From here on, you need to change the way you think about your current situation. Most people tend to confuse themselves with their jobs. I mean, how often has someone asked you to tell them about yourself, and you start with what you do for a living? I know I have. Hi, I’m Ben. I’m a teacher.
This ends now. You are not your job. Your job is just one of the (soon to be many) investments in your portfolio. It’s only purpose is to pay you a dividend (your paycheck). Don’t get me wrong. You can still love your job (and I hope you do) but you need to treat it like an asset.
What’s more, this job/investment, is just one part of the business that is your life. See, large corporations take their net profits and reinvest them. Sometimes they invest in their own company (increasing efficiency, upgrading equipment). Sometimes they invest in other companies. They invest where they can get the highest/safest return on their investment.
This is what you will be doing. At these large corporations, there is someone in charge of making those decisions: the Chief Financial Officer.
Be Your Own CFO
Before we get into choosing a business, we need to get our financial plan in place.
Remember, the goal is to make one million dollars in the most efficient (ie least time-demanding) way possible. To do that, you have to to think like the Chief Financial Officer of a major corporation. Don’t worry. We’ll keep it simple. There are really only two major lessons to learn.
Lesson # 1: Treat Your Life Like A Business
Look around you. Look at where you live, the stuff you own, your sources of income, your debts. This is Headquarters, homebase, the original business you weren’t aware you were building.
Your business is probably small right now. Like most people, you probably have one main source of income, and maybe a few smaller income streams on the side. You probably have debt. You probably want to grow and bring in more money, or put less effort into work, or both. Just like a large corporation.
The finances of your home and of a major corporation really aren’t that different. Major corporations just use a bunch of fancy lingo that make it seem that way. We want you to start looking at your life the same way a CFO would look at his own business. It their job to cut costs, maximize income, and grow the value of the business. We’re here to help you do just that with your life.
For now, the best way to get used to this new way of thinking is by changing the way you think of the dollars that flow in to your ‘company’ (ie, your income). Just like a large corporation, your cash flow has to go to some specific places. Some of it will go to the government in the form of taxes. Some of it will need to be spent on keeping your business up and running (like paying the electric bill, buying groceries). Some of it though, is up for grabs and it is your job to decide where to put it.
To properly do this, you’re going to need lesson number two….
Lesson # 2: There Are Only Assets and Liabilities
One of the healthiest financial moves you can make is to begin viewing the stuff in your life in one of two categories: Assets or Liabilities.
A quick note here: the definitions that follow are our own. They do not conform to the textbook definitions you would find in Business Finance 101. The reason for this is simple. Business Finance 101 is confusing. The whole financial world is. We’ve done our best to simplify terms, remove what you don’t need, and in general cut through the fog of financial minutia.
Assets Defined:
For our purposes here, an asset is anything that earns money.
Liabilities Defined:
A liability is anything that burns money.
Simple, straightforward, but also completely flying in the face much of the financial advice you probably got from your parents. What do we mean by that?
If I went and asked my dad what my greatest financial asset was, he would, without hesitation, reply, “Your house.”
My house is not my greatest asset. And it’s probably not yours either. It’s a liability. Here’s the reasoning behind this heretical statement:
The current annual increase in home value (according to Zillow.com) is between 3-5%. Knowing that, let’s do a quick study of a real property in my neighborhood.
- Cost of Property: $100,000
- Property taxes: $2,400 (From public record)
- Insurance: $1000 per year (Our state average)
- Average cost of home maintenance (using the ubiquitous 1% rule): $1,000 per year
Ok so let’s pretend that we just bought this fine property for $100k. One year from now it’s value will have increased in value to $105k. Hooray.
BUT, in that same year we have spent $2,400 in taxes, $1,000 in homeowner’s insurance, and another $1,000 in keeping the place from falling down. (2400+1000+1000) = $4,400.
So yes, our equity increased by $5,000, but it cost us $4,400 dollars to get that increase. Net gain: $600 for the year.
And we didn’t account for heating, cooling, electricity, water, sewer, the family of mice that moved into the basement, or fact that your neighbor has started cooking meth in his free time.
Are we telling you that you should rent instead of own? No. We just want you to see that much of what ‘everyone knows’ is wrong. Homes are great. Owning one is (most of the time) great. But let’s be honest. Homes burn money.
