Archive

Jun 20

Income Diversity is Essential to Financial (and Moral) Success

By NickNo Comments

At one time or another most children are asked what it is they want to do when they grow up.  Consensus is building that the answer to that question is not a single answer anymore. 

Financial planners consistently tell us that we should have diversity in our investment portfolios.  Diversity, they say, provides a hedge against the risk of a single investment failing.  I am a strong supporter of diversity in income sources.  Multiple streams of income can provide a hedge against an interruption of a one income stream.  It is a reality of the global economy that almost everyone is vulnerable to a layoff.  If your current job is your only source of income, a layoff is potentially devastating to your family’s financial health. If you are a business owner and one sales market suffers a setback, your business can quickly fall apart.  Multiple income sources protect you and your family from financial catastrophe.

But there are other advantages to having multiple income streams.  First, not all income sources require significant active management.  Many of them are passive or semi-active, meaning that you can create them and they enrich you without significant effort.  Among all the types of income, earning from working a job is the most time consuming and often the lowest paid.  Passive income sources, such as investing in dividend producing stocks, or semi active sources, such as rental real estate or options trading, can be very lucrative with only a few hours of your time a month.  Even the most motivated person cannot work more than 2 or 3 jobs, but one can manage dozens of passive and semi-active income sources with proper care and investment.  Over time, by the mathematic force of multiplication, it is possible to eclipse your active income sources with the passive and semi-active sources.  This is the dream of the investor–becoming one who can safely afford to retire from work life with no sacrifice in lifestyle.  Indeed, with the increase in free time, you will be free to realize ever larger increases in income because you will be able to devote yourself entirely to building new income sources. 

More importantly, there is a huge difference in the type of person you can be when you have multiple sources of income.  In times of financial stress or insecurity, people often find themselves in ethical dilemmas.  Your employer may ask you to cut corners to increase the company bottom line.  You may find yourself having to choose between eating and falsifying your tax return.  You may even be tempted to steal from those closest to you.  Financial stress may drive you to do things that you would never have considered doing if you didn’t feel the stress.  Actions that you resort to in times of great stress may haunt you for the rest of your life, either physically in the case of imprisonment or psychologically with regret and shame. 

Multiple income streams, therefore, help you build a firewall to protect your moral and ethical self.  They allow you to always do things on your terms and empower you to say “No!” when your conscience tells you to do so.

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Nov 29

Book Review: The Total Money Makeover

By NickNo Comments

This book offers the simplest and most down to earth approach to financial success I have ever read. 

Having been reading financial books for nearly a decade, I had continually struggled to find one who’s philosophy would be accepted by my wife.  I exposed her to various experts, even took her to a couple of conferences.  Nothing every stuck, until we started watching the Dave Ramsey show.  She was impressed by his common sense, tough love, and simple ideas delivered with a Christian perspective. 

Seeing that we’ve finally stumbled on something that she was able to embrace, we picked up the Total Money Makeover.  

Having lived life where he had to deal with apparent success, a long and painful collapse, immense financial stress, and eventually bankruptcy, I feel a kinship with Dave Ramsey.  So do many who have had to endure or are enduring financial hardship and now sing his praises.  Through the simple 7 step formula outlined in his book The Total Money Makeover, he has created a path that has led hundreds of thousands of people onto the road to financial success.

As married devotees of Dave Ramsey come to understand, as I have, when life partners do not have a common set of financial goals or objectives, financial success is elusive for both of them.  Each partner follows his or her own heart and most often they work against each other—usually not by malice or deliberate contrarianism, but just because two people joined at the hip, moving in different directions, makes sure that neither party goes anywhere.

There are 2 distinct differences to the Ramsey approach that differentiate it from all the others I have examined.  First, Dave’s approach does not bank on speculation what-so-ever.  He works with financials that exist today.  He does not advocate gambling on getting involved with speculative ventures or starting businesses except those that are small enough that encompass low overhead and making money quickly.  He doesn’t believe in starting businesses that you must subsidize for a lengthy period of time for them to get off the ground. 

