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empty goal

I was reading a good article at The Practice of Leadership called Leaders Participate and Actively Play in the Game of Life. While the article itself was about playing a leadership role in your own life in general, it slims down nicely to personal finance too. You can’t expect success if you don’t play a role in your financial picture. If you don’t take responsibility for the situation that you’re in, by first understanding your financial situation and then planning your way to the next stage, you can’t expect any kind of real results.

I think people are lead into being financial spectators instead being their own personal leaders for three reasons. The first is fear of not knowing – not knowing what to expect, or what you can do, or whether you’re even doing it right. The second is pure laziness and a detachment from your own reality – it’s easier to just keep spending and enjoying what you get without looking at the broader implications. Third is the pain factor that drives people into the spectator situation – it’s just such a pain and there are so many obnoxious talking heads saying confusing things that it’s too hard to figure out and too time consuming when you try.

Frankly, none of these are acceptable. You must be your own leader in life, which includes your finances. The third isn’t exactly your fault, though, so I sympathize, but that won’t help you much at this moment, will it? There is some effort required. As in most things like driving a car or using a computer, there is a minimum for you to understand, and without that you’ll be left in the dark driven more by a fear of the unknown. However, once you’ve hit a basic level of understanding, and created a basic plan to follow, it all becomes rather easy and automated.

Some tips that will help you block out some of the confusion: 1) Ignore Wall Street and any talking heads. They’re driven by today’s return and grabbing more audience today to boost their ratings today. You’re not. You’re needs are long term, and progress takes time, patience, and persistence. 2) Use the time you’d spend listening to the chicken’s cluck instead by buying a book and getting that basic level of understanding, or checkout a finance site like I Will Teach You To Be Rich that will actually help you get your finances under control. Remember once you have the basic level down, it gets much easier as you now have a financial infrastructure to work with. You need pipes in your house before you can run the water, but once you’ve got running water, you’re set from then on (until you decide you want filtered water, or a bidet in your bathroom, but you’ve still got running water).

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clown

A continuation of my fear in business series, post numero dos.

Economies of abundance, the Long Tail, digital rights management (DRM), which one of these doesn’t fit? The internet is changing the way we do business and making money, but how do these things affect you? Are you starting a new business, or creating a new product for an existing business, and you’re worried about someone else stealing your idea? Can intellectual property (IP) laws protect you, or will you be driven by a myopic business model of protectionism?

Whether you’re starting or already running a business, these are key questions that shouldn’t be over looked. However, there is an easy trap that’s been set for you when considering each, and that’s the trap of fear. Fear causes business myopia, and this will invariably harm your profits as innovation is ultimately hindered, which as the wise (and often misinterpreted) Peter Drucker noted as one of only two functions of a successful business (the other being marketing).

Sadly, this problem has been around for a long time, and many powerful corporations have been struck by this bug. Today, the end result that we have is a terrible IP situation in the US, and varying degrees of bad IP in other countries like England. Ultimately innovation is put on a leash, and protecting past revenue streams, and the business models built around them, become the name of the game.

Don’t get me wrong, I’m not against IP as it was originally intended, but IP has come a long way from its founding purpose and it’s now a tool for hindering innovation more than it’s a tool for encouraging innovation. This leads to the development of business models that hinge on IP law and in turn hinge on hindering innovation (both outside and inside the company). If you’re a small company without many solid revenue streams, you can’t afford to make this mistake, and if you’re a large company, then it might not appear to hurt much because you can rely on other areas of business, but don’t be fooled that you’re in a different situation from the smaller companies.

For larger companies, fear inducted myopia is actually the second stage of business myopia. First, they create a successful product or service, and then think they’re great. Nothing is better and no one else can compete even with all of those copycats out there. Truth be told, someone else is innovating, and is waiting for you to slip up by not innovating. This is myopic stage number one. The next stage is the realization that you’re not innovating, and that you’re behind the times, which can cause reactionary, knee jerk defense – think RIAA and MPAA tactics of wrongly suing just about everyone they can to protect their current business models.

