Creating a Personal Economic Plan

This post is a continuation of What’s Your Personal Economic Plan?

What Can You Do? What Suits Your Temperament?

Now there's a plan.

There are a few ways to make money.  There is passive income, which involves no effort beyond cashing checks.  This could be from investment income (interest and dividends), rents (if rents exceed maintenance expenses), passive ownership share in a profitable business, and royalties (from music, books, and performances).

There is the possibility of having a job, with salary and benefits.

There is freelance, or independent work, where you charge a client for services delivered (on a job, hourly, or daily basis).

There is the entrepreneurial route, starting, or gaining an ownership stake in, a profitable business.

Your spouse, significant other, or family might be willing to support you, but this can mean sacrificing a lot of economic autonomy.

There’s also crime, but in the end crime doesn’t pay.

Part of creating a strong personal economic plan is understanding your own temperament.  What are you suited for, and more importantly, what are you not suited for?  The big “traps” in my opinion are as follows:

1. If you chafe under authority, don’t get a job.
2. If you can’t manage your time effectively, don’t try to go freelance.
3. If you aren’t enormously tenacious and stubborn by nature, don’t start your own business.
4. If you don’t have any tolerance for risk and wealth fluctuation, don’t try to make money by investing in the stock market.

If you can generate passive income sources, good for you.  I made an early decision to retain as much ownership of my own music as possible (it’s one reason Spesh and I started our own label), and that decision has paid off as a steady stream of sales, licensing, and performance royalty income.  But many so-called “passive” income sources are also beset with traps.  Many of them aren’t passive at all, but require enormous amounts of work to keep the money flowing.  For example:

1. If you own property, being a landlord to even the nicest, most reasonable renter requires a lot of work.  If you get a high maintenance renter, you’re screwed.
2. Finding a good property management company is a big project in and of itself.
3. If you invest in the stock market, properly researching and tracking the companies you invest in (as well as overall market trends) can take up all your time.
4. If you have a passive stake in a profitable business, you’re very lucky and/or very smart.  Most passive investors just lose their stake.
5. If you run your own business, it’s possible to automate most aspects of your business and vastly reduce the time required to run it (Four Hour Workweek style), but getting to that point won’t be easy.

Coming Up With Your Plan

Of course no single plan can fit everybody’s economic situation, but here’s one possible approach:

1. Evaluate your economic endgame.  Where do you want to be? How much, exactly, do you want in the bank?  What kinds of income sources do you want?
2. Evaluate demand.   In what areas do economic demand (and projected future economic demand, as best as you can guess it) overlap with your personal skills, interests, and ambitions?
3. Consider your temperament.  Do you work well in the context of a structured hierarchical organization?  Do you excel at organization and resource management, and are intrinsically motivated?  Do brand-building and marketing turn you on?  You might be suited for job, freelance work, or starting your own business, respectively.
4. Plot course based on above three variables.

Personally, I chafe under authority.   I’ve never had a full-time job, and I never want one.  I manage my own time fairly well, so freelance work has been a good fit.   I love running a business, especially with other people.  I have a low tolerance for risk, and I’ve discovered that thoroughly researching securities is not something I enjoy, so I’m currently simplifying my portfolio (away from stocks, more towards ETF’s and cash).

In terms of matching my own skills and interests with demand, it’s a constantly moving target.  My tech skills are not “cutting edge,” but at the moment there is still plenty of demand for what I can do.  I learn new skills on an as-needed basis, project by project, and intend to keep doing that.  In terms of music, my tastes don’t always line up with mainstream, but sometimes they do.  I’m still exploring what kinds of songwriting and music production satisfy my inner muse, but have a greater chance of hitting the roving zeitgeist “taste spotlight.”  My fiction writing skills are still raw, but I aspire to write novels that are page-turners — stories in which the reader actually cares what happens to the characters.  There always seems to be demand for that kind of writing.  Blogging?  I enjoy it, but I don’t expect to make an dime off of it.  If I’m wrong I’ll be pleasantly surprised.

Want to get ahead? Then find a way to make time not equal money.

Here are a few principles to consider while plotting your course:

1. If you try to make more money by working more hours, there will be opportunity costs.  You’ll have less time to spend with family and friends, less time to exercise, less time to cook, to read, to sleep, etc.
2. In almost all cases, to become wealthy you’ll need to find a way to separate your time from your income.  Even if you command a high hourly rate, day rate, or salary, you’ll be forever limited by the number of waking hours in a day, and your personal energy level.  True passive income and true entrepreneurial income are not limited by time — there is no growth ceiling to these categories of income.
3. Most personal and small businesses fall into the time = money trap above.  With any business model, does extra demand mean you personally need to work more hours?  IMO that’s not a business, it’s just being your own boss (which is nice, but won’t make your rich).  For more on that topic read this book.
4. If you are “superstar” in your field, you might be able to command exceptional rates for your services.  Even if you are “just” very good at what you do, it will improve your economic prospects.  Investing in your own skills and knowledge base is almost always a good investment.

