financial education – Page 5

Assets

Assets are simply what you own. Don’t just blow by that last sentence. Go back and look again. The last word is key. To this date, I still don’t own my home. From the first time you are asked to fill in your address for a credit card, bank account, etc., you’ll be asked if you rent or own your house. There’s no box to check or explanation that your house is financed. It’s just rent or own. Looking back, the first time after I financed my first house I thought I was making great progress because finally the “own” box could be checked on credit applications. I can remember thinking it’s weird because the house was deeply financed. But I was told that’s the normal and correct thing to do. Somehow that little interaction was the first step down the crap line of BS that the financial world sells, the ones that pick your pocket anyway. I knew it wasn’t technically correct. But I played along and somehow felt better, more comfortable, and maybe even a little more successful. Their strategy to underplay debt had worked. The language that’s the norm in our society today is wrong. I don’t “own” my house. I have equity in the bank’s house. That’s the true situation from a financial perspective. Assets are what you own.

Assets are something that someone else will pay you money or trade you something else of value to get. Things like owning stocks, bonds, profitable businesses, and investments. A house, a car, a motorcycle, a travel trailer, motor home, and land are all assets. Those are things that have value. Other people will pay you in exchange for those type of things.

This word asset is used frequently, but not always correctly from a financial perspective. People say your looks are an asset, but that’s not true. Maybe they said your brains, or work ethic, or some other characteristic was an asset. Those are not assets. They are characteristics. These days folks seem to use incorrect words to describe things. Maybe they are just using it for emphasis, but it’s still wrong. Words matter. If you repeat things long enough you get more comfortable with what you are saying. You may even start believing it. Don’t fall into that trap.

Assets are generally categorized into one of two types. Appreciating assets and depreciating assets. It’s a little more complicated that that, but if these two categories are understood and used properly, large gains can be made over time. Even the investors with the fancy degrees don’t get every move right. Just keep playing and moving forward.

Appreciating and depreciating assets are the two big rocks in this post. All assets are not created equal. Some assets go up in value in certain situations. Others go down in the same situation. Some things change rapidly and some slowly. Some stay stagnant over time. While there are numerous variables that can effect assets, usually they are just affecting the rate that the asset appreciates or depreciates. Generally they go in the direction described above over a long time. That’s what we’re playing for here. The long game is what we want to win.

An example of an appreciating asset is PepsiCo Stock that I own. When I was young, one of the things I explored was something called a DRIP. DRIP stands for Dividends Re-Investment Plan. Under the plan small numbers of stocks can be bought. Once you own the stocks, the dividends are used to buy stocks instead of receiving a check for the dividend. If you haven’t figured it out yet, dividends is money a stock sends its investors. That’s one of the benefits of OWNING stock. So, back in like 2000 or so, I purchased $500 of PepsiCo Stock. It was only like 5.2 shares. Not much at all. I’ve never added a penny to the stock. So, for like the last 18 years the dividends were reinvested back into PepsiCo stock buying more shares. When I checked the value of the account today my $500 investment is now worth $2,734.09. That’s more then 5 times my initial investment. You can argue details about PepsiCo isn’t a great stock, DRIPs are too expensive with fees, or whatever. But can’t argue that it increased in value more than 5 times my original investment of $500. Assets like that are what you should be after. The Big Rock here is you have to do something. Anything is better than nothing.

Appreciating assets is where you want most of your effort to go to achieve forward progress. Simply put, it increases in value over time. They are worth more tomorrow than they are today. Some examples are low cost index based mutual fund, stocks, a savings bond, savings account in a bank. Over time, your assets will allow you to achieve the financial freedom to do the things you value most in your life. The more appreciating assets you own, the harder they will work for you. Compounding interest also works in your favor to multiply the positive affects over time. When your assets are providing more income than your expenses, you are financially free, financially independent, retired, or whatever you would like to call it. Generating income from clocking in at a job, going to work at your business, or looking for new jobs to create income to cover your expenses can be over!

Depreciating assets are the opposite. They are worth less and less over time and may even eventually have no value. Just about anything with a motor would fall into this category. A boat, car, motorcycle, or even a weed eater. RARELY can you purchase one of these items and then sell them for more after a short time of use. These are major drains on your valuable resources, mainly money. Rather than creating more value at a later date they drain your resources as they decrease in value. Then, as in the car, when it no longer works it is usually replaced. Then the cycle of bleeding value repeats.

The key here is to limit your losses on depreciating assets and maximize the acquiring appreciating assets. When looking at future purchases, ask yourself which type of asset are you buying. Will it lose value and have to be replaced? Will it be worth more in the future? It’s obvious that the depreciating assets are holding you back from forward progress. Appreciating assets tend to grow or provide dividends (money). If they are producing dividends, reinvesting those dividends to buy more appreciating assets will push you forward towards a financial goal. If you are investment is in a business, say a coffee shop, profit you make thatis invested back into the business is similar in that you would do that in order make the business more valuable.

My little granddaughter (in the picture) may or may not become a great fisherman one day. Of course, she’ll never know if she can unless she fishes. She has to cast her line in the water to find out. Are you fishing for the type of fish that will be worth more than the minnow you bought for bait? It’s never too late, or too early, to get off your assets and purposely cast your line in the water.

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The Big Rocks of Finance

Get the Big Rocks right and you’ll be well on your way for financial success. The Big Rocks are assets, liabilities, and net worth. More on those later.

