Brand new this month is a book by Kiyosaki. Not Robert Kiyosaki of Rich Dad, Poor Dad, but his Buddhist sister, Emi Tenzin Kiyosaki. It is a memoir about her time as an interfaith hospice chaplain. “The Three Regrets: Inspirational Stories and Practical Advice for Love and Forgiveness…” reports that the most common regret people have at life’s end is “I did not live my life of dreams.”
If you’ve seen my video on the HFS home page, you know that empowering you to live the life of your dreams is my mission. And I want you to know that the #1 thing you should have as your foundation for realizing those dreams is a rock-solid balance sheet.
If you’re wondering what a “rock-solid balance sheet” is, it’s simply :
- Having enough money in liquid assets to provide you a safety net – ideally funds to live for a year.
- Having more assets than liabilities – meaning, high-quality, appreciating assets like your home, art, classic cars, stocks, bonds, real estate
- Having low (or no) “bad debt” – and I’ll discuss in more detail “bad” debt vs. “good” debt
If you haven’t already, it’s time to understand and make a commitment to these essentials. Once these are in place, you’re on solid footing.
#1 – A Safety Net
Why do I believe it’s vital that you commit to maintaining a safety net? Because I’ve seen both ends of the spectrum with my clients – from those having a liquid cash reserve to those being completely unprepared for the unexpected. The #1 mistake I see people make that requires drastic measures for a turnaround is not having a safety net fully dialed in and ready.
When you have a safety net of liquid assets you are prepared for an unexpected financial setback or challenge, such as being laid off or needing to jump ship from a job that is no longer in alignment with your values. Sometimes health considerations need to take a front seat, or your family could benefit from a change in lifestyle. Having a safety net gives you the financial buffer to make vitally important life decisions with financial calm, rather than from a state of financial limitation. You can take a year off, walk away from that job, travel the world, help a loved one, or go find yourself. If you don’t have a safety net, you may someday be stuck in a situation that is unpleasant, limiting, or both.
#2 – More assets than liabilities
In the context of a rock-solid balance sheet this means having assets that are not “over-leveraged.” The #1 thing I see that has gotten my clients in trouble is that they have assets – a home, maybe some income-producing real estate – but they don’t have sufficient cash reserves to maintain those assets if something goes wrong. Imagine, for example, you own an apartment building and you plan for the income from that building to be your retirement fund. Then, unexpectedly, your tenants all lose their jobs and there’s a national moratorium on evictions for non-paying tenants. If you’ve been watching the news you know that this situation is an entirely unexpected reality for some people with investment property right now.
I’ve been fortunate to help several clients turn around major financial setbacks, but some of them could have been avoided with a solid balance sheet. Not too long ago I received a call from a client I had not heard from in a few years. She had implemented some of my recommendations but not others. The news was not good. She had a late-stage terminal illness and was simultaneously in disputes with lenders over a very large amount of money. I was able to help her restructure some of her liquid assets to put money in the bank and pay off her creditors. Then I went to work on the rest of her financial challenges. Today, her survivor has a rock solid $6mm balance sheet and over $1mm in liquid accounts. This case was rewarding to work on, but could have been avoided.
In contrast, another client in a similar business had a potentially bankrupting 75% reduction in sales during the 2008-9 recession. But he survived without a great setback because he had low debt and a lot of money in the bank. And when things recovered, he was in a position to carry on. He has since then enjoyed several of the most profitable years in his company’s history.
Life can bring unforseen challenges and different balance sheets will give very different experiences. If you are currently in a financial bind, or are wondering how prepared you are for the unexpected, please reach out before things get worse or the unforseen happens.
#3 Low or no debt
When I talk about debt, I’m not warning about “good debt,” such as a rental property that is mortgaged but collects rents and is backed by a financial plan. I’m talking about the consumer debt we are drowning in as a nation.
Credit card debt: If you are carrying a credit card balance, it is a sign that you are living above your means. There is no other reason to be carrying a credit card balance for the long term. If this is you, you want to take a serious look at your expenditures and reverse this behavior. For further tips on the proper use of credit cards that gives you the advantage, read my newsletter Your Bank Is Just Not That into You – and Two Things You Need to Do About It.
