Chapter 2 - How to Make Money

Ways to Make Money

To manage money first you have to make it. You have to create consistent cash flow. How you make it and how much you make depends on some very basic things. One is your attitude towards the source of your income. Do you love your work? Is it at the level of pleasant but I wouldn’t describe it as love? Is it at least tolerable? Or are you at the level that Karl Marx described as “trading work drudgery for money”? I do know that there are many out there that love work of any kind. Others, like Movie Stars are in a job that very few people would not love to do. I personally know a few people who love their work, its environment, and its opportunities and get a great deal of satisfaction from being in touch with the end product of their endeavours. The cynical view is “I thought I was looking for a career but found I was just looking for a salary”. No matter what the case is, you have to find an attitude that makes going to work and keeping your income sustainable.

Career

Some people have a career. They thrive and work long hours for modest pay but stay with it for the non-monetary rewards as well as the monetary ones. I never understood how much prestige had to do with this until later in life. By the position they are in, people have access to powerful resources that they could never afford access to. They are invited to social gatherings and parties where the other guests’ wealth, power, and position is so overwhelming that they will never be their peers, but there they are in the same room with them. The military is very good at offering this carrot and so is the public service. Military pilots are instilled with the knowledge that the taxpayer owns that multi-million dollar airplane that they are rocketing around in and that they are just along for the ride. They are constantly reminded that their plane can be taken away at any time should they lose respect for that fact. For some people this is a great life. They just have to come to earth to deal with what personal resources they do receive must be managed for the best long-term result for them selves. They must always be conscious that a pay package is not just the money involved but also the total package including benefits. Here again the military and public service are a great example of an organization that an employee can gain access to educational and retirement benefits that no other employer can possibly offer. These can be used to advance your career but also they can be used to advance your personal goals. The important thing is that there be a focus on and separation of personal financial goals from your career. They are two very distinct aspects of your life.

A Job

In a career you get paid for doing things that few people can do well but most would like to. Most jobs fall into the characterization of doing things for others that no one would do except if you were paid to do them. You find a nice workplace with a survivable work environment and try to last through whatever political and economic ups and downs transpire. You try to live a normal life and have a gentle retirement. The money you make is all directed at your personal finances. For this group, this is a huge advantage because you just need to keep that job and then focus your remaining energies on properly managing your personal finances.

A Business

You can always start your own business. You are your own boss and you get to manage your time. It is up to you. You can work those long hours and it is for your benefit rather than your efforts being capitalized on by the corporation. If you find a hot market niche, you make a ton of money.

In a best-case scenario, you can use the company to buy your cars, send you on vacations disguised as business seminars, or even buy your house. The tax advantages are there but they are there for a reason. The government uses this to track useful economic statistics to measure how well the economy is working. You employ people and take care of government-initiated programs. The employees pay income tax and other deductions which you as the employer are obliged to deduct and account for. In return for you doing all this work the government will give you the tax breaks. That way they keep you on the working treadmill. You get tied into the finance system. If you try to get out, you will see how they keep pulling you back in. It is a good life and you live off of the cash flow you are creating. To have you run this going concern of a successful business is important to the economy. Those who manage the economy have set it up so that it is hard for you to quit and rewarding for you to continue.

In a worst case, the business somehow loses track of such an obvious fact that to survive more money must flow in than out. The marketplace and products are constantly changing and your product may become obsolete. Businesses that have depth of assets and a solid customer base willing to buy their product can go bankrupt through mismanagement. There are garages full of great inventions that have million and billion dollar markets out there and they are gathering dust because those trying to bring them to production just do not know how to run a business. An unsuccessful business does not feed cash into the home budget. In some cases, it draws money from the personal budget to survive. There is not much point of being in business unless it is feeding cash into the personal budget.

Even when your business is successful, you must pull your personal finances away from the business and run them separately. Strategies for a successful business budget and a successful home budget are very similar but not exactly the same. They each have their own dynamics and goals and tax laws. It is important that you achieve separation of the two aspects of your life. Success in one facet of your life does not mean that the other facet will be successful. Separation means diversity and diversity means flexibility which leads to security in the long run.

