Mission Improbable Part 5: Education, Schmeducation

Robert Kiyosaki defines an Asset as something that is a “source” of Cash. He distinguishes it from Liabilities, which are a source of Expenses (and thus a “use” of Cash). So a rental property that produces rent income every month is an Asset, but a family home, which requires upkeep but produces no Cash is a Liability. Yes, your family home, often considered the bedrock of one’s financial future, is a Liability!

One needs to look no further than the current real estate crisis to understand why. It is true that if the value of one’s family home is appreciating, it can be sold for a profit and generates Cash. This would appear to make it an Asset. But across the country the “equity” value of this perceived Asset has been mortgaged and re-mortgaged to a fair-thee-well in the last few years, and the resulting glut of new mortgages, often granted to households that were unable even to make the first payment, is what triggered the downfall of the financial giants you are reading about in the news. If the family home were an Asset, it would have been reliably generating Cash rather than requiring Cash to sustain it. The “bedrock” of many people’s financial future turned out to be sandstone.

Rental property is only one kind of Asset, one that’s easy to wrap the brain around – it’s easy to understand how rental properties generate Cash. A business is another such Asset - a service or product sold for a profit provides Cash, and the business is as such an Asset.

But Kiyosaki states that the most valuable asset one can obtain is financial education. Education an Asset? But doesn’t Education cost money, making it a Liability? Yes, at first glance. But a sound financial education can position a person to recognize financial opportunities. Taking advantage of such opportunities can generate income for decades, far exceeding the initial Cash outlay for the education that made it possible. Education is an Asset, if it is geared to recognizing financial opportunities.

As an accountant, you’d think that I’d had more than enough financial education to be a success. I can read a Balance Sheet and an Income Statement. I understand the Accounting Equation: Assets minus Liabilities equals Owner's Equity! I know how to spot financial problems and figure out the sources of those problems so that they can be corrected before profit is impacted.

But my Accounting education taught me how to monitor and evaluate Wealth – NOT how to attain it. This is a key quality that distinguishes an Entrepreneur from his or her financial Controller – the ability to spot financial opportunities and boldly seize them. And it was a key ingredient missing from my education and career.

So I left my job back in February, and was soon aware that I’d never be able to return to the grueling, stressful career that I had tended and nurtured for nearly thirty years. And where had it gotten me? I had some cash in the bank, but no real understanding of investments, no way to use that cash in ways that would build wealth and allow me to escape the career that had been destroying my health. So I decided to embark on a program of real, financial education.

Most schools teach people how to be employees. Think about it: An MBA – that cherished prize of people who want to embark on a profitable career in business, often prepares its recipient for nothing more than a cubicle farm.

Even doctors in our age, once considered the epitome of financial success, have succumbed to employee mentality, often working for hospitals and HMOs in overworked, underpaid, and horrendously stressful conditions. Combine that with a right-out-of-college debt well in excess of $100,000, and it makes for a pretty miserable career choice for all but a few select specialties.

There is nothing wrong with being an employee. But I’ve decided the whole financial paradigm of employment is wrong, and will not provide sustainable income in the current global economy.

The trouble with employment? You work once and get paid once. It is LINEAR income. Reasonable pay for an honest day’s work. What’s wrong with that, you ask? Well, linear income will pay the bills, but only the highest linear income (think CEOs) can provide a truly secure financial framework. Look at the news: CEOs get paid generous, contractual bonuses for destroying companies these days! When was the last time an employee besides a top manager got such a parachute?

But here’s what’s even more alarming about my situation right now: What’s a guy with training in Accounting and a successful twenty-five year background as a financial analyst and Controller, with not even a CPA or MBA, supposed to do in an environment where CPAs and MBAs are now a dime a dozen? In my city, that would mean preparing myself for an extended period of unemployment, likely followed by an extended period of underemployment.

What’s a guy to do? In my case, I began educating myself about opportunities. I had to turn off the risk-aversive accountant inside of me, ignore the advice of my CPA and the tsk-tsking of my attorney, and start looking at new earning paradigms.

I’ve heard it said: Profits are better than Wages. The meaning: Owning your own business is preferable to employment. That’s great. But I’m no Entrepreneur – I’ve only been trained to keep an eye on other people’s money. What kind of business would work for me?