Car debt: Another big category of bad debt is on cars. Unless you are buying cars like the vintage Porsche I told you about in the last newsletter, they are generally not an asset. If you must finance one, pay it off as soon as possible and drive it as long as you can. And avoid leasing an automobile unless you are a business owner, carefully writing it off. Leases tend to allow you to drive more car than you should afford.
Student loan debt: The third category of bad debt I want to discuss is one I see a lot where people get themselves into far more debt than they should. Students (and their families) lately spend enormous amounts financing college education, ignoring the reality that the economy has shifted from credentials-based to skills-based. Those expensive degrees don’t buy you the jobs they used to because now it’s “what you can do” (not “where you learned”) that companies care about.
If your child wants to go to that Ivy League school right out the gate but can learn the same skills for far less money (and possibly in a far shorter time) elsewhere, encourage them to try a gap year or two at a smaller college or university. Then they have freed up both finances and time to explore which of their talents give them joy, and what skills are necessary for employment in their chosen industry. After her first year at a very expensive college, a friend’s daughter dropped out because she could already make enough with her coding skills to rent a great apartment in the city of her choice, avoid crushing student loans, all while driving the luxury car of her youthful dreams.
So, how to strengthen your balance sheet? It just requires some commitment and thoughtful behavior. And the good news is that you can start now.
- To begin, quit with the quick fixes.
Many people I meet are trying to find a new winning stock or unknown gamble that will finally set them free from years’ worth of not planning ahead. And trust me when I tell you, this approach is what not to do.
What if you put all the money you’ve spent on lottery tickets over the years into an investment account? What would that be worth? I’ll tell you. The average American adult spends $350 a year on lottery tickets. That amount invested in an S&P 500 index fund would yield over $482,000 at the end of 50 years at an average rate of return.
I can confirm after decades of experience that there is no quick fix. Believing that there is will only weaken, rather than strengthen, the foundation of the life of your dreams.
2: Learn to live below your means – for now.
I have clients who have a successful manufacturing shop that generates about $400k in revenue a year. The family has built up a $10m balance sheet and they travel 200 days out of the year. And how did they do this? Not by buying lottery tickets or playing the stock market, but because they worked to protect the assets of their company and chose to live a lifestyle well below their means for a long time. For years they lived frugally, even when they had enough funds in the bank to do almost anything they chose. Now, it has paid off and they are free to live the life they always dreamt of.
If you haven’t read it yet, check out The Millionaire Next Door by Thomas Stanley and William Danko to get more of an idea of what I’m talking about.
3: As you reduce expenses, move those freed-up funds into savings and reducing debt.
When you start making those budgetary changes, step back and focus on the intersection of what matters to you in this process and what you can control. This essential bit of perspective will make your choices clearer each time you make a shift in your spending and saving. This is the inspiration of another blog, Focus on What You Can Control, where I wrote:
“Spending and savings are within our control. It may not seem like it at times, but
what we spend our money on and what is left over is within our control.”
So, are you ready to work on your rock-solid balance sheet?
Get one month of emergency reserves in the bank, and then start reducing your debt. That is where you start. Then start making choices that allow you to live below your means, be disciplined about assigning a certain percentage of your income toward paying down bad debt and liabilities, and build that strong safety net.
In the event you didn’t know it, restructuring and eliminating debt is one of our specialties here at Hicok Financial Solutions. If any of this has brought up questions for you, I am one phone call away. I would love to help you get started.
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Check out our 9-question quiz designed to ask you all the questions necessary to assess Your Financial Fitness.
If you’re ready to spend an evening with good movie, I highly recommend Made You Look: A True Story About Fake Art.
An excellent book about a way to re-frame your financial choices is Your Money or Your Life. The authors show the math on how much “life” each of your expenses and purchases costs you, and they show you ways to examine which of your choices are worth it (or maybe not!). It’s a wonderful technique to apply to consumer purchases like cars, RVs, boats – versus things that you can enjoy for far fewer hours of sweat equity!
