Growing your wealth is not just about keeping up with your budget and investing some money in the stock market. To achieve financial independence, you need to have a solid plan, and that starts with better decision making.
Today on the show the guys talk to Douglas McCormick- Army veteran, entrepreneur, and author of Family Inc. He teaches us about managing your family finances like a business and how to use business principles to maximize your wealth.
Many Americans of all ages struggle with finances. Douglas wrote Family Inc to provide everyone a straightforward and holistic way to manage their money and build wealth for their future. He wants to empower people to strive for financial independence and give them the education to make the right decisions.
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Like any business, someone needs to be in charge of what is going on financially. Although the whole family will make decisions together, there should be one person who will be in charge of making sure all the money is managed correctly. This person is going to be the family’s Chief Financial Officer, and every family should have one.
They will handle cash flow, risk management, small business investments, education investments, tax planning and most importantly be a teacher. The CFO will use the tools of the business world to customize a family financial plan and actively manage it.
The CFO will use income reports and balance sheets instead of a traditional budget. Budgeting is a useful tool but can sometimes be short sited and distract us from what is paramount. Marking off every penny you spend month after month is pretty tedious and can easily get neglected after a few months.
Douglas believes with budgeting; less is more. You want to focus more high-level expenses like rent and electric and less on tracking packs of gum and coffee shops. If you are ready to ditch budgeting for balance sheets, you can create your own on his site.
Value of Labor
In Family Inc., Douglas talks about the value of labor and how it is factored into the families net worth. Although we never really think about our labor as a financial asset, the family’s labor (selling skills for money) is a huge asset and it needs to be managed like one.
You carry this labor asset with you throughout your life, and you’ll need to maximize it from your first job into retirement. With this value of labor mindset, you can make better choices when it comes to education and career.
Higher education is certainly important, but you don’t want to pay for “excess” schooling. Let’s say you want to get your MBA. As chief financial officer, you will need to figure if the skills you’ll acquire can push your career to the next level while still being beneficial to your overall financial goals. Don’t just jump in head first without a clear goal.
The value of labor also factors in when deciding on a job offer. We typically focus on the compensation, but you should also consider what about this job can drive more long-term value like developing new skills that can help you earn more in the future.
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“The surest way to financial freedom is entrepreneurship.” Douglas believes that it is unlikely you will create real wealth through traditional employment because of the competition in both the labor and capital markets. Starting your own business does come with some financial risk because there are no guaranteed minimum earnings, but there is no ceiling as well.
The nature of employment has changed in the last decade and every year more and more people are moving out of the rat race and taking the leap into entrepreneurship. Besides the tax benefits and being your boss, when you own a small business, you will get much higher returns on your labor investment.
It also has built-in job protection. If you are a successful entrepreneur, you can transition yourself out of the business when you choose not when your employer decides they are ready to replace you with some spring chicken right out of grad school.
Being an entrepreneur is not for everyone, but anyone could do it. What you need is passion, financial flexibility, and the aptitude to get the job done. Depending on what sort of business, it doesn’t have to cost that much money to start.
Start by doing some experiments to get some successes under your belt. Let’s say you want to open a bakery, start by selling some cookies at a street fair or making birthday cakes for friends and family. This will help you see what works and give your idea validation. The most important is your attitude and confidence to take the risk.
The Next Generation
Financial independence begins with education to make the right choices for your situation. Teaching your children the importance of finances early on will give them a significant advantage when they approach adulthood. It will help them make significant decisions in education and career.
Douglas believes in controlled failure, and financial responsibility should start at a young age. You can create valuable learning opportunities letting children assume some financial responsibilities like being in charge of a budget or giving them access to a credit card. You want them to learn in a controlled environment with little risk before they are old enough to make mistakes with real consequences.
Family Inc – Douglas’ Website