I started desperately trolling the Internet for investment and business opportunities. This was the period of terror I described in an earlier post. Fueled by the image of that child in Kiyosaki’s Rich Dad Poor Dad who observed his environment and spotted opportunities to earn money, I began watching – god help me – infomercials and ordering materials about possible Internet businesses. I took advantage of coaching opportunities offered by some of these programs. I learned a great deal about the kinds of businesses and investments that are available out there.

Let me be blunt: I do not recommend that ANYONE do what I have done here. My fear-based foray into “financial education” was scattered and random - like a shotgun - and pretty expensive. I am ashamed to say that I fell prey on occasion to the unholy Nemesis of Reason: Advertising Copywriters! Curious about any and all wealth-building programs that purported to “work,” I invested in a few dogs. And not cute, fluffy ones – mean, snarling dogs that would have chewed my throat out if I’d let go of the leash for a second.

But it gave me an eye to the opportunities that are everywhere. And I began to affirm that I deserved to benefit from one of the good ones. Practicing this affirmation, I just kept looking and learning until I found some things that fit. In retrospect, I don’t think I would have done anything differently (except for picking the "dogs" a little more carefully!), and I’m positioned now for an entirely different life. More about that in the next post!

Now a Word from Our Sponsor: Murders and Acquisitions 101

As I admitted in a previous post, my education over the last six months has been a bit scattered. The reason: Pretty quickly after I left my last soul-draining job, I knew with a certainty that I could never return to that business. I found myself, at the age of 52, trying desperately to figure out what I wanted to be when I grow up, only to realize that I’m already too old not to already be grown up! That, I’m afraid, threw me for a short while into a bit of a terror, and caused me to look in lots of directions simultaneously.

I’ll discuss some upsides to this educational approach as well as what I’m sure are the pretty obvious downsides, in a future post.

Previously, I was a controller for a mid-size company that had been purchased by a large company. This is not the first time I have had such a job, in fact the job before this one was almost identical in situation, activity, and scope. And I had actually made a sort of specialty out of taking mid-size businesses through acquisitions, helping them adapt to the new operating environment, modifying their accounting systems and reporting to make them compliant, and implementing new policies and procedures. Having gone through this a number of times, I have noticed a very persistent pattern, and it goes like this:

A mid-sized company has through dedication and hard work created for itself a track record of success and a bright future. It is very profitable. It has a wonderful corporate culture, is actually like a large, extended family. They have parties, share their personal lives, and see each other through dating crises, marriages, pregnancies, divorces, and family deaths. Home away from home.

Then, the mid-sized company is purchased by a large company, usually in an effort for the large company to “diversify.” The mid-sized company, because of its success and bright future, is purchased for top dollar by the acquiring company.The former owners are very happy, and sometimes go away, or are worked into the new top management team for the acquired company.

The new parent company’s financial people descend on the mid-sized company, auditing, evaluating, and changing everything. They force the smaller company to wrangle their accounting and program reports to fit into the scheme of the larger company. Because the smaller company is an attempt to “diversify,” their business is by definition different from the parent’s core business. This requires the smaller company to chop its numbers into odd, meaningless pieces simply to get them to fit into the new required format. Simultaneously, they struggle to maintain their previous, meaningful accounting and program reports because these actually help the management understand the business properly. This requires the financial staff to produce double the reporting, including a set that is demonstrably meaningless. Honestly, this is not my own bitterness speaking – I’ve watched this play out time after time.

Then, because the large company wants to reduce their own expenses and improve their rates, they begin allocating a portion of those expenses to the smaller company as “corporate allocations.” Because the smaller company has shown a history of inordinately large profits, the larger company applies these allocations with an increasingly heavy hand. In short order, the allocations require the smaller company to raise their prices to the customer in order to cover the additional layer of expenses. This makes them considerably less competitive on new business, and the struggle to maintain growth and retain customer base begins.

The last company I worked for was a defense contractor, and the smaller business had benefited from government-instituted “small business set-asides” prior to their acquisition, a boost given by the government to promote the development of small domestic suppliers. Being acquired by a large company, however, the smaller company no longer qualified for these set-asides, and they lost an important competitive edge. This, too, affected their success in the marketplace.

