Reprint of Article Published in the the largest circulation real estate magazine in America, the Financial Freedom Report, in 1983

Financial Contentment

The myths about Financial Contentment and estate planning have grown with the mounting economic pressures that have made its need so very obvious,

Finding the Money
First, it is unfortunate, that even professional planners assume that a prerequisite for a serious financial plan is having money! This stereotype was dramatized in a recent issue of MONEY magazine which focused on financial plans from five of America's most successful financial planners. I am positive that the Americans who read that issue became very discouraged and frustrated with the article entitled “What to DO with your MONEY".

The fact is, most Americans don't have "extra money" to invest. The Japanese people on the other hand, lead the world by saving 19 percent of what they earn in a year. Americans seem to have developed the reputation (at least among ourselves) for spending 19 percent (probably higher) more than we earn in a year (easy credit, mainly),

When compared to other industrial countries, Americans are not known for saving money. We do however ;own more- than our fair share of real estate equities by international comparisons. But that's not cash in the bank.' A good financial plan for Americans today, must address itself to creating liquidity (the available cash) in your portfolio.

Your Assets
"Portfolio" is just a complicated word for assets. Even though your assets have a gross value, the net value (what remains after you deduct your liabilities, or bills and expenses) is not as important these days as the cash flow from these assets. It really doesn't matter what your income is in relationship to your net worth, if you have the income you "qualify", if you have the net worth only, you don't.

Finding Financial Contentment
Another myth, is that the natural consequence of financial planning is financial contentment! Contentment is not always a part of a financial plan. Having a million dollar net worth may not seem so fulfilling when one has achieved the goal only to find that, because there is nine million dollars worth of debt service surrounding your net worth, you realize you can't take the extended vacation you thought would be yours. Just one vacancy in an income property asset can put You $50 short of making a $2,000 mortgage payment! That feeling is not contentment; but rather something more closely akin to the feeling which must have been experienced by General Custer. It is far more likely that your financial plan has not been thoroughly thought through, and you may be on your way to a heart attack or a divorce or maybe even both!

"Spending" money may well be the only true test of how much contentment money can buy; but, by the same token, the "striving" to get enough money to take that test usually brings an antithesis of contentment.

Learning My Lesson
Financial Contentment? I learned a powerful lesson from my grandfather and my grandmother. When I lived with my grandparents they were too poor to buy waxed paper, so not only was my school lunch taken to school in a brown paper bag, but my sandwich was wrapped in a butter wrapper! My school friends were not ready to understand why I was so careful to fold that butter wrapper each day and take it home along with my sack. The next day's rules were simple: No sack, no lunch; and no butter wrapper, no sandwich! While my grandparents may have been "too poor" to buy waxed paper, when it came time for my mother and father and my uncle to buy a new car or a new home, my grandparents were there to lend them the down payment and help them qualify. In fact, though they might have been too poor to buy waxed paper, they were able to pay cash to build themselves a triplex to aid in their retirement.

Here's something my business friends today are not ready to understand: Were my grandpa and grandma too poor for waxed paper? Or did they have "financial priorities" which led to a financial success?

Frankly, financial planning is a process. Financial contentment is merely the attitude which can develop because you know that your process is not only in motion, but it is also working in accordance with all your motivations. Contentment is a byproduct of well-disciplined priorities which are constantly developing into where you want to be in a permanent, lasting context, not as a short-term great idea.

Choosing Financial Priorities
Choosing Financial Priorities A financial plan in the 1980s can be appropriate only when it lists the priorities necessary to show you what to do to build your money, continually, creating the liquidity (the cash) to reinvest or spend. A financial plan should make no prior money assumptions at all. It must start from zero, as though you had nothing. Only such a financial plan will address itself to the realities of the American lifestyle. Then any money you do have can move you along faster and also protect you from error.

Portfolio (Asset) Plans
In order to set proper financial priorities and to determine what a portfolio (asset) plan should look like let's first examine the traditional (and antiquated) "hedge investment portfolio."

Imagine an asset pie graph. Cut the pie in half. The left side will represent the fixed income assets; the right side will represent the appreciating assets. Fixed income assets are bonds, certificates of deposit, and money markets, these are assets with a guaranteed fixed income. Gold, silver, antiques and real estate are appreciating assets; others are art, strategic metals and precious gem stones.