For small businesses, two things can happen. You either recognize this situation, and realize that you should use IP to whatever advantage you can. No reason ignoring the reality that people might use IP against you and your own IP might protect you, or so the reasoning goes. The other thing that you could do is look at the successful companies and follow suite. They do it, so I should too. Our product that we haven’t finished yet is the greatest thing in the world, so we should protect it, right? Can’t be anything wrong with that expect that you’ve falling into the first stage of business myopia, and you don’t even have a successful product out yet.

If you’re of the first mind, I know the feeling being a entrepreneurial software developer with a patent lawyer in the family. But in the end, your job is innovation and if you get talked into fear driven business decisions by patent lawyers, you could miss the bigger picture (I have nothing against patent lawyers, and they’ll definitely have some good advice, but you need to realize that they’re a part of the system itself, and make their living that way). Certainly protect yourself where you can, but don’t plan your business model on what you think MIGHT happen if someone finds out you’ve had a good idea. By the time you’ve gotten this far, it’s too late for your competitors. Copying today’s iPod, or MySpace, or YouTube, and shipping that a year from now, will at best put you a year behind the current lead with its product that everyone wants instead of yours. Don’t let fear drive your business.

For a great thread on the economics behind these choices, and why no matter how hard the RIAA tries its current business is doomed to failure, check out a thread of posts at Techdirt with the most recent called Infinity is your friend in economics (the rest of the thread is at the bottom of that post). I’m planning on my own posts about the economics of abundance and basically regurgitating what Mike at Techdirt has already written. Still, the more people repeating this the better and repetition is key to learning new things.

Red and gold feathers

Creating beauty in personal finance manifesto found at bottom of page

Where’s the discussion of beauty and creativity in personal finance? So many industries, arguably all industries, depend and thrive on these two key values. So, why doesn’t it seem to exist in personal finance, and how can I build an application that I hope will be both creative and beautiful for an industry filled with people who would laugh at the thought of beauty and creativity being associated with what they do.

I know few persons who take delight in their personal finances, unless they’re taking delight in the masses of money they’re raking in, but that’s not exactly a good reason to be delighted in your finances. This leads me to question, even if it’s possible, do people WANT to think of beauty and creativity in finances? Can I do what Apple’s iPod (and soon iPhone) have done? While the average person probably couldn’t care less, people in the industry should, right? These values have to exist, but where, and how do I exemplify them in my application for the user (who at least unconsciously cares)?

Your finances are a snapshot of your life from a dollar perspective. Therefore, the only way for your finances to be creative and beautiful is if your life is both creative and beautiful, no? Although, even the creative aren’t inspired by the process of managing finances. So, the problem is as much a process problem as it potentially is a life problem. I don’t know the answers to every thing I’m questioning, but that’s part of the reason for this blog. It’s both an informational and educational tool for those interested as well as an exploratory experiment for myself.

As a person who wants (and needs) to be creative and make beautiful things, how do I start the conversation, if only with myself, and create the drive and desire as seen in this excellent post by Josh called How to be creative in architecture [originally found at: gapingvoid]? As Josh says about architecture, “It has become a commodity,” and that’s certainly true for finance. So, how does one break out of that commodity state of everything being alike and instead be something different and great as Josh prescribes in his manifesto? For that reason, even though I certainly haven’t figured it all out yet, I’m giving myself the challenge of writing my own Creating beauty in personal finance manifesto.

Creating beauty in personal finance manifesto

  1. Your financial picture is a dollar-by-dollar snapshot of your life. Your life, however, is not your finances.
  2. You ultimately decide the direction of your life. Direction and fulfillment cannot be obtained from money.
  3. Still, an understanding of your financial habits can help you understand and manage your life better.
  4. You don’t need to hire a professional to do that for you. Your life (and therefore your finances) isn’t rocket science (unless you’re a rocket scientist, in which case you can handle it).
  5. Every minute spent managing your finances takes two minutes away from your life, but that doesn’t mean you shouldn’t manage your own finances. Therefore, simplicity and ease are central to finding a balance.
  6. Simplicity doesn’t mean stupidity. Diversification can be a complex idea, but that shouldn’t stop you from using it in your finances and using it to create a simple financial picture.
  7. As in good writing, learn the rules before you break the rules. However, you can’t expect greatness if you only follow the rules. Start a business, travel to a country where you don’t know the language, make something that blows your mind, take risks or die!
  8. Boredom in life is as corrosive to growth as is boredom in finances. Black numbers on white paper (or screen) are boring. Relationships are exciting, therefore, your financial picture must have and define a relationship with your life.
  9. Beauty cannot be obtained if you don’t contemplate what beauty means to you.