The second distinctive aspect of his philosophy pertains to his opinion of debt.  Having gone bankrupt, he believes that no debt is worth taking on.  On his radio show, he is fond of saying that of the homes that have gone through foreclosure, 100% of them had a mortgage on it.  He believes in a life without debt.  While other experts advocate borrowing money to put it toward money making ventures or investments, Ramsey rejects this.  Although, leveraged returns on investments appear to be more profitable, he contends that once you account for risk of the investments falling and the potential to be on the hook for the borrowed funds, those returns are much less lucrative then they appear. 

After my own experiences with leveraged investments failing I am inclined to agree with him.

Dave Ramsey’s unapologetically Christian approach to personal finance and investing is also quite refreshing.  In a field that for too long has been dominated by secularists and by those whose ethical choices have worsened by the decade, Ramsey provides learning and education about money in a way that is without moral ambiguity.  He fearlessly makes value judgments all the time.  His readers and listeners love him because he is right. 

Dave Ramsey’s program is a blessing to those who chose to follow his wise advice.  The Total Money Makeover is the step-by-step instruction booklet to financial freedom.  The steps he lays out are simple.  Notice I did not say they were easy.  But it is true, that a family that follows his recipe for success will achieve it.  And the sooner you start it, the sooner you will become a success. 

Total Money Makeover

 

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Oct 09

56,000 Broken Promises

By NickNo Comments

“Things fall apart.  The center cannot hold.”  ~ William Butler Yeats

The economic downturn of 2008 through 2010 hit many people hard.  I would like to share with you a story of one way I was hurt through the downturn.

I have worked closely with real estate investors since 2005.  One of the tools real estate investors use frequently is private money, where one investor or pool of investors lends to others for the purpose of acquiring or fix up a new property.  Instead of going to a bank, these private loans are very useful in jumping on opportunities quickly.  In 2006 and 2007, I made three such loans.  For two of these loans I took advances from credit lines to increase my gains to partially fund the loans.  The third loan came from my individual retirement account.  All told, I lent a total of $56,000 of my and other people’s money.  Each of these investments are no longer performing.  The interest in one loan was exchange for property interest which may never pay me back any part of my investment.  The second loan was put into a business property.  A few months after the loan was made, the business owner started having difficulty and eventually turned over operation of the business to our investment group.  Unfortunately, the owner had eroded much of the value of the business prior to turning it over.  The business no longer has the necessary earnings to make loan payments to me.  It is unknown when this investment may ever start paying dividends.  Today, I learned that my third loan will be lost when the investor declares bankruptcy.

In each of these cases, I had chosen to lend to individuals with great reputations and in deals which looked to be fantastic based on reasonable assumptions.  Unfortunately, this downturn has been exceptional.  Each of these individuals has been either ruined or are treading water.  Each individual has broken a promise to me.  I have lost over $56,000 in principal, several thousands of dollars more in lost interest, and have been left with over $30,000 in debts that became my responsibility.

I cannot blame the others for the debts I had to assume.  I knew the risks involved.  But I am a man who knows statistics.  What are the odds that all of the investments go belly up?  The problem is that when the world goes upside down, chances are, all of them will go belly up and they do.

An unpaid debt is a broken promise.  Whenever such a promise is broken it often leads to the breaking of further promises.  When the income that was promised to me did not pan out, I was no longer able to keep the promises I made.  I have to live with that.  For a person who values integrity, few things hurt more than breaking your word.  It caused me untold amounts of personal pain and problems in my personal relationships.

Learning the lessons of financial responsibility too late put me in a position that I felt I had to put myself in a vulnerable position in order for me to get out from the mountain of debt and obligation that I had built for myself.    My poor decisions early in life set me up for unjustified financial risk taking later in life.  It took losing everything to give me a chance to start over.  I will do it right this time.   I have dedicated myself to help others avoid the challenges I made for myself.  As you read and follow my comments, know that the comments have been fashioned by hard times and difficult experiences.

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