In the meantime, the larger company is seen by the employees of the smaller company as a bit of a nuisance, but nothing more (except for the accounting and human resource departments, which struggle to keep up with considerable changes without impacting the employees any more than necessary). However, the new corporate culture begins to seep into the smaller company: Rising costs make it increasingly difficult to maintain the regular parties and fun events that maintained esprit de corps. Employee benefits change, impacting the employees and their families in ways both large and small, almost always at least troubling. Bonuses begin a steady downward trend, until they are based in large part on Corporate performance standards rather than those of the smaller company – in other words, unless the parent has a good year, nobody gets a meaningful bonus. And further, they are often skewed toward top management in spite of management's best efforts in the interest of the employees,. Even tiny holiday bonuses, which the employees had come to rely on, begin to disappear in the struggle to maintain price competitiveness.

The result is a growing dark cloud over the offices of the smaller company. Bitterness increases, and the management of the smaller company struggles to maintain even paltry incentives for its employees. At this point, usually the most talented employees begin resigning, often lured away by competitors and customers. The business base eventually deteriorates, raising the concerns of the parent company, and further stressing pricing. That’s when the hideous specter of “reorganization” begins.

The parent company, compelled to rework this marginal business into their incompatible business structure (and motivated by the high price they paid for the smaller business in the first place), begins moving the smaller company into various positions within the larger framework. They move from business line to business line, each time adding new layers of allocations and often requiring that their accounting information be presented in new and even less meaningful ways to fit the new division they have been placed in. Besides the disarray this causes the accounting department, often the human resources department finds itself in the hapless position of changing employee benefits again and again to fit the new organizations.

I’ve seen the “end game” play out in three different ways: Either the parent company puts the smaller company on the block to sell it for whatever they can salvage; or they chop it into sometimes minuscule and meaningless pieces, fitting these arbitrary chunks into existing businesses that are as close as possible to their trade; or they are consumed by the Borg and lose any semblance of their former identity. Sometimes, if it is sold to a suitable buyer, this can result in a return to some semblance of normalcy. If it is assimilated entirely, that, too, can be okay – although it has by this point lost all of its “charm.” But the endless rounds of reorganization rarely go well for either the business, the customers, or for the remaining employees.

In the meantime, the halls of the smaller company are dark and joyless due to attrition and discouragement. Empty offices scold the remaining employees, making them feel like failures for not have left the sinking ship early in the game. Often the smaller company’s management team is removed or changed, eliminating what was once a central focus of employee motivation and loyalty. This is a dreary, thankless, demoralizing process, and I have sat through this “end game” twice to completion – and that’s why I simply can’t go back.

Please note: Every bit of the above analysis is my humble opinion. I am sure that viewed from another perspective the process looked very different, and perceived (or assumed) motivations may not been the real motivations for what transpired. Nevertheless, it is cathartic to put this process as I have observed it into writing. Honestly, it’s not that the large company is an “evil empire” – they’re just trying to do the best they can to assure long-term stockholder value and a firm foundation for the future. The problem is that they often do this while instituting short-sighted, bottom-line policies that quickly undermine what they’ve acquired. They’re somewhat like a child who captures a bug in a bottle, and “loves” it to death.

In the next post, I’ll discuss the range of my recent education, and why I believe my “shotgun” approach was helpful for me (and the price I’m paying for it).

Mission Improbable Part 4: Actively Creating Passive Income

Yes, we’re finally coming to it, at long last! You thought I’d never get to my business plan, my vision, my mission statement, my goals and objectives, my strategies! But yes, I’m getting there!

If the mindset (actually: Mindset, “Bodyset,” and “Spiritset”) were not so important, I would have put the Vision Statement in the first posting. But as a former bean-counter propelled suddenly into the world of entrepreneurship, the first step of realizing the necessary fundamental shift in my world-view was far more important than a business plan.

I have been aware since early on that my business approach would eventually be (at least) three-pronged, involving Real Estate Investment (the “First Habit LLC” part), Stock and Equities trading, and Internet Marketing, or some other kind of Internet-based business. So I began educating myself in all three areas. It made for a somewhat psychotic educational experience, but slowly the pieces are coming together, and I know it’s just a matter of time and effort.