classy cool

For the uninitiated, portfolio and investment strategy can sound like big words. However, if you have money in the bank, even just a checking or savings account, you have a portfolio. And, if all you do is save what money you can each paycheck and put that into your account, then you have an investment strategy, be it the most basic of strategies. There are all sizes and shapes of portfolio, and all forms of simple to complex investment strategies. In general, there’s nothing scary or mind blowing about portfolios and investment strategies, but there’s a lot of hype and confusing talk that could make them seem so. I’ll cover three basic factors, risk, wealth, and planned usage that help you decide what kind of portfolio you should have and what your investment strategy should be.

Risk

The challenging part of creating a portfolio is realizing your risk factor, and if you go to a “professional”, the first thing they’ll have you do is fill out a risk assessment form of some sort. All these try to do is assess the Five Controlling Factors, and estimate very broadly what type of investments you should invest in. No matter what, though, everyone uses the same tools for building a portfolio being 1) cash and cash equivalents, 2) fixed income (aka bonds, CDs), 3) equity (aka stocks, mutual funds, index funds), and 4) tangible assets (the home you own and live in or other property you own) or business adventures (companies you own and help run).

For the most part, the risk assessment forms are for figuring out what kind of stock you should own as there are all levels of risk and volatility associated with stocks which typically make up anywhere from 50-90% of your portfolio. Although the differences of who should invest in what levels of risk might surprise you when you consider lifestyle vs. portfolio risk as the wealthier you are the less risky the asset you typically want because you’re less worried about growing your wealth as you are maintaining your wealth and sustaining your typically more expensive lifestyle. Imagine having $10,000,000 and losing 10-20% on any given day – that’s $1-2 million – vs. $1,000 and losing 10-20% on any given day – $100-200. Day-to-day stock prices can fluctuate up and down as much as 20% or more, and for those who aren’t familiar with the markets, this can seem like a very scary thought. For that reason, you need to think long term as in years which can historically return up as much as 10% or more, and if you’re well diversified, then you can be rest assured, you’ll make money over the long term.

Wealth

I could cover plenty more about risk, but I’ll continue with the other two major factors, usage and money, and cover all of these factors further in future posts. Wealth was already mentioned, but there are three levels of importance to the wealth equation and how you’ll go about making decisions. The beginner’s problem is typically amount of funds and cost of investing, then there’s the middle and upper classes which are similar and more concerned with type of risk and return from their portfolio. The middle class, which doesn’t have more money than they can retire on before actual retirement, is similar to a beginner’s portfolio strategy where the goal is growth of wealth. The middle class is more like the upper class in that they have nearly all investment options open to them because they simply have enough money.

The best form of investing is generally owning a set of different index funds of different asset class types creating a well diversified portfolio, but many funds require minimum investment of $3,000 and up, so purchasing 5 to 10 of these for a solid portfolio can be a limiting factor depending on absolute wealth. There are ways to get around the minimum requires such as setting up accounts like a Roth IRA or 401(k) with regular automatic deposits of $50 a month. As long as the brokerage or bank is certain of getting regular deposits, they’ll usually waive minimum investment requirements, and if you begin by investing in a single fund like Vanguard’s Target Retirement funds, then you get one fund that itself is multiple funds, and it adjusts its asset allocation as it and you age adjusting for your new risk outlook. Honestly, there’s nothing wrong with owning just one fund like this. It saves you tremendous amounts of time and possibly money, but for those interested in doing a little more, there can be a slight advantage to doing it differently, but I stress slight as it’s less a factor of getting better returns as it is decreasing risk.

