The Dam Analogy

A river and a dam across it is a nice way of visualizing one’s finances.A source of income is like a river.To save a bit of it is like building a dam across the income stream.

In real life dams are used to impound water in times of plenty so that it can be used when water is scarce.Deducting money from a salary cheque to fund one’s pension or investing regularly in a mutual fund  via a SIP , is like holding back water in the time of plenty to use when water is scarce.If a person comes by a windfall,say, by selling a business/ winning a lottery/receiving an inheritance etc. and saves/invests the money safely,it is akin to storing rainwater from a freak shower for use later.

Dams are also used to raise water to aid in navigation or to generate electricity.In the same way by holding back one’s income a person can raise a larger corpus to acquire bigger assets and/or more sources of income;i.e. do more than they would otherwise be able to do.

Dams have sluices through which water can be released downstream in a controlled manner.In the same way many assets/investment vehicles can release a cash flow in a controlled manner to ensure that it can last one or more life times.Think annuities and trusts.

Finally just as the dams took time and effort to build,acquiring great assets to last  many lifetimes takes time,hard work and patience.