The Most Important Thing About Money and Investing

The average household income for readers of this site $82,000 per year. That makes sense—there are only three reasons why someone would want to read about money: (1) they have money, (2) they anticipate having money, and/or (3) they act on behalf of people who do have money.

Politically, the typical reader of this site is conservative (I mean, heck, it’s in the name of the site)—however, the typical reader on this site is liberal compared to other websites on the internet that claim folks in the $75,000-$99,999 household income bracket as their regular audience. Statistically, when you leave my site, you are most likely to go directly to another site that involves: (1) finance, (2) news, (3) undressed women, or (4) sports (in that order).

Most of you are from California, New York, Illinois, Canada, Florida, or Germany. There is also one regular reader from Ireland. Erin go Bragh, my man.

However, despite the differences among you, there is one similarity that links you all: everyone reading this site wants to be in a better financial position next year, the year after that, and into the indefinite future. While every person you will ever meet (short of monks that have taken vows of poverty) probably agrees with that sentiment in the abstract, you are actually reading online about how to make that a reality, and based on the average demographic information, you have the financial means to make it happen.

So then the next part becomes: How do I make that happen?

The answer is two-fold: You have to create big ‘ole spread between where your lifestyle spending and the money you bring in, and you have to acquire ownership stakes in things that can be capitalized. To increase your chances of success, you will hopefully do this in a diversified and relentless manner.

(1)    If you are among the typical demographics and bring home $82,000 in household income per year, that means saving around $10,000 per year to see real, sustainable changes in your household situation on a regular basis. That’s a household savings rate of 12.19%. If we are only a generation or two removed from having relatives that stormed Normandy, we ought to have it in our DNA to save a measly $0.12 on every dollar brought in.

(2)    The second element is business ownership, something that is a substantial focus of this site. Paul Allen, the co-founder of Microsoft along with Bill Gates, once quipped: “No one got rich by putting all their money in a savings account.” The gradual acquisition of cash-generating assets over the course of a lifetime means everything—it’s the kind of thing that allows you to wake up one morning and wonder, “What the hell? I got more money coming into my bank account every month from rents, interest, dividends, and distributions than I make from my job. When did that happen?”

Normally, when we discuss the difference between active and passive income, we speak solely in terms of labor. We say things like—for a grocer to make $100 in a day—she has to actually show up and work for eight hours. If, after your first week as a grocer, you decide you don’t want to put people’s stuff in plastic bags—the money stops coming. That’s at. No labor, no money.

With passive income, it’s different. If you own 14,000 shares of Johnson & Johnson, you are going to collect $100+ per day (paid out four times per year) regardless of whether you decide to do anything with your life—all you have to do is stay alive and not relinquish those shares.

But there is a second difference between active income from your labor and business income that you should keep in mind as well: when you are selling your labor as an employee, you are working for someone that is trying to pay you as little as possible. Employers don’t wake up one morning and say, “Gee, our grocery store made $12,000,000 this year. We only wanted to make $10,000,000. Let’s spread that other $2,000,000 between our employees since we made too much profit.” The employer’s job is to pay you as little as possible without alienating or insulting you if you have a specialized talent, and without getting you to quit if you are working a job that does not require a unique skill set. If you make $75,000 per year at your job, your employer isn’t sitting in the office all day thinking, “How can I get my employees to go from making $75,000 to $100,000?”

Business ownership is different. It’s all about trying to make more money. If you own those 14,000 shares of Johnson & Johnson, you are effectively employing a management team that is trying to put more money in your pocket all day long. If the CEO doesn’t achieve 8%, 9%, 10%, or whatever the target growth amount is, he will eventually get fired. In fact, the management team is trying so hard to make you more money, that sometimes they will resort to actions to increase profits that earns rebukes from the community—employee layoffs, cutting of medical plans, and even negligence in the factories when it comes to selling safe products. The morality of those topics can make for one hell of a debate—but the point is that the intent is to make more money for shareholders. But when you are just an employee, there is no one out there whose overriding intent is for you to make more money.

Your end game should be to turn your personal balance sheet into a financial fortress. Everything I have to say about personal finance can be boiled down into this paragraph:

(1)    Create a job that allows you to pool your money into business ownership stakes, hopefully reaching a point where you can set aside $10,000+ per year from your labor to acquire business ownership stakes.

(2)    Understand the major tax shelters available, and take advantage of them. The less money that you let the government take, the more you have working for you. Putting $5,000 worth of AT&T stock into a Roth IRA and letting it grow for 25 years will yield much better results than putting $5,000 into a regular, taxable brokerage account because most of AT&T’s returns come from the dividend, and avoiding a tax of 18.8% on that income each year will make a huge difference when the holding period is measured in decades.

(3)    Own the most dominant enterprises on this earth—they should drown their owners in cash, as Charlie Munger likes to say. That means Coca-Cola. That means ExxonMobil. That means Visa. That means Disney. That means Johnson & Johnson. That means Procter & Gamble. That means Chevron. Depending on your skill set, it could be quite advantageous to acquire a few rental properties over the course of your life, because they give you monthly rental income that can also shove into more stocks and bonds throughout your life (bond rates are bubbilicious and insulting right now—when they become more attractive, the content of this site will change to reflect the better terms when those days arrive).

(4)    You eventually have an endgame of being a capital allocator. You work when you want to work. Meanwhile, you have several properties generating $3,000-$5,000 per month for you to deploy as you wish. You have blue-chip stocks that are deploying tens of thousands of dollars in annual dividends for you to reinvest into new opportunities that will in turn generate cash of their own. You have an emergency fund of $25,000+ so that you can handle any unexpected expenses that show up. In short, you’re a financial powerhouse.

Everything I say hinges on the successful and sustained conversion of income from your labor being converted into an ownership interest that will generate cash of its own, so that with each dollar you invest, you have more and more money coming from business ownership sources instead of from your labor.