Framework for Release

Financial Yoga is a framework for release from seeing yourself as a productive asset. An asset is not simply something you have. 

It is true that you can buy and sell things that are not productive. They can be referred to as an asset, even though they do not do anything. They may even go up in price if more people want the thing, and more is not made. 

Cash can be a wasting asset. Something that reduces in value because of inflation and costs (e.g. in a money market fund, or because of bank charges). 

What makes an asset something that can release the necessity for you to earn money, is when the asset itself earns money. If that money is reinvested, then the asset can grow, and earn more. By working rather than wasting. 

Property can be a productive asset, if you get rent from it, but you are not making anything. So if you live in the property, you should not consider it an asset. You are consuming what it produces. The same for cars if you are driving them for you. For most people who own them, their house and car is not there biggest asset. They are. Their capacity to earn is. 

Productive assets are not valued for what they are, they are valued for what they produce. That is why you do not want to be a productive asset. Not all good ideas are good business ideas. Not everything we should do, should make money. 

Count yourself lucky if the thing you are passionate about, and competent at, is also something that makes money. To finance the difficult-to-monetize good ideas, you need to solve the funding problem and generate energy from good business ideas.

Release

Escape Plan

Building wealth requires a plan. Before that, if you are trapped, you need an escape plan. If you are in a situation where you don’t have the ability to earn, or are stuck where you don’t own enough of what you earn. If what comes in is used to pay interest on previous consumption. 

Building only starts when there is forward momentum. Good debt is where money is borrowed, and given a productive job. The money is not borrowed and consumed, but earns a salary. The money gets paid. There is still risk. The borrower takes on the risk of not being able to pay the salary, because what is produced does not cover the costs. If you commit to salaries, you have to pay even when there is not money. Or close shop. The wage bill comes each month, and you have to meet it. Like if you have borrowed and consumed, and still have to pay interest. It becomes the cost of waking up. 

Building only happens with space. With construction rather than destruction. With a source of income. With control of expenses. If you then want to separate yourself from the anxiety of hand-to-mouth living, the escape plan can morph into a growth plan.

Resource Depletion and Consumption

Forrest in Forest

My dream when I “stopped working” in 2014 was not to do nothing. I just wanted to not have to think about how what I would do would make money. I also did not like my fate being in other people’s hands. In a pure meritocracy, everyone would line up on a theoretical starting line and the gun would go. In reality, there are plenty of gate keepers to opportunity. There is not a path you choose and then knuckle down and crack on. So washing your hands of that rubbish, and saying “I am done” had incredible appeal. Front loading the effort, then constraining expenses going forward. The problem with that idea is I do see myself as part of others. It does not help if I am not stressed, if others are stressed. Like the scene in Forrest Gump where he runs back into the forest (with one r) to rescue people. The idea of financial independence is an illusion. I celebrated stopping working for money as “Independence Days”, but the problem is we aren’t independent. We are interdependent. So even though I talk of financial security and stilling the waves of money anxiety, the reality is it is a process of practice. The struggle to still the waves will continue. Part of stilling is acceptance and perception. Stillness where you are, not where you are aiming for. Stillness within the chaos, not after the chaos.

 

Absorbing Shocks

Insurance works on the “law of large numbers”. Unlikely events with big consequences are spread out over large groups. A small, certain, premium that can be afforded instead of a small, uncertain, chance of ruin. You can self-insure for a lot of events if you have enough capital that it won’t result in your ruin. I built my Engine the traditional way. With a salary (from a job) that was bigger than my expenses. When I started, I took out life, earning ability, and severe illness cover. The world is designed around us living hand-to-mouth with our salaries defining our capacity to take and absorb risk. To snap that connection, you need a gap. Then that gap needs to be invested, and what it earns reinvested, until your Engine can be working and earning what you need to spend. It is only with a working engine that your life choices can be gradually freed from the constraints of money making. Good ideas that are not good business ideas are still worth doing. They need to be powered by good business ideas. Merit/worth/value (a good idea) is not sufficient. At least not in the beginning. With planning, you can increase your ability to be the one who decides what has value, and what you do with your time. 