When I first joined the Air Force I really thought I was doing okay. Oh, ignorance is bliss. The reality was as a young Air Force airman basic (yes, that’s a real military rank) I was only making about $700 – $900 per month with two kids. I was really poor and had little to no savings. My family was getting food stamps, eating deer meat and government cheese. The kids were on a government program called Women, Infants and Children (WIC). That program provided formula, milk etc. for the kids. The driving car, a Bronco II, was financed, so I didn’t own it even though when you finance a car everyone says things like “Hey, I like YOUR car”. It was the bank’s car that I was driving. If I stopped paying for that Bronco, they would come get it. I did have another car, but it rarely ran. It was a hot rod that was a money pit and not practical at all. While financially it was tough, we were able to get by with help from the government and an occasional family gift. The household net worth was negative.

By the time I was in my mid 30s, or 60% of my life to date, I thought I knew a few things about finance. Nice cars were in the driveway, silk curtains hung on the walls, big HD TV complete with an upgraded audio video system, antiques from my tour in Italy. I had some mutual funds, a couple of shares of Pepsi Co, a little bit of savings, savings bonds, a car and a truck. But I also had way more debt than that young airman basic above. I had more and better stuff in my possession, but again, just like my first car, most of it was financed. My family had tens of thousands of credit card debt. Financially speaking, I was not much better off than I was when I first joined the Air Force! It was not readily apparent, but the debt was killing me financially. There was more nice stuff, but it would only take a month or two without income and we would be on the streets and the nice stuff would have to be sold. The household net worth was still negative.

I’m sure we’ve all heard financial terms before like assets, liabilities, net worth, investment, insurance, trusts, and the list goes on. There’s no shortage of advice from numerous sources and especially advertisers. Commercials on the television are frequent. Brokers, advisors, banks, credit cards, insurance, annuities and more. Why are there so many commercials coming your way? Because they are all trying to get a piece of your finances! There’s lots of money being made by handling your money. I sure paid my fair share to those companies.

There are literally thousands of financial products out there. Which ones do you choose? How do you even begin? It’s easy to get overwhelmed by trying to learn about these products. It can be difficult to figure out which one you need to meet your financial needs. If you are not well versed in these topics, there’s lots of information to learn about them even before you can make a decision as to which one is right for you. Right? Don’t get overwhelmed. Navigating them doesn’t have to be overly complicated.

You can make finances as complicated as you like. Universities offer associates, bachelors, masters and even doctorate degrees just in finance. But even then, you can further specialize within specific areas of finance. However, folks managed to live happy, healthy, and whole lives before these fancy degrees came along and will continue to do well without them. Education is definitely important in finances, but a fancy degree is not always necessary. There are plenty of resources that can help you along the way. Hopefully this blog can help navigate through the maze.

Some of the wealthiest family members that I know who left an inheritance for their children and their children’s children only had high school diplomas! So, it it possible to gain financial independence without a fancy degree or certification. Cynthia’s parents only had a nice house, a bit of land, a rental house, some land down the street and about a year’s worth of expenses in the bank. My Aunt Terry passed away fairly early in my Air Force career with a few hundred thousand dollars worth of AT&T and South Western Bell stocks in her retirement portfolio. She had always been a saver and started teaching me about savings when I was young. She was the first person who actually got me thinking about money. All three of these people had a few things in common when it came to finances. They had very modest incomes, lived below their means, had no debt, and used what was left to ensure they always had money to live well into retirement. When they left this broken world, they passed some wealth on to their heirs. Oh yea, one more thing…they all only had a high school diploma and no fancy financial degree. They also tithed 10% and gave more hard earned income to church and were generous to family members or others in need.

It’s all about putting the big rocks first. If you learn the big rocks of finance, you can surely make smart decisions that will align with your financial goals. So, what are those big rocks? The big rocks are what make up the foundation for you to build your financial life upon. With the correct perspective as to what type of rocks you are dealing with, you can look at all of the small decisions you make daily with a different perspective. You’ll look at it and understand how it fits into either moving forward to gain a little ground, moving backwards or away from your direction, or maybe it’s a neutral and insignificant decision that doesn’t really matter much.. But by consistently making small decisions that push you forward, you’ll go far. Rest assured, however, there are no shortcuts.

I’m happy to report that my net worth today is positive. Very comfortably positive that will take me to an early retirement and still leave something for the children’s children. I have funds available for emergencies. If there was a break in income for six months the emergency funds would be available to replace income. I’m also looking towards retirement no later than 59 and a half or sooner (I just turned the big 5-0h). So, if you don’t waste as much time as I did doing what everyone else does, you can be better off and retire even earlier than I do!! Hopefully reading this blog will help you avoid some of the mistakes I made.

Get the Big Rocks right and you’ll be well on your way for financial success. The Big Rocks are assets, liabilities, and net worth. I’ll cover assets next post.

Here’s an old, yet relevant, video on finance. (It’s short for the ADD generation). It lays out one of the most important concepts of financial independence. It shows you how to avoid the biggest mistakes the average american makes and teaches you efficiency in spending money. It’s complicated, but I’m sure this crowd will be able to boil down the complex issues into something useful. Enjoy and let me know your thoughts. Here’s the link: Complex Financial Video.

Paw Paw

Tag: financial education

003, Get off Your Assets!

002, Big Rocks