A key goal of my business will be the generation of “passive income,” the Holy Grail of financial freedom. Robert Kiyosaki explains the process in Rich Dad Poor Dad: Poor people earn money from a job and buy “toys” and other Liabilities using that income. Wealthy people, by contrast, use the money they acquire from their jobs to buy Assets, and pay for their “toys” using the income generated by those Assets. That distinction is the definition of passive income: Liabilities cost money, while Assets are a source of money. When you buy an Asset – for example, an apartment building – you can rent out the apartments for monthly rental income. You will be paid that money month in and month out, as long as there are tenants. You earn this income whether you are working your nine-to-five job or not – and that’s why they call it “passive income.” When you earn enough in passive income each month to pay for your day-to-day expenses, you are financially free. You no longer need the job to pay your bills.

A new mentor of mine (whether he knows it or not) is a man by the name of Jordan Adler. I will tell you about my (remote) relationship with this man in a future post. (I’m sure he doesn’t even know who I am – yet.) But he has written a wonderful book called Beach Money, all about the power of passive income (and network marketing – more about that later, too). The “Beach Money” he refers to is money that you earn while you are lying on the beach – true passive income. He explains that when you work a “day job,” you get paid once for your work – you work one hour, and you get paid for one hour of work. But with passive income, you work one hour, and get paid over and over and over again – for years if you work it right. That’s the power of passive income, and that’s why it’s a central goal of my business plan.

Kiyosaki defines the “poverty cycle” of working a job to buy toys and pay bills as the “Rat Race.” Only by generating true passive income can we hope to escape the Rat Race and build the financially secure life of our dreams.

In these tumultuous times, with the threat of failure in the Social Security system, the decline of the dollar, the volatility in the stock market, and the insanity of the privatized health care system in the United States (including the stress that is being put on Medicare), I think we could do much worse than adopt this change in perspective regarding the treatment of money in our lives. Our futures, and the futures of the coming generations, depend on how we decide view the Rat Race – as a necessity based on a dysfunctional misunderstanding of the “work ethic,” or as a destiny to be escaped at all costs. Kiyosaki advocates prioritizing the acquisition of Assets even before monthly bills have been paid – escaping the Rat Race is that important.

As an aside, if you'd like to read an almost Apocalyptic vision of the future as predicted by Robert Kiyosaki's "Rich Dad" himself, pick up a copy of his book Rich Dad's Prophecy - it will scare the bejesus out of you!

Do you own a house? Do you consider that an “Asset”? Let me disabuse you of that notion. A family home is a LIABILITY – not an Asset. Think about it: Do you earn money from it every month? No – you pay money to keep it in good condition. And for what – resale value? I think the recent burst of the real estate bubble is evidence enough that even a family home is not “safe” as sources of passive revenue go.

There are ways to make the acquisition of real estate into an Asset – don’t misunderstand me. What I’m saying is that if you are counting on your family home as a “nest egg,” you’d better at least build a second nest to put some eggs in. Putting all of your eggs in the investment-basket of your family home is risky at best.

So what is the best Asset you can buy, when you’re just starting out? Is it stocks, bonds, or rental units? Is it gold, or other commodities? I’ll submit (along with Robert Kiyosaki, by the way) that the answer is Financial Education. Education, an “Asset,” you ask? Yes, Financial Education is perhaps the most powerful asset, because once you have it you will be attuned to the vast world of opportunities out there, and be in a position to wisely discern which opportunities are in your best interest.

As a former accountant, I understand Robert Kiyosaki’s Assets/Liabilities formula very well. But as clearly stated as it is in his book, I can tell you that this equation was never presented this clearly in any of my accounting classes. We learned how to keep track of other people’s money – not to build wealth for ourselves. This is an entirely different skillset, and a powerful distinction: true Financial Education is learning how to recognize and acquire Assets, and determine with reliability that they will generate passive income.

So having left my soul-depleting job back in February, and having now read Robert Kiyosaki’s powerful book Rich Dad Poor Dad (have I mentioned that this book is a must read?), I determined that my first course of action would be to expand my Financial Education.

As I said, my educational experience in the past six months has been psychotic – perhaps “multiple personality disorder” is a better description – but I know it will eventually come together in a workable package – it will just take the addition of that magic concoction of “Practice, practice, practice.”

I’ll speak more about the education I’ve pursued in a subsequent posting. Stay tuned!