Way down inside most people where nobody can see it is a certain level of fear. They might not think of it as fear; they may call it by more acceptable names such as caution, prudence, risk-avoidance, level-headedness, judgment, etc., but it all boils down to an unwillingness to venture into uncharted territory where the future outcome isn’t clearly seen and guaranteed to be safe. I’m not knocking this. It’s kept the human race going since the beginning. On the other hand, fear has kept more people from succeeding financially than any other thing.
Sometimes fear is instilled by parents as a defensive mechanism to keep their kids out of danger. Peers almost without thinking instill fear in their friends without any thought of doing harm when they try to convince them not to take chances on something they wouldn’t take chances on. Career counselors all over America counsel young people to study hard to find good jobs. They don’t tell them to learn all they can so they can start new businesses.
You can see the products of all those who counsel prudence and caution when you go to any large company or government offices, or ride a commuter train, or see people taking steady jobs with little chance for advancement, or visit a Union hiring hall. Thousands of people settle for far less than they might achieve because they don’t want to gamble on their own ability to succeed.
I know what I’m talking about because I used to be one of them. Those who know me might find it hard to believe that at the age of 17 I joined the Air Force not because of patriotism, but because it offered me steady employment and an early pension. At 17, I thought getting a couple hundred dollars a month retirement pension by only working 20 years was about as high as I could go, given the fact that I had been brought up in hard times where my dad lost job after job. If I’d been brought up by a wheeler-dealer entrepreneur, I wonder whether I’d have ever cut 20 years out of my youth to get that pension.
From the Air Force I jumped right into another “safe” job with a Fortune 500 company. It wasn’t until I was fired at age 40 that I realized that financial security is an illusion and was able to overcome all that programming I’d been subjected to by well-meaning friends and family members. Today, thinking that a guarantee about future financial security is pure folly. Ask any retired Airline Pilot or down-sized corporate executive; or superannuated Wal-Mart greeter who can’t live on his “Social Security” pension. More about this next time.
Making the Move from Job Security to Financial Security
Picking up where we left off last time: If financial security is more perception than reality, what’s the next step: I confronted this at the age of 40 when, unemployed with two teenaged kids, I was trying to make up my mind what to do next. I started by taking stock of what all my careful, prudent, planning and budgeting had done for me.
When I added everything up except the future value of my $249.51 monthly Air Force pension, my total assets came to $106,000. I mean total: The cars, house equity, furnishings, clothing, insurance policies, cash, money market mutual funds, etc.
When my mortgage was subtracted from my assets, my true net worth was less than half of my assets, and much of this consisted of things that had no real market value.
It was at this point that it came to me that working so hard to avoid financial risk had produced less than $1000 per year of net worth for every year of my life. Incidentally, this more than aging yuppies have today. I realized that I had to go back to the drawing board and re-design my life while I still had time to do something with it.
Not knowing exactly what to do, I simply reversed most of what I had been doing financially. Where before, I had saved to get ahead, I began investing my money in leveraged real estate. Where before I never bought anything unless I could pay cash for it, I began to take over payments and rent out houses to make them. Where before, I waited to get investment offers through the mail, I actively went out looking for things to invest in that would increase my monthly income.
In an era where there was very little price appreciation, rents on properties leveraged at about 80% of fair market value produced cash flow, so my mantra was to only take over payments on houses at no more than 80% of value, then to get the seller’s to give me terms that I could afford out of the rents.
Looking back, clearly I passed up a lot of opportunity, but looking forward, the only way I could achieve financial security was through loan amortization. I focused on people with high equities in nice houses who needed to move for one reason or the other.
My first ploy was to try to persuade them to let me take over their payments and to pay them for their equity when I sold their house. In return, I promised to pay them full retail market value for it. This solved their immediate cash flow problems, and gave me immediate rental income from the very first tenant; but it didn’t give me much amortization. We’ll continue this next time.