With the two sides of the portfolio balanced, the "hedge portfolio" was considered "safe." Because with your investments split 50-50, you never loose – at least that was the principle. This plan anticipated that when the value of gold moved up, you knew the value of the dollar was going to move down; then, if the dollar started to move up, gold was sure to move in the opposite direction. The economies of the past few decades acted like sluggish see-saws, with only occasional fluxuations. You could plan on controlling your portfolio with a simple tidy formula: P = A + F. That is the whole was the sum of its parts, or 50 percent + 50 percent = 100 percent.

Here's how the model functioned. During times of inflation the appreciating assets will move up in value almost at the same ratio that the fixed income assets will move down in value. Thus, the fixed income assets would go down to 20 while the appreciating assets moved up to 80. The sum? Still 100 percent.

Twenty five years later, however, what have you got? Plus or minus what? Zero. In other words whatever you started with, you ended with.

Use Portfolio
Use Portfolio™ is an asset management concept for the 1980s. It is based on the principle of REAP Investing™, which is the thesis of my forthcoming book, How to Make the Crash Go Boom. "REAP" stands for "Real Estate Acquisition Planning.

REAP Investing goes hand in hand with the simplest philosophies of investing. It is not just a system of knowing what to do with a property after you have bought it, though many investors today cannot see past the closing. They seem to have their fingers crossed, positive that there's a profit "in there somewhere." Maybe you will be lucky, but that really is just buying blind, and you deserve what you get.

REAP Investing establishes priorities which help you buy real estate right by assuring that every property pays for itself. Also solutions to future problems are fixed in advance. In other words, plan on solving these problems before they happen: I) vacancies, 2) unexpected repairs, 3) increases in taxes, 4) untrustworthy tenants, 5) unemployment, etc. Structure your purchase to brace for the worst. (If the property won't support itself if one of the above problems occur, look for another property.) If you are prepared for the worst and anything better happens (i.e., record breaking increases in rents), you are on your way to financial contentment.

Examine Portfolio
Now we're ready to determine how the Use Portfolio idea can work for you.

First, let's examine your portfolio of assets broken into two categories represented by two separate pies. The first pie is your Income Pie, for most of us that is our "Job Pie." The second pie will be your Asset-Equity Pie. It will represent the net value of everything else you own.

The pies are separate because each pie will require a different plan of action, and will net a different use.

Income Use
Use Let's dissect the Income Pie. Cut two small pieces out of the income pie, each representing 10 percent of your income, leaving a third much larger piece, to represent the balance (80 percent) of your income.

Now label each piece: The first small 10 percent piece call "HIS", the second small 10 percent piece call "OURS", and the third piece call "THEIRS".

The first 10 percent, which we called HIS, does not belong to you. Give it away. If you are a student of the Bible you may call this 10 percent "tithing." It is a gift or donation of 10 percent of everything you earn to your church. If you attend positive thinking rallies, then you will understand this principle as the Law of Abundance, and you will give your 10 percent to a charity, a library, a college, or a hospital. This great principle is depicted quite well in the book The Greatest Salesman in the World. "The secrets of true wealth are made available to those who understand giving for the sake of giving. Those who have tried it believe that knowing how and when to give is a requirement for becoming wealthy. In addition, it is fun. It doesn't matter what you decide to call it, that:10 percent doesn't belong to you it belongs to HIM, whomever that may be! The second l0.percent, the "OURS", actually belongs to you! It may be the only part of your earnings that does. I am serious. Most of us waste, or spend all of our money each month. The fact of the matter is that someone else has earned your money from you even before you made it - it is not yours! It belongs to the shoe store, the grocery store, the bank, unless you will learn the priority of paying yourself first, none of your money will belong to you!

Tithing to Yourself
This 10 percent is a kind of tithing to yourself or your family. It too can be a tax-deductible contribution to yourself if you will make it to the next step, forming a family trust, or a pension plan, This could well be the only system you have for systematically increasing your net worth. These monies may be used for paying down the principle on the mortgage on your home, or reducing any of your liabilities. This could be your Safety Fund. The new IRA's and KEOUGHs are making this tax-deductible self contribution possible to even those who don't have more sophisticated resources.

This money is yours. Put it to work for you and soon enough you will not have to work. This is your investment money. It is the reason my grandparents were too poor to buy waxed paper, but they had the cash to build their retirement triplex free and clear. This is your investment money, it is the only thing that separates your today from your tomorrow, which you promise to yourself by putting this 10 percent to work. Live on whatever else you have; this 10 percent belongs to you and your "Survival Portfolio" which will be described later. The next 80 percent, the balance of your earnings is what you live on. It will usually and rightfully belongs to everybody else. Without exception, you cannot spend more than you make. Living this priority will give you great power to see bargains as an investor, and you will thrive on living within a budget.