 

Solved Problem

Investing is a solved problem. As Seth Klarman points out, “the real secret to investing is that there is no secret to investing”. The unsolved problem is that most people don’t do it. Most people still live hand-to-mouth. A lot of people are stuck in debt traps which is “reverse investing”. Like the underworld of Stranger Things, you work to pay for past consumption or misfortune. Three key factors in investing are (1) competence, (2) relationships, and (3) beliefs. I don’t believe in Gods of investing. I do look out for red competence flags. You have to do your due diligence. Like romantic relationships – we form connections with people. The grass isn’t always greener. Improving our investing habits starts where we are. Our beliefs are path dependent. There is an element of this in the “how” of investing. You have to choose a path that resonates for you so you can stick to it. The basics are pretty simple. Find a way to earn. Spend less than you earn. Get the difference a job. 

too many live hand-to-mouth

 

Getting Paid

Money is made by solving problems for decision-makers with money. Desire to solve those problems is not enough. You need the skills and knowledge to be able to deliver. To do that, you need training/studying. You also need the decision-maker to choose you specifically. There will normally be others who can solve the problem too. How many others is the key factor in how much you get paid. It is not about you. It is about the supply of problem solvers, and demand for problem-solving. Beyond merit (skills and knowledge), the two other key factors are capital and containers. Capital buys you time to build skills and knowledge. Ideally, you can build while earning, but often there is a trade-off. Time to learn. Time to earn. The container is the barriers to entry that make it worth your while. The container is the “rubber hits the road” way to get paid. You can spend years developing merit, but if there is no container to fit that into a countable “product” where an ask meets an offer, there will be no reward.

Where the rubber hits the road

Decision Maker with Money

My first job after university was in Risk Product Development. My focus area was Earning Ability. Money is made by solving problems for decision-makers with money. In a hand-to-mouth economy, without capital-backed decision-making, you only get to make decisions on how to spend money if you have earned it from another decision-maker. First, you have to find a job. Then you have to do a job. Then you gradually get breathing space if you get paid more than you need to spend. When you venture into the land of discretionary (by choice) spending. Then you can either consume that money or put it to work. To start, you are at risk. Unless you have someone to turn to, there is the danger that something goes wrong, and you cannot work. Something goes wrong, and you cannot do your daily tasks. Something goes wrong, and you cannot do the work you were trained to do. Or you cannot do any work. The question “How much capital would I need if I couldn’t work?” is the starting point for the target size of the Engine you need to make your own decisions. Until then, something might go wrong.

Three-Horsepower Engine

Mini Me

You can think of capital as your Mini-Me. In a world that defines us by our earning ability, building capital is a path to telling those voices to get knotted. If you spend money, you are firing it. If you put it to work, you are feeding your Mini-Me. Gradually that Mini-Me can grow. If you reinvest (rather than consume) a combination of what you produce, and what your Mini-Me produces, one day your Mini-Me may earn enough to be your bread winner. So you can focus on ideas that are good ideas, but not good business ideas. You can only build capital if you are not servicing past consumption (debts), and you are earning more than you are spending. There cannot be growth while you are bleeding. There cannot be growth without breathing space. But if you can hold space for, and look after your Mini-Me, with time and care it can grow to hold space for you.

The Great Wave

There will be many lessons learnt when we reflect on 2020, and unfortunately probably most of 2021 too. When the dust settles. One of those will be the danger of predicting things we pretend to understand, but have not experienced. Another will be the peril of basing society on hand-to-mouth existence, because of (amongst other things) a belief in “work ethic”. Asking children as they grow up what they will be, and meaning how will they earn a living. Existence based on a willingness to work, requires the existence of work. The ability to create real value requires reinvestment and a long-time frame. It requires breaking the cycle of feast and famine. It requires being able to pause. Sometimes for longer than we like. It requires a safe place to retreat to. We have to snap our earning addiction by creating capital. Capital is not hoarding. Capital works. Capital can create space for when we realise how much of what we thought we knew is not true. Capital allows you to be wrong without it being the end. If you have the ability to work from home. Be grateful you have work. Be grateful you have a home. Then let us build back better.

