Today’s post marks the start of a new series on the fundamentals of personal finance. This series was inspired by the numerous emails I’m grateful to have received asking me rudimentary questions regarding personal finance.
Throughout this series, I aim to provide a fresh perspective on the universally applicable topics of debt, investing, retirement planning, and savings.
In today’s podcast, I talk with Luke Williams. Luke is a 3rd generation real estate investor and entrepreneur. The Williams family has successfully renovated over 130 homes collectively in the Seattle area. As well as being a licensed real estate agent, Luke has helped launch several high-tech companies and has consistently delivered winning sales records in multiple industries.
His ability to communicate and breadth of experience has led this conversation down a lot of interesting avenues. I hope you enjoy the post and as always, please feel free to chime in on anything you think might add to the conversation.
I’ve listed a few bullet points from our conversation below, but please be sure to check out the audio as well.
Here are a few notes from our conversation…
Basic Definitions of Assets and Liabilities
In our conversation, we both concluded that simplifying lofty definitions is a great way to keep your personal financial picture in perspective. Here is what Luke defines as an asset and a liability:
Assets – anything that puts money in your pocket.
A few examples are rental income, dividends from stocks, royalties, work vehicles contributing to personal financial growth, interest-yielding retirement accounts, etc.
Liability – anything that takes money out of your pocket.
A few examples are high interest credit card debt, bloated mortgage payments, recreation vehicles, extravagant appliances, children (j/k), etc.
Luke made reference to a term that really caught my attention – Opportunity Costs. The definition according to Investopedia is, “The cost of an alternative that must be forgone in order to pursue a certain action.”
In our discussion, I brought up an example of a couple that is going to literally liquidate their entire nest egg ($120K) to purchase a home in an exclusive neighborhood in West Los Angeles.
After acquiring this property, the couple’s discretionary income (after mortgage payments and monthly expenses) is going to leave them with $300 per month vs. the $1,000 they were able to save renting an apartment in the same neighborhood. I explained that I thought this was a poor move simply because the couple will have no liquid cash available for other investments and that they are completely on the hook for the mortgage if one of them faces illness or unemployment, etc.
Luke’s point was even more eye opening.
He said that even if the couple manages to keep their mortgage payments current, over the next 10-15 years, they would be taking a bigger loss in “opportunity costs” – inflexibility to relocate for a job promotion, lack of funds to acquire multiple assets or to pursue income-producing ventures, etc.
We went on to discuss one of the great advantages of being young – TIME. When starting your financial education young, there is still a great deal of time and opportunity to build wealth.
Rather than racking up consumer debt or acquiring possessions that depreciate in value like cars or TVs, we can use this time to build assets and grow our net worth via 401k investments, stocks, bonds, real estate, etc.
Another point Luke added was that there is typically less financial responsibility at this stage in most people’s lives. This is why it is incredibly important to make sure any discretionary income is used to acquire assets that will continue to yield residual income.
When discretionary income is used to pay down high interest debt or to purchase things that don’t retain long-term value, there’s no excess money to invest. At a glance, this may not seem like a big problem, but missed opportunity compounded over an extended period of time can result in a HUGE opportunity cost.
The Biggest Asset you own – YOUR MIND
One key takeaway point from our conversation that struck a nerve with me is that our minds are ultimately our biggest asset or our biggest liability. Luke and I agreed that if you continue to make an effort to grow your financial education, the better you’ll become at spotting opportunities to grow your net wealth.
I know there is a ton more that can be said on the topic of personal finance, but the goal of today’s post isn’t to be an encyclopedic reference but rather to cultivate reflection.
This was a great conversation to have been a part of, prompting me to reflect on how I spend my money and more importantly, why I’m spending it –keeping in mind the end goal of financial freedom.