By the way… if the debate of Rent vs Own is pertinent to your current situation, check out this excellent calculator from The New York Times. Rent is not ‘just throwing money away’. This statement is often blindly thrown around, but it just serves to guilt people into poor financial decisions. Never let anyone try to guilt you for renting.
So What Is Your Greatest Asset?
You are.
You earn money. You might be working too hard (or too many hours) to do it, but you still earn.
We want you to get the most out of your greatest asset as possible. To do that, you need to be happy, healthy, and not constantly exhausted from work, or depressed by your financial situation.
You’ve heard the adage “Invest in yourself”. It’s true. My greatest year-over-year return in the stock market was 30%. But when I invest in myself, I routinely earn double my money or more. (Our last big business investment has yielded 500% over two years, and an untold amount of value in skills and experience. I can’t even compute the value I’ve gotten from the books I’ve read.) You are your first and greatest asset.
Ok, that’s all warm and fuzzy but what else counts as an asset? Anything that earns money.
Rental properties (assuming they turn a profit over costs).
Investments in the stock market (over time).
Believe it or not, some debt. If that debt is used in a controlled manner to grow your business with a very high probability of earning more than the interest it will cost. (This is why just about every large American business has at least some debt on it’s books. When you own a business, you can generally find ways to responsibly make debt earn money, rather than burn it). This statement is just as heretical as claiming homes are liabilities, but remember, we are using our definitions here. This is about changing the way you think about money.
Your skills, your creativity, your ability to organize, or any other non-tangible quality you possess that can bring in cash… These are all assets. Don’t ignore them just because you can’t see them.
And last but certainly not least, the business you are about to build.
Well Then, What’s a Liability?
Remember, we define a liability as anything that burns money. Liabilities include:
Almost all non-business related debt.
Cars (You would not believe how many people I’ve seen try to sneak cars into the Asset column. I get that you paid eighty grand for that Beemer, but it still, almost literally, burns money).
Literally anything you’ve purchased that either wears out, gets consumed, uses electricity or fuel, or will for some reason or another, need replaced at some point.
Literally anything you spent money on that will never earn money or gain in value, even if it somehow never wears out. Even if it doesn’t have on-going costs, it still burns money (this is due to Opportunity Cost, something we will discuss later.)
If you’re thinking that you have way more liabilities than assets, don’t worry. We all do. In fact there is one last liability that almost no one talks about, even though it is single largest destroyer of wealth in history:
Cash.
That’s right. Cash is not an asset. It is a liability. Cash burns, it does not earn.
How in the World is Cash a Liability?!
Two reasons. One macro, one micro:
The macro reason: Inflation.
The average long-term inflation rate in the US is around 3%. That means that every dollar you keep in cash will (on average) be worth $0.97 a year from now.
This is important to remember because:
When my boss acts like he’s the most generous boss ever by giving me a 2% cost of living increase, I know that I’ve actually gotten a 1% pay cut. Or….
When my neighbor brags about all the cash he’s invested in 1.5% Certificate of Deposits, I know he’s actually losing 1.5% per year on his ‘investment’.
Even the cash you have sitting in that fancy high-yield online savings bank is earning less than the long-term average interest rate.
Much of what people think is investing (people like my neighbor) is actually just trying to slow down the effects of inflation.
Cash burns cash. How do we make it stop? By turning it into an asset. How do we do that? By investing well. In ourselves, in our business, in the market, or anywhere else where you are earning at least 4% per year.
Let’s Wrap This Up…
To reach the million dollar mark, you need to…
- Treat your life like a business.
- Know the difference between your assets and your liabilities
- Compile as many assets as possible
- Eliminate as many liabilities as possible
So, Mrs. or Mr. CFO, take a look around your business. Stroll around your home. How many assets can you think of? How many liabilities? When cash comes your way (from your paycheck or maybe a windfall) acknowledge that it is a liability, that it’s burning away right before your eyes. Remember that most people would take that liability (the cash) and convert it into even worse liabilities, like an Apple Watch or take-out.
But not you! You’re going to take that money and put it to work. You going to turn that liability (cash) into an asset.
So how do we compile assets? Let’s choose The Perfect Business.