The Great Wave off Kanagawa

Human Voice

“Poverty is not a lack of character. It is a lack of cash,” points out Rutger Bregman. Two fundamental principles in stilling the waves of money anxiety are (1) Never be a Forced Seller, and (2) Never be a Forced Buyer. Avoid being put in a corner. Get yourself in a position where you can say yes, or no. Become a decision maker. Price is not value. It is a way of listening to supply and demand. Adding force or scarcity is a way of price swallowing value whole. The key source of force is basic living needs and unexpected emergencies. Things you cannot say no to, that stop you from building or breathing. To avoid force, you need to snap the hand-to-mouth connection of depending on your earning ability. Overcoming any debt traps, then building an emergency fund of cash. Gradually putting money to work, and building your lung capacity. The breath to say no. Price does not listen to those with no voice.

Spectrogram of the Human Voice

Learning to Work

During the first decade of building your Engine, you won’t see the dramatic effects of compounding. If you think of your money as a mini version of you, the first years are still school time. The most important focus during that time is laying solid foundations. Creating the habit of paying yourself first. Where every time money comes in, you spend less than you could, because some immediately gets invested. Where every time money comes in, you get some of it a job. You internalise the discipline of having money “that is there, but isn’t”. Learning to live dramatically within your means. Finding a way to have a buffer for life’s emergencies, so you aren’t continually starting from scratch. This isn’t hoarded money. It doesn’t sit sunning in a pool. It works, then takes the money it earns and (if you leave it alone) gets it more work. Shifting from a hand-to-mouth life dependent on your earning ability, to a custodial life where the task of financing problem solving is shared with your past self. Then gradually, the magic of compounding can power the realisation that life isn’t a problem to be solved.

"Thresher" Van Gogh (1889)

Putting Capital to Work

Fundamental Investing is the idea that what a business does actually matters. A good business takes Capital and sustainably generates cash. That cash is then either paid out to owners or is reinvested and becomes Capital. Maximising sustainable growth. The Payout Ratio is the proportion of earnings a company pays as Dividends. The Reinvestment Ratio is the same thing, looked at in the opposite way. It is the money that is reinvested back into the business. Ideally, there is a good balance. The money paid out is sufficient to cover the cash needs of owners. The growth opportunities are there to sustainably put more Capital to work. An Equity Portfolio can give an owner generating more cash than their needs and their investment opportunities, the option to put the cash to work in other quality businesses. If all this works well, then what matters is what is going on in the businesses. Not what is going on with the share price. Share prices are noisy. That is where people are guessing. A share price is a quote of what someone will pay for a slice of ownership. People who play the market focus on the price. People who invest focus on the business.

"Oxcart - My Dream" Van Gogh (1884) 

See a Stream

Disability Insurance covers the risk that you are unable to work. If you can’t work, you still have to live, and the way society is structured… it is a problem if you aren’t a productive asset. Should you get disabled, depending on the product you bought, the cover is paid out as a Lump Sum or an Income stream. This is intended to replace your earning ability, and the adjustments to your lifestyle. A useful analogy for Engine building. People don’t have to be productive assets. You can replace a salary stream with sufficient Capital. You don’t have to get disabled. You do have to build the Capital. The challenge is changing the way you see money. As something to look after, rather than something to spend. $1,000,000 is not a big pile of cash to be spent. It can be an income stream. Put to work on your behalf, it *can* last for life *if* you spend less (on average) than it makes (on average). 3.5% real return (after tax, inflation etc.) would give you $35,000/year. Capital for life. For life.

Streams create Life