If you were a child of the 80s, growing up with Michael Jackson, Madonna, ALF, (I am dating myself here…), I am sure you have seen this poster; it may have been hanging in your own room and it definitively declares, “He who dies with the most toys…WIN”. You then see the collection of exotic sports cars, each neatly nestled in the multi car garage or carport.
(OK, I still drool when I see a garage like this.- FUNNY HOW CARS HAVE CHANGED!!!)
Buying into this dream will mold and shape your money DNA. It certainly has become my inspiration to go on to higher education and command a commensurate salary for my efforts. Alas, now approaching mid-life with more than 19 years into my career I am a bit wiser when it comes to money. As I emptied my former primary abode to prepare for it to become a part of my rental property collection; I realized where more than 12 years of excess spending end up…the LANDFILL. In coming to this realization, 3 money “truths” revealed itself to me that I wish I knew then…and is my goal to teach my children now. For if I have known these truths, I would be much farther ahead toward my destination of financial freedom.
Money Truth 1: Know Assets from Liabilities…Follow the Cash Flow
So here I am, amassing asset after asset, second homes (vacation Condos, “San Jose” home “just in case I stay the night in the Bay area”), cars (Audis, Porsches, Range Rovers) up the wazoo…at one point, we had 5 cars for 2 drivers (WHAT LUNACY!). My money DNA has been wired to build up my asset side of the equation. I was and have always been prudent with liabilities. So here I am building towards the “American” dream of keeping up with Joneses, all the more thinking I am closer to financial independence with each asset I collect.
The true fallacy of this pattern revealed itself to me 2 weeks ago. When my wife and I realized that we were no longer using a second home in Tracy for any purpose. It was time to convert and include this home into my rental property portfolio. We thought it would be a “simple” clean up; rather, we were perplexed as to how much stuff we have accumulated, in the span of 12 years we lived in the home. In fact, we had to rent a 4 ton container to throw out “stuff” we thought we needed. Fortunately, we were able to give flat panel TVs, furniture, paintings, etc to my family and loved ones; but still WAY TOO MUCH. WE WERE INFECTED WITH “STUFFITIS”.
I looked back at how much money was spent; and I lost sleep for a few nights. I realized now that those things were not assets, they were in fact liabilities. It “cost” me to get rid of the junk! It is still costing me now renting a storage facility for “stuff” that we haven’t quite figured out what to do…
I realized that everything I learned in accounting about asset and liabilities were all wrong. Yes, they taught to generally acceptable accounting principles…but I don’t think this really applies to real financial planning. Case in point…your home.
Is your home an asset or liability? I’ve always put my home in the asset side of the ledger. We’ve always been taught that it was one of the biggest investment assets we own.. Now 19 years in the business, homes are clearly a liability. WHAT DO YOU MEAN?
With a home, you pay the following expenses:
How much money does the house bring in? ZERO, ZILCH. When you look at the cash flow (like a forensic accountant), no income coming in, multiple expenses going out…IT IS A LIABILITY!
“Well, it’s a forced savings account because I am paying down the mortgage and I will amass equity..”
Ok, I like that argument. Let me ask you this…what does the equity do for you while living in the home? I recently met with a prospect (a physician for more than 50 years) who have accumulated a net worth of more than $6M. Of which, $5M is tied to their home. So, they have this huge asset, that they won’t be able to enjoy in retirement. They made memories in the home, it served as the anchor for the family; yet, they will need to sell the home to turn it into a true asset. It was not quite what they envisioned in retirement.
Now don’t get me wrong. I am not saying you should not own your own home. Rather, I am trying to change your perspective as to how you see this home fitting into your future financial independence. Some families I counseled are perfectly fine selling their home to downsize; some put in the pedestal of the “sacred cow”.
You know a true asset if it has the following characteristics:
- Does it produce more income than you are paying in liability?
- Does it grow in value?
If and only if it passes those 2 simple filters, can you call it an asset. You have to follow the cash flow. So think about the assets you own, the cars, the TVs, the vacation homes…are they assets or liabilities?
Money Truth #2: Know the difference between Rich and Wealthy
Back in 2005, I met with a retired physician with a net worth of more than $10M dollars. From anybody’s standard, they were rich, in fact they were decamillionaires. What I found out after my financial planning meeting is that they were indeed rich…but not wealthy.
What do you mean? What is this…a riddle? You see, one can indeed be rich, but not wealthy. Another truth that I wish I knew early on, was the difference between rich and wealthy.
You see, in this couple’s situation with $10M in investable net worth, they were indeed rich, but their expenses (liabilities) were north of $700K per year. When we ran financial planning projections, they had a decent probability of running out of money in 17-18 years, particularly if the markets go against them early in retirement. They were rich…but not wealthy.
From here, through deductive reasoning you can arrive at the true meaning of wealth. What I learned is “wealth” is a measurement of time, whereas rich is a measurement of your “dollars”. You measure your wealth by the amount of time you have to survive (maintain independence) before having to work or trade your time for money. The longer and more time you have (even indefinitely), the more wealthy you are. Do you see the difference? Do you see the power of understanding and knowing what makes one wealthy vs. rich? If I knew this early on, the architecture and the programming of my money DNA would have been completely different. I would not put a ton of money in liabilities (cars, big homes, stuff); rather, used money earned from my most valuable commodity, which is time…to purchase and invest in true assets.
Money Truth #3: Get out of Trading Time for Money as Fast as You Can
Wealth is a measurement of time. Say it with me…wealth is a measurement of time. Some folks like to say that money is everything, and the end all and be all…rather, we have to remember that money is nothing more than a “means” to an end. That “end” goal is different for every one; but rarely do I meet someone with an end goal of just having a bigger bank account. It is what you do with money that counts. Does money symbolize security? Freedom? Pride? You see, we are after what money will allow us to feel and do.This will determine if you are rich or wealthy.
The most valuable commodity is time; and if you master the 2 truths above, you start to transform your money DNA toward wealth building. You will be automatically drawn to spending your money toward true assets that generate cash flow. Examples of these are the following (I will write about these assets and how I use them in my strategy)
- Passive Income: Real Estate and Cash Flowing Rental Property
- Passive Income: Internet Properties, E Commerce
- Passive Income: Semi-absentee Franchise Business
- Portfolio Income: Dividend Paying Stocks
- Portfolio Income: Master Limited Partnership Income
- Portfolio Income: Annuities
- Side Income (Still time for money): Freelance, Gigs, “sharing” economy
When you set your sights to get to the point where passive and portfolio income sources are above your expenses, you become wealthy. There’s no million dollar rules of thumb, or asset dollar goals, rather, keep your vision towards producing income from your portfolio of assets to outweigh your expenses.
Now, it doesn’t mean you are now going into the professional leisure circuit (you can if you want), but now you have complete control of your most important commodity…TIME!
Rollan E Dizon, CFP(r)