The Ultimate Side Hustle: 5 Keys to Being a Life CFO
Step up and be the chief financial officer of your life.
If your life was a business, how would you evaluate its current financial state? More importantly, how would you evaluate the Chief Financial Officer (CFO) of your life? Would you fire them or give them a bonus?
While there are obvious differences between personal finances and the finances of a business, there are many similarities that can help organize how we manage personal finance and investments. Imagine yourself (or your spouse/significant other) as the CFO of your life. Just like in a business, the CFO has several areas of responsibility that include things like planning, expense management, cash management, risk management, reporting and growth.
Being a Life CFO is the ultimate side hustle — many “advisors” are ready to profit off of your lack of investment knowledge. And the cost of ignorance in certain areas of personal finance and investing can be extremely costly. Investing time and effort into optimizing your personal financial performance can help you achieve higher returns on your investments, avoid large drawdowns of your hard earned money, help you better position yourself for the future, and help you avoid unnecessary costs that others may not have the discipline to prepare for. What does it take to become a great Life CFO?
Like many things in life, the answer is simple to understand, but hard to implement. A great Life CFO has a solid foundation of personal finance defense and fundamentals.
The success stories of people like Jeff Bezos, Bill Gates, Elon Musk are sensationalized in our society. We idolize the few people who have built mass fortunes beyond what we consider generational wealth. Their stories are inspiring and interesting, but building generational wealth is much more achievable (and can be much more boring). In the narrative that we tend to sensationalize, wealth is built by playing great offense. In sports, we all love the entertainment of great offense, but more often than not, the teams or individuals that win championships are those that play great defense and have sound fundamentals. The same is true in building wealth. While the stories we hear of people building wealth are largely those who hit it big through a great startup investment or entrepreneurial idea, the fact is that most long-lasting wealth is built through defense and fundamentals. That requires being an outstanding Life CFO.
Here are 5 key elements of personal finance defense and fundamentals that every Life CFO must understand:
Budgeting — A budget is THE foundation of optimal personal financial performance. It is well documented in books like the Millionaire Next Door that the overwhelming majority of wealthy people know where their every dollar of their money is going. People who don’t know where their money is going may look wealthy, but they are over-consumers/high-earners whose wealth will not outlast their ability to earn. There are several tools out there that can help you create a budget and track things almost automatically (my personal tool of choice is Mint). Setting a budget helps to inform your financial goal setting and can shine a light on what changes need to be made in your personal financial situation.
Reserves and Sinking Funds — a reserve is a fund used to offset certain expected or unexpected future expenses. In order to feel truly secure before you begin putting some of your money at risk (i.e. investing), you need to establish reserve funds. The most common reserve fund you hear people talk about today is your emergency fund. The emergency fund is your pool of money that would only be used in case of the loss of a job, unexpected healthcare expenses, etc. I build other reserve funds for things like automotive maintenance expenses (tires, oil changes, maintenance, tag renewals, etc.) and home repairs (HVAC, electrical, plumbing, roof). Once you build these reserve funds there are no need for products like extended warranties or home warranties. Sinking funds are earmarked funds used to cover certain expected expenses like vacations, Christmas gifts, birthday gifts, and other large expected purchases.
Debt and Interest Rates — debt for things that appreciate in value can sometimes be a good thing, as long as you have plenty of room in your budget to afford it and the interest rate is low. Debt for things that depreciate in value is the personal finance kryptonite you want to stay away from. Going into debt to buy consumer goods (TVs, computers, other electronics, credit card debt, furniture, etc.) is always a bad idea. You are borrowing purchasing power from your future self, and paying a premium for that purchasing power through interest. Life CFOs have the behavioral discipline to stay away from consumer debt, and understand the true cost of using debt.
Retirements Plans and associated Tax Benefits — Most employers offer a 401(k). The tax advantages associated with a 401(k) make it extremely attractive — but you can easily get hung up on a Roth vs. Traditional decision. The key question is whether or not you want to pay taxes up front and allow your investment earnings to grow tax free, or make tax-free contributions and be taxed on investment earnings in retirement. If you run the numbers using the same investment return and tax rate assumptions, you will end up in exactly the same place either way. However, if you expect that your tax rate will be higher in retirement than it is today or vice versa, the numbers begin to diverge and it is clear what decision you should make. With our current low tax rates, high wealth gap and looming significant social liabilities in the form of Social Security, Medicare and government-backed pension crises, it seems that taxes will only increase. However, with Modern Monetary Theory (MMT) becoming more and more popular, it may take longer for our taxes to actually rise (but the real tax in MMT is the risk of inflation).
Asset Allocation — as an investor, it is extremely important to understand the fundamentals of asset allocation and the characteristics and risks associated with various asset classes. Some of the asset classes you can invest in include equities, corporate bonds, treasury bonds, treasury inflation protected securities (TIPS), emerging market bonds, gold, silver, bitcoin, commodities, cryptocurrency, & real estate. Depending on the economic environment, asset classifications are either correlated (i.e. they increase or decrease in value in tandem) or they provide a hedge against each other (i.e. a decrease in one asset class would be largely offset by an increase in another). Understanding relationships between asset classifications and the effects of macro-economic conditions on asset classes can inform investment decisions that maximize returns while minimizing risks.
Becoming truly great a truly great Life CFO can pay off quickly and have a great impact on your future. Your Life CFO “career” is the most valuable side hustle you can start today.
My name is Brian Matney. I am a CPA passionate about personal finance and investing. At The Life CFO, I share more about my personal financial management framework, the tools I use, and what I am learning. I also document my Journey to Generational Wealth, a weekly post updating my strategy and progress towards achieving my wealth goals.
Originally posted at https://thelifecfo.com on October 23, 2020.
