Investing in your financial education is the First Alpha Jag Principle. This Principle lays the foundation for the other four and establishes the baseline you will need to build long-term wealth.
The Financial Foundations principle is divided into two parts: Personal and Business Finances. As with all of the Principles, you should prioritize these in order. Understand and begin to take action on establishing a strong base around your personal finances. From there, begin to understand the intricacies of business finances. Business financial foundations are built upon confident knowledge in personal finances.
Personal Finances: This is the world of Dave Ramsey, Suze Ormon and other practical financial gurus. It’s not as exciting as some of the things that Robert Kiyosaki and Grant Cardone talk about. And many “gurus” will tell you to not even bother with following traditional financial advice. I strongly disagree. Starting a business and/or investing are much easier when you understand and put into practice personal finance strategies.
Principle 1: Financial Foundations – Personal Finances requires action in the following areas.
- Balance your household budget – Understand your liabilities (what you owe from loans, credit cards and other recurring debt obligations) and expenses (what your regular bills are such as utilities, food, etc). On the other side of the ledger, you need to understand how much money you bring in month to month. These activities will tell you if you are making enough to cover all of your obligations and whether you should even begin thinking about investing. From here, you will also know your debt-to-income ratio (DTI). This is a critical indicator that you will need to understand to achieve our overall Principle 1 outcome
- Achieve household profitability – You will assume that you should jump to Principle 2 in order to make this happen. You could–and run counter to our preferred approach of following our steps in order–but I don’t recommend it. We prefer that you leverage what you have at your disposal to make your current income exceed your liabilities and expenses.
The reason is twofold. One, if you are irresponsible with what you are already making … you will be even more irresponsible when you have more money at your disposal. The natural tendency when people make more money is to increase their expenses and liabilities. We don’t want you to do that. Secondly, we don’t want you to trade time for money. We want you to use your available time focused on the other Principles. Not working a second job.
And how do you do this if your liabilities and expenses already exceed your income? This is the not so fun part: you have to reduce your liabilities and expenses. Find another cell phone plan. Sell a car that is driving a high note. Use tax refunds and other money that comes unexpectedly to pay off or pay down debt. In essence, work to get your current income to exceed your liabilities and expenses through any legal, moral and ethical means necessary.
- Save the Excess – Save the money you have left over after paying your remaining liabilities and expenses to achieve our recommended first outcome: purchase a primary residence. Buying a home is the most complicated financial transaction most Americans will make. And, if you follow the first two steps outlined above… you are well positioned to become a homeowner.
Homeownership falls in and out of favor more often than fashion trends. “Gurus” let interest rates and “buyers’ vs. sellers’ markets” and other factors dictate recommendations on whether you should buy a home. Alpha Jag is ALWAYS in favor of homeownership. We have multiple articles outlining the reasons. A quick snapshot on those reasons: leverage, equity build up, tax advantages and appreciation. Once you’re in a house … bought the right way … you’re in the game. You have a potential asset to use that can carry you into phase 2 of this principle.
Business Finances: You should have savings, a good credit score and a home if you follow our advice. At this point, you should focus on understanding Business Finances. I am a major fan of how Robert Kiyosaki breaks down asset classes. Our approach to building business finance knowledge is to approach it with Kiyosaki defined asset classes in mind. The only change we make in our approach is that we merge cryptocurrency in with commodities. I’ve prioritized our recommended prioritization on learning about these various asset classes. However, you might find you have an affinity of one over the others. Study what you have an affinity for but make sure you are at least familiar with all classes.
- Real Estate: If you haven’t already noticed, I am a major fan of real estate. On the Business Asset side, we are talking about real estate as an investment … not as a primary residency. However, you still reap the advantages outlined above with the possibility of adding two additional perks– rental income and depreciation. Talk about a wealth accelerator!
- Business: As you go on your financial literacy journey, you’ll discover there is a difference between being a “small business” owner and a “big business owner”. You are creating a job for yourself with a small business … which means the business doesn’t make money if you’re not working in the business. The Alpha Jag definition of a big business is a set of systems that work in unison to create value for the producer and consumer. Defined and documented systems can be executed with or without the presence of the system founder. This means the business can make money with or without your presence as a big business owner. No business is completely passive. But there is a big difference in what you can achieve when you spend 10-15 hours a week making sure your systems are properly executing instead of 50-60 hours per week executing the system yourself.
- Commodities: My oversimplified definition of a commodity is an asset class in which the supply is capped by the limits of nature. Gold, silver, oil, diamonds, coffee are all examples of commodities. God’s creation dictates the availability of and the ability to produce more of these items. The commodity itself is the item as it is found in nature. Further refinement of a commodity results in new products that can be sold. The ability to produce those derivative products are limited by the availability (or scarcity) of the underlying commodity. In this example, think of jewelry, computer chips, cars and other items that are manufactured. Sophisticated investors trade on commodity prices and/or invest in the direct asset for the presumed appreciation value of the commodity over time. I include cryptocurrency as a commodity because it is intended to be a limited supply capped by the available computing power associated with Blockchain technologies.
- Paper Assets: These are stocks, bonds, mutual funds, ETFs and cash. It’s my least favorite because you have the least amount of control with this asset class. The broader markets and a handful of true market makers dictate the pricing–whether up or down–of a paper asset. However, it is the most readily accessible asset class and the one that most investors start with–whether that be through an employer sponsored 401(k) or through buying fractional shares through an app such as Robin Hood. While this is my least favorite asset class, I do like dividend stocks.
Focus your financial foundation on learning the intricacies of one, a few, or all of these asset classes. Alpha Jag’s recommendation is to start with one to deep dive into while investing some time to get a cursory knowledge across the other three.
Our preferred outcome if you want to follow our approach is to start the process of transitioning your primary residence obtained by following the steps in “Personal Finances” into a rental property. Doing this can potentially unleash the full power of real estate as an investment (consult a financial advisor/accountant) while providing a second prospective asset. You are able to access the equity of either home to go deeper on your wealth building path.
Whichever direction you choose … we encourage you to start on your journey by investing in your financial foundations with a focus on improving/maintaining your personal finances and deepening your business financial knowledge.