Investments

Some but very few people are blessed with having cash flow provided by investments. One of the major themes of money is that it is simple. So it is with Investments. It just gets complicated when human behaviour is factored in. The most successful person to make money from investments is Warren Buffet CEO of Berkshire Hathaway. He is what is called a “value investor”. This is a concept that was originally laid out by a man named Benjamin Graham. Mr. Buffet has just continued to prove that this is an investment concept that is proven more and more with the test of time.

Mr. Buffet’s organization is noted for doing its “due diligence”. This term is a mainstay of successful investors. Mr. Buffet’s organization is noted for dealing in companies that do the down to earth business that builds an economy. They look for those that do it honestly and by hard work and by controlling costs. They do it with good book keeping and by making good deals. In short they do good business. Good business that follows the rules of money makes more money. Does this sound easier than it is? The short answer is yes. The long answer is in hundreds and thousands of financial statements. Many think that an investor’s life is one of leisure and lunches and golf course deals. To some extent it is, but nothing works without the grass roots work of “due diligence” and to be thorough, it takes a lot of time and a lot of very dry homework.

The majority of people view investments as a passive way to make money. By that I mean they figure that you hire someone to do it for you, and then you sit back and wait for the money to roll in. But things can change and Shit happens! There is no one who will look after your money like you will so you better be involved and become knowledgeable. Changes can be as big as war or acts of God on an apocalyptic scale. The media covers changes of government and the action of government because they make a lot of the rules written and unwritten that business has to operate within. This can add or reduce costs to business. Interest rates set by Central Banks seem like small amount because they are quarters of a percentage point but on a whole economy the addition or subtraction of this small percentage is huge. It affects every investment you may have. 2008 is the poster child year for the dangers of being an uninformed investor. We will return and expand on the theme of investments throughout this course because you have to learn how to protect the asset side of your balance sheet as soon as you build it.

So the conclusion is that to make investment income is work. You have to be awake and alert. Big banks and investment institutions make sure that they will survive first. Then, they will look out for you the client. The argument is there that if you don’t survive, they won’t survive. This is valid but it is the only reason they would look out for you. They are not as benevolent as they make themselves out to be in those mushy ads that they air on TV. Where there are millions of dollars of others people’s money, the temptation is overwhelming for some to abuse their position of trust. Fraud and theft can occur at all levels. Audits are done and security oversight agencies are set up. However, there is always someone or a group that will conspire to try to steal investors’ money. Once lost, to try and recoup your assets is a time consuming and resource consuming effort. It not only costs you money but takes away time from your productive efforts. The resultant judgement is usually pennies on the dollar. A recover percentage of 40% or higher is extraordinary.

The most dangerous of these covetous people are those closest to you. They are usually a relative. They have the power to know your finances and how to touch your emotions to let you give up control of them. You are a target because others know you have money and they cannot control themselves. They covet it. Those who covet it will manipulate, lie or just steal from those who have investments as they are viewed as people who will never miss the money.

So the challenge for you if you are relying on investment income is that you must find companies that do good business so that they have enough left over to create cash flow for the investor. Then you have to keep an eye on them. Once you receive dividends or interest income, you must then manage that properly. If you are in the position to make money from investments, you must move your inspiration to another level to make that money work hard. You must be aware of who you can trust as many covet your money and will do anything to get it. If it is mismanaged it will go away. You will miss it when you need it the most…in your old age.

Windfalls

The papers are filled with stories of lottery winners and their adventures. How many people are lured to Las Vegas or even their local casino with dreams that this is their lucky day? Another type of windfall is “the Inheritance” . The nickname for estate law is “greed law”. I have never seen anything that has the capacity to bare peoples’ souls like the illusion of the rich aunt or that “the old man saved his money in his mattress”. I think I could write a book just on stories of what has happened when someone has moved on to the next life and the survivors think that there is a fortune of this worlds’ goods left behind for them. I know just about every reader has at least one of these stories that just popped into your mind. I know I have about 5 racing through mine as I write this paragraph. This is the wildest and most exciting of the topics. However, the excitement is short lived unless you take your windfall and know that the rules of money apply to windfalls or they are lost almost as quickly as they are won. Some windfalls have greatly benefited the lives of the lucky souls who won them. Then there are those stories of greed, selfishness, foolishness, deprivation and just plain stupidity. I prefer and this book is about doing it right.