Slicing the Asset-Equity Pie
Now for the asset-equity side. Leaving the Income Pie, divide your separate imaginary Asset-Equity Pie into two unequal pieces, one should be large enough to represent 70 percent of the pie and the other the remaining of 30 percent. Arbitrarily we will call the smaller one your Growth Portfolio only because we will assume that even though the gross value of this portion of your assets may be much larger, it should have a lower net value to you. The larger pie is your Survival Portfolio.

The assets in your Survival Portfolio are the basics. They are the things that make you and your family happy. They are the things that you need, and if you had only these things, you could make it comfortably through the day and sleep warmly at night. These are the things that would be important if you lost your job, or something drastic happened to your income. These are the things that, because you are prepared, will help you survive.

Crisis
Crisis Perhaps a trucker's strike of three days had left the grocery empty. (Remember the toilet paper shortage scare, started by Johnny Carson's joke on air?) Perhaps even a major economic crisis, whether regional or national in scope might have you glad you planned ahead, and you have what you need to survive. The word "crisis" bas its roots in two Chinese words that mean "opportunity on the wings of a bad wind." A list?

1. Something to eat: Your food.

2. Someplace to live: Your home.

To really be safer than sorry your home should be free and clear of any debt. Then, with a three month food supply, and no debt, you could live in your home quite independently for at least three months – if you had three years supply of food, your independence could last for at least three years! Then, you need allowances for other minor contingencies. At that point you could not only be independent, but if you had the other aspects of your survival portfolio working for you, you could probably also feel quite content, too!

3. Other Things of value: Clothing, and fuel and other items for barter (trade) that will have-value-in-use to your family and to your neighbors.

This portion of the Survival Portfolio is a catch-all category for all the things that are necessary to keep your family secure.

4. Source of resources and income: Six to twelve rental units close by your home, all free and clear. They could bring any rent the market could bear because without debt (less maintenance) the rents received would be all yours to use as you see fit; perhaps you would prefer to trade the rent to those whose services you could ''use" to create even greater security.

5. Income: Several owner-occupied residential mortgages. These are single-family homes that you have sold to buyers who live on the premises. You made a great deal of profit on these homes, and you are carrying the financing in the form of a mortgage payable to you.

A Safe Yield
A Safe Yield Real estate mortgages are one of the safest high-yield "money markets" you'll ever find. Safe because it is money that your buyers owe you, and since this money is owed on the homes they live in, they will pay it first before other debts. These income producers have a higher yield than bonds and most all other paper, when the long-term gain tax treatment on the equity buildup is considered. In addition, "paper" is a natural by-product of your real estate endeavors, It is "monthly liquidity," because it trades for face value for another piece of real estate which can be refinanced for immediate cash.

Real estate paper is the only hedge-type asset you need to consider. If your Survival Portfolio were not free and clear of any debt, you might consider having at least twice the cash amount in excess of your anticipated liabilities and expenses coming to you each month from the installment payments on your paper mortgages. If most of the liabilities on your Survival Portfolio are not fixed payment obligations then you may want to anticipate higher needs and plan on a safe margin of error.

6. Other items: To round out the Asset-Equity portfolio, you may want to consider gold and silver coins for "face value-in-exchange" tendering. In addition, small carat diamonds offer portability. We shall not take space to discuss them here.

Growth Portfolio
This is the segment of our Portfolio plan with which most of us are infatuated. But now is the time for action. The 30 percent segment of your Asset Pie represents your Growth Portfolio. The investments here are fixer uppers, conversions, and highly leveraged properties. With each acquisition we plan to maximize and force equity growth with minimal, if any, cash outlays.

Growth Portfolio gives a maximum return because down payments are minimal, and the profits from these growth properties can be used to grow and grow. The eventual outcome is that profits can help secure free and clear property and other assets in our Survival Portfolio.

Summary
The unique concept of the Asset-Equity Investment Pie, divided into a Survival and Growth Portfolio, is a solid real estate investment method. It forces you to secure your future rather than leverage it, which is spelling disaster for many of today's investors. Read this article over several times. The alternatives will begin to make a lot of sense; and if you apply the REAP method of investing in real estate, Financial Contentment will be the result. After all, that's really freedom is all about.