Money Management

Wheelin' and dealin' in Babylon.

Regardless of whatever economic hand you’ve been dealt, if you can identify and meet a demand, and manage your money effectively, you’ll be in a good position.  The second part of this proposition is the easiest, and also the most important.

You’ve probably heard the phrase “Pay yourself first.”  I first read it in the book The Richest Man in Babylon.   In practice, paying yourself first means that you put a percentage (at least 10%) of your income into savings every time you get paid.  But what are you saving for? Nothing — you’re just saving.  As your nut gets bigger, you become more and more financially independent.  You gain more economic freedom.

Many people, when they get a check, instantly think of what they can buy with that amount of money.  These people, no matter how big the check is, will always be broke.  Money “burns a hole in their pocket.”   They don’t see the point of saving money (you can’t take it with you, after all).

Maybe there’s a genetic element.  I started saving money as soon as I knew what it was.  But even if you’re not a natural saver, it’s not that difficult to put that 10% aside each month.   You actually get to keep some of what you earn.  Pay yourself first.

A Difficult Problem

Making and keeping adequate amounts of money often qualifies as An Extremely Difficult Problem (in the linked post I discuss rational, empirical, and subjectivist approaches to problem solving).  What I’ve outlined above is a rationalist approach.  There are, of course, other ways of thinking about it.  The subjectivist approach, advocated by Steve Pavlina and many others, would advocate that you have an “attitude of abundance” rather than an “attitude of scarcity” (in the linked article Steve notes that he finds making $10K about as difficult as “making a sandwich”).  I completely agree that maintaining the right attitude is important, but I also think there is a potential trap there — a magical thinking trap.  There’s no reason you can’t use an “attitude of abundance” in conjunction with a rational plan.

On the other hand, the empirical approach would be to observe which activities lead to adequate income, and which ones don’t, and act accordingly.  I think that’s how most people navigate the economy, but it’s not very efficient.  It’s driving forwards while looking out the rear window.

Ideally, you would use a rational approach to make your plan, a subjectivist approach to maintain the right attitude, and an empirical approach to test your assumptions about demand.  Don’t just guess at what is hot, or trust “the experts.”  Go do some real world testing.  Set up some informational interviews with potential employers before you enroll in the degree program.  Research market demand before you create and promote a product or service.

The Lens of Privilege

Observe the horrors of a social democracy.

Some countries try to provide a more equal economic playing field for all their citizens.  Progressive taxation, state-funded education (including preschool) and healthcare, anti-discrimination laws, and anti-nepotism laws all help level the playing field.  Still, some people are born into privilege.  Being born able-bodied, of sound mind, with a loving two (or more) parent family, in a country with a good education system, of an ethnicity-age-gender combination that is not discriminated against, of a socially accepted sexual orientation, with family connections, having access to family investment/capital, having good social skills, being well-nourished in childhood, being good-looking — all these things are enormous advantages.  It’s hard for people who have these advantages to understand how much more difficult earning money is for those who don’t have them.

I have a middle-class background, and remember a fair number of arguments about money while growing up.  Still, I consider myself extremely lucky.  I’ve done plenty to create my own positive economic situation, but at other times I’ve received major help from my family (buying a first house, getting introduced to a business owner who would help me develop my technical skills and provide work, and many other things).  I also benefited from good public schools.

My point is not that you should feel guilty (if you drew a good economic hand), or hopeless (if you didn’t).  My point is it’s the right thing to do to support strong public education, anti-discrimination laws, equal pay for equal work, generous public assistance for people with mental and/or physical disabilities, strong public health programs, and anything else that brings the less privileged up a notch.  And funding these program doesn’t cost money — they’re the equivalent of minting money for society.  Money saved on emergency services, money saved on healthcare costs, money earned from taxation of skilled labor — investing in the welfare of the least-advantaged is probably the lowest-hanging fruit there is in terms of easy, quick national economic improvement.

Real Wealth (Pyramid Scheme)

I tend to think about wealth as a three-sided pyramid.  One side is financial assets.  One side is physical health (which translates into energy and clearheadedness).  The third side is the amount of love and friendship and social connectivity in your life.   Without all three, you can never really be rich.   On the other hand, if you have at least one, you’re never going to be poor.

Anything you invest in any side of the pyramid will accumulate interest on all three sides (and conversely, anything you borrow from one side will cost you interest on all three sides).  Working out will increase your earning power.  Being fair and kind to people will eventually translate to cash in your pocket.  Becoming wealthy affords you access to better healthcare and better food.  Being socially active helps keep you physically healthy and can lead to economic opportunities.  It’s all connected.