Money has a great responsibility attached to it. A large amount of money has a huge responsibility attached to it. A biblical parable comes to mind to illustrate this point. A man had 3 sons. He gave them each an equal amount of money and told them to work with and show him the results. The story goes that one of the sons panicked that the father would be angry with him if he lost the money so he buried it in a safe place. The second son invested the money in a secure investment that had a small return. The third son worked with the money to put people to work and created a successful enterprise. The father’s reaction to each son was very interesting and enlightening. He was very angry with the first son. He was angry that the son was so afraid and so lazy that he just hid the money. He was somewhat pleased with the second son for at least putting the money to work. He was greatly pleased with the third son for making the money work not just to create a profit but to allow other people to engage in work that would improve their lives as well. So this is why no matter how you make your money, it is very important to make it work. This always means work for you even in the case of a windfall. You are the new custodian of this money. By work I mean physical, mental and emotional work. Take care of your hard earned and your not so hard earned income. By making it work harder for you, you also make it work harder for others and the benefit reaches far beyond yourself. The joy and satisfaction are the non-monetary rewards for doing this on top of the monetary rewards that you will reap when you properly shoulder the responsibility.

Perks

Perks are a nice addition to your pay packet. One of the nicest things about them is that they are often in a form that is too complicated for the government to tax. They can take the form of a discount in merchandise bought at the store at which you are employed. This is a particularly nice perk for those who work part time in the retail industry. If you are working at something that gives you pleasure, you can increase your pleasure by investing or indulging in your favourite activity at a discount. Most if not all places of employment have some perk or have to compensate for the lack of one with a higher pay rate. Tips are one of the best perks. It is impossible for the taxman to know exactly what you get for tips because they depend a lot on how good you are at your job. Then you can spend that money on whatever you want. You still have the responsibility to manage this money properly and you must not forget that. It is not free money. It is part of your pay packet and should be viewed as such. To not responsibly take advantage of a perk is a personal finance crime. To not take advantage of a perk is like not picking up free money lying on the side of the road.

Diversify

How can I make this clear? DIVERSIFY…DIVERSIFY…DIVERSIFY!!!!!!!!!!!!!!!!!!!!!!

In this economic age when experts predict that the next generation of worker will have many careers, as in not just many jobs but many careers, the importance of staying diversified is extremely important. Whole industries can die with the rapid introduction of a new technology. A business or a product can become obsolete in a very short time. Companies change hands or have to reinvent themselves to stay in business. At the very least they move, sometimes to the other side of the planet. The concept of a JFL (job for life) is dead. More and more the individual is left to take care of himself. More and more countries that carry social programs and companies that carry benefits and pension plans cannot carry the cost and remain competitive. The pressure of global business competition leads to the pressure to cut costs, any costs.

This is not necessarily all negative. The old system let people slip into secure ruts and that is not what life is all about. This new world forces us all to wake up every day ready for the challenges of that day. One of those challenges will be to keep your cash in-flow steady in this new environment. To protect yourself you must diversify your income sources. Look for income from as many as possible of the 6 different sources outlined above. Even windfalls can be included. Education and training will be essential to keeping doors to opportunities open. Who doesn’t have a grandmother or mother who has told them “When a door closes a window opens”.

Diversity is a term strongly associated with proper management of investments. Your most important investment for you is in you. You are the source of all of your income so like other investments you may have; you have to stay up to date. You should be trained in more than one specific skill. Diversify your training. Some skills can be applied to many different careers or jobs. These are desirable. The most useful and diverse skill to build is to learn how to learn. Then you can adapt to any work and investment environment.