 14 pears, you donated 2 pears and you expensed the hat for 9 pears. That is a 20-pear income, Zone 4 with a 25-pear expense Zone 5.

This is the foundation of the EconoShell, Zone 1 is what you own at the beginning of the First AlphaOmega Duration. 

Zone 2 Is what you owe at the beginning of the first Alpha Omega Duration

Zone 3 is the total of Zone One minus zone 2

Zone 4 is what you obtain and own during the entire AlphaOmega duration

Zone 5 is where you enter a reduction of Zone 1 or an increase in Zone2,  to acquire, a hat, or pay for food,

Zone 6 is either an increase, (gain) or a decrease (loss)  and is calculated by subtracting Zone 5 from Zone 4.

At the of the Alpha Omega duration Zones 4 and 5 are zeroed out, the gain or loss is recognized as an increase or decrease of Zone 9.

During the AlphaOmega duration it is also possible to increase and/or decrease Zone 9 by completing transactions within zones 1 or 2 or between zones I and two.

In Zone one it is possible to exchange one asset for another. EG Trade pears for apples

In Zone 2 it is possible to change liabilities, EG. Exchange the pear debt for an apple debt.

And lastly between Zone 1 and Zone 2. Pay the pear debt in zone 2 with pears from zone 1. Or buy more pears by borrowing pears from a pear bank and buying apples.

In Chapter(x) all of the above concepts will be expressed in money terms, not pears, and the EconoShell Model will be converted to accounting terms.  You will learn that almost every accounting transaction that occurs throughout the world can be recorded in zones 1, 2, 4, and 5 and end up in zones 6 7,8, and 9. During the Alpha Omega Duration.  Because “Nothing Happens Until Something Moves”

  Zone 3 was determined during the prior AlphaOmega Duration.

T