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Thursday, August 20, 2015

Investing In Yourself

When we think of “investing” often what comes to mind is the stock market, ‘Mad Money’ or the Wall Street Journal. If we think a little deeper (or impart wisdom on the next generation) we may think of college education. But I would say that most people never spend much time even thinking about their overall direction in life, much less investing in the assets that will get them to their destination. 

In broad terms, I hope to define some specific assets we all have, that go a bit deeper than simple finances. 

Human Assets
At the end of the day, Human Assets are the most important, though we hardly treat them as such. The most important above all? Time. Dr. John Izzo puts it succinctly in The Five Secrets You Must Discover Before you Die: 
“There are two fundamental truths of a human life. The first is that we have a limited and undefined amount of time—it may be 100 years, it may be 30. The second is that in that limited and undefined amount of time we have an almost unlimited number of choices of how to use our time—the things we choose to focus on and put our energy into—and these choices will ultimately define our lives.”
Human assets are internal. They are the skills and abilities we spend time mastering. Human assets are the knowledge and wisdom accumulated by experience. And finally time is the Human Asset that we can choose to spend on the things we deem worthwhile. How do we invest in human assets?
  1. Educate ourselves. Often the purpose of education is to build up knowledge that we can trade for money (via a job). But deeper than that, wisdom has no price tag, and it improves our lives both at the office and at home. 
  2. Improve skills and abilities. These skills are limitless. From skills that produce joy (surfing, cooking) To skills that are useful, (fixing a car, repairing a wall, or roofing a house) these skills can directly improve our lives. 
  3. Make time. Often we get carried away with whatever is in front of us, be it Netflix or Facebook. We are always hurrying, from work to practice to home again, but we never arrive. 
Social Assets
It’s interesting to watch the evolution of social assets – on one hand, we are told professionally that business depends on relationships, to build soft skills, and to build your network. Yet on the other, I wonder if we have ever been so alone. Glued to a screen, we have let our social skills deteriorate in the wake of individual entertainment (hello Netflix binging). 

Yet the relationships with those around us tend to be some of the most powerful forces we have in our tool belt today. Whether it’s to hold us accountable to a diet, or to find a potential spouse, or even to find an identity, our social assets are the relationships that we turn to for help. But how do we even measure our Social Assets?
  1. Spouse/Immediate Family. Your family is probably your most important social asset. They are the ones that know you the best, and for the longest time. They are often the ones who are there unconditionally, and want the best for you. 
  2. The Inner Circle. These are deep – the ones you go to for guidance. They could be family or friends, mentors or accountability groups. 
  3. Outer Circle. These are your friends and family that are in your life, but you might not consider going to for guidance. 
  4. Professional Network. Colleagues, partners and acquaintances – these relationships are resources for personal and professional growth. 
The methods of expanding your network and deepening your relationships is far beyond the scope of this post. But if there was hope I could convey for you, it is that you might be intentional with your relationships. That you invest in them, nurture them and care for them. I’ll leave you with this gem from Mitch Albom’s Tuesdays with Morrie:
“In the beginning of life, when we are infants, we need others to survive, right? And at the end of life, when you get like me, you need others to survive, right? But here’s the secret: in between we need others as well.”
Capital Assets
I’d like to separate the word capital from the idea of money. Instead of dollars, Capital Assets are the things that we own that help use produce. A capital asset would be a lawn mower, an egg beater, or even a pen. These are the items that we own that we use to produce. Owning a lawn mower allows us to achieve our end goal – a pristine looking lawn. A solar panel is even better – it provides us value that we would otherwise have to work and pay the energy company for. 

However, not everything is a capital asset. And the difference largely depends on how it gets used. A fishing boat, for the fisherman, is a capital asset. It allows him to provide fish to make a living. On the other hand, a fishing boat, in the hands of a widget salesman, not so much.

By investing in the things that help us produce or save increases our level of real wealth. 

Financial Assets
Simply put – this is the money we have. The cash in the checking account (or under the mattress), the change in your pocket, and the stocks in your investment portfolio. The tricky part about financial assets is that they have no value in and of themselves. Money has value simply because we agree it has value. 

The hardest thing to remember about financial assets is that they are a means, not an end. They are a tool. If you were starving you couldn’t eat your money. You couldn’t build your home out of it. But since we agree that it has value, we trade it for the goods or services of another. 

