moneyFYI
Financial Freedom Is Merely Organized Common Sense
Capital Allocation Is Key
Have you noticed that assets can be organized by purpose? Sometimes doing so helps you allocate capital. Especially when you are young.
The categories are:
Assets you use. Your home, your car, your cottage, your bass boat, your golf clubs, and dozens more. These assets produce no income and have maintenance costs.
Assets for fluctuating expenses and for emergency use. Usually near cash. A savings account for example. You don’t want the value to fluctuate. These could also include savings for irregular purchases like a car or furniture.
Assets to produce future income. Usually for retirement or children’s education. These assets tend to be more complicated than cash-like assets. You should learn about the choices and find a method you understand.
Assets for growth. These are usually more complicated than income assets. The idea is to have money working that, while more volatile, could produce life changing capital or earlier retirement.
Assets because you like them. Could be art, antiques, jewelry and many others.
Why isolate
Each kind of asset behaves differently over time. You should not own development land for emergencies or a money market fund for growth.
Each involves different skills both to buy and maintain.
Each has different income tax issues
Maintenance
Each should be insured to the extent possible. Houses and cars are easy. Portfolios a little possible but it takes skill to implement.
Don’t forget to insure the source of your money. You and your ability to earn income are your most valuable asset.
The challenge
Establishing a priority. Young people usually buy too many assets to use at first. The next ten years can be challenging because of debt. A little care and discipline can make the rest of life easier.
Decide not just how much to save, but also consider the other part – allocate to what and why. There is no right answer that applies to everyone.
Learn about long economic models.
Learn about compounding growth. What you see in the first few years seems too little. Know that the last double contributes more than all the others before it.
Understand the rule of 72. Money doubles roughly in 72 divided by the investment yield. At 9% money doubles in 8 years. If you have 40 year the investment income you earn from year 33 to year 40 is more than from now to year 32. You won’t be patient enough until you understand that.
The bit to take away
The keys to a successful financial life are asset allocation and how you get the money you use to pay for what you buy. Debt can help or hurt depending on how you use it.
It’s just organized common sense.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don@moneyfyi.com
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