Financial assets, though they may give a sense of peace and security, really cannot be appreciated until they are converted into one of the other assets – into the freedom to pursue the career you love, to spend time with those you love. 

Real Wealth
What I hope to convey is that Real Wealth is not just the number on your bank statement. But just because Real Wealth isn’t just financial wealth doesn’t mean we cannot intentionally build it. That we can’t plan for it, and work towards it, or even (in some ways) measure it. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Wednesday, August 12, 2015

The Income Challenge

When it comes to what I focus on with my clients, I admit that I often make a mistake. Often I focus on what I (as the financial planner) can control. Asset allocation, investment selection, risk management are all tools I use to help pursue the goals of the families I work with. But what can easily fall through the cracks is a conversation regarding one of the most important pieces of financial independence, and what the client controls – income.

Without income, the rest of the financial plan is toothless. Expenses won’t be paid, there can be no savings, there can be no financial security. Financial independence starts with income. But not all income is created equal. 

Earned Income
When we talk about our income, we are generally talking about our ‘earned income’ or, the income that is produced by our daily work. For some people this is employment or salary income – reported on your form W-2 or 1099. For others it is self-employment income or partnership income. But the biggest thing these all have in common – we trade our time for money. Simply, we are working for our money. 

I address earned income first, because in most cases, this is the primary income source for families. Whether we are salaried, hourly, or self-employed, we can reduce our income to how much time we spend earning it, Vicki Robin and Joe Dominguez call this your ‘Real Hourly Wage,’ in their seminal book Your Money or Your Life. Increasing your real hourly wage, increases your income. 

The tradeoff that earned income demands is that when we spend time making money, we are by definition not doing the other things that are important to us. This is easy when we are passionate about the work that we do. But there are costs that cannot be defined in dollars or cents, when it comes to time spent with our family, our friends, time in nature, or in pursuit of our dreams. 

Passive Income
Passive income, in contrast to earned income, does not demand our time. It is income we receive without needing to work – it is money working for us. While we sleep. While we play with our kids. While we read. Even while we work for our earned income. It is the tool we have to help us pursue our dreams, even if the dreams don’t pay a financial reward. 

Passive income can be rent from an investment property. Passive income can be dividends paid from investments, or interest on loans. It can be royalties from books written, apps designed, or businesses owned. This income will come in whether you are there or not. 

The tradeoff passive income demands is lifestyle. It demands an up-front investment. In the case of stocks, bonds or real estate, you must invest money that has already been earned – savings. That means spending less than what comes in – in order to increase income. Writing books, songs or programs also demand an upfront investment of time, the time spent creating. And without pay. 

The power of passive income is that it is often cumulative. Once you turn on the spigot, it may stay on indefinitely. You can then turn your attention to the next spigot. After time, your expenses could potentially be paid without the need to work at all, and you are free to pursue what matters most.

Multiple Streams of Income
One of the big topics in the personal finance blogoshere is the concept of ‘multi-streaming’ your income. As you probably guessed, this is simply the idea of having not just one, but multiple sources of income. In generations past, individuals only needed to focus on their craft – they stayed at the same company for their careers, earned a gold watch, and retired on a pension. The next generation, the ‘free agent economy,’ saw massive employee turnover as the loyalty between company and employee (and vice versa) diminished. 

The next development has been the rise and impact of technology. Not only have previous computer models been replaced by tablets and smartphones, but entire departments of companies have been reduced to robots or computer archives. In order to stay relevant, employees must specialize in a small niche of the industry, stay current on advances, and continuously better themselves to earn their paycheck. 

By having multiple streams of income (diversification in financial jargon), families can both potentially reduce the impact of catastrophes, as well as increase the odds of financial freedom. When streams of passive income meet our expenses, we can afford to pursue dreams, spend time with family, or travel. Families can also reduce the risk of suffering from a job or economic change, knowing that their eggs aren’t all in one basket.

Everyone’s situation is unique, and no one strategy is appropriate for everyone. When looking at options to increase your Real Hourly Wage, or start building passive income, consult with your financial advisor. Additionally, you can check out the following great books:
  1. Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century Paperback by Vicki Robin, Joe Dominguez, Monique Tilford 
  2. Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosaki (Author)
  3. Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence by Jacob Lund Fisker

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.