Usage

While the wealth you already have will change the decisions you make, so will how you want to use the money you’re investing. It’s best to start with retirement investing, especially the younger you are because the longer your money is invested, the more money it’ll make you through compounded interest (and I’m talking about hundreds of thousands of dollars). Everyone hopes to retire at some point, so investing for retirement is always a safe and wise choice, especially with tax advantaged retirement accounts.

Alternatively, you might be looking to buy a new car or home, and would rather not tie up all your money in retirement accounts. Or, you’ve just gotten married or have a baby coming, so you have special needs popping up that you didn’t have before. Each of these and your time horizon until usage will change what kind of investment you make. The basic decision is between putting your money in a retirement account and leaving it until you retire, or putting it into a taxed account where you’ll be able to get at the money again in the near future. The investment strategy that you’ll follow for any choices you make usually involves rebalancing and investing new money evenly based on your planned asset allocation.

Future Posts

The next post along this line will delve into choosing the asset allocation of your portfolio and how each choice might change you investment strategy. Also, look forward to a primer for this post. I know, a primer should come before the thing its priming, but tough luck, I’m posting based on my whims at the moment. I think I’ll call it, What is a portfolio and an investment strategy? I’ll also cover more on risk, wealth, and usage in greater detail another time as my whims come and go, but if anyone reading wants me to go in one direction or another, then please contact me.

fear

You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face. You must do the thing which you think you cannot do. -Eleanor Roosevelt

He who awaits much can expect little. -Gabriel García Márquez

This should be the first in a few posts about fear and its negative impact on life, and I’m particularly interested in fear in business models and intellectual property rights.

Fighting your fears can provide some of the greatest experiences in life as it certainly has for me. This makes sense if you recognize that change is the leading cause of fear. Change brings up thoughts of instability and uncertainty. Thanks to my parents and my choice of profession (as a software developer for financial companies), I’m comfortable with change, and actually almost uncomfortable if there isn’t change.

Now that I’ve entered the entrepreneurial world, volatility and change are ever more present factors in my life, and while I love it, there’s still a natural fear that registers probably from some primitive part of my brain. The better you are at recognizing your fears and dealing with them, the freer, more agile, and adept you’ll be in life, business, and everything else, and this will manifest itself in your financial situation as your financial picture is really a dollar-by-dollar snapshot of your real world life.

Change has been a good friend of mine throughout my life, and I have one experience that I’d like to share (and more that I’m eager to share in other posts). Of all of the choices I’ve had to make in life one of the hardest has been quitting my job at Citigroup years ago where I had worked as an intern through college and then full time after. I was a developer on one of its internal trading software suites, and had the privilege (in their eyes) of supporting my traders directly from the trade floor with a seat right next to them (constant noise and confusion is not a prime work environment for IT as cool as it might sound, although the constant and direct “client” contact was enormously beneficial). I had a great paying job with all the wage benefits of working in the financial industry, although without the horrible horrible working hours on the business side.

Quitting this job wasn’t an easy choice, and this is one of the few times when my parents didn’t understand my desire to quit such a “dream” job, buy a car, drive across the country, and move myself to California without a job already waiting for me. While I was raised on my parents’ values, baby boomers have a decidedly different view of the world than their kids (I’ve had some interesting discussions about their views of financial markets as compared to mine and even some of their parents’ views vs theirs, but that’s another post. Helping baby boomers is not the same as helping Gen X and Y simply because of the different life experiences and expectations). Of course, fear of change and instability was a driving factor in their concern that I shouldn’t quit and move to the opposite shore.

Right out of college I had what my parents, and even more so their parents, saw has the ultimate life goal – a stable wage paying job with a 401(k) that you can work at until you retire. I say, “BORING!” They say, “JACKPOT!” However, as everyone should know by now, pension funds don’t work (a 401(k) isn’t a pension fund, though) and are relics of a generation past, and corporations generally show more loyalty to the bottom line than their employees, so the expectation of giving decades of your life to one company is a simple myth because the “favor” won’t (and shouldn’t) be returned (The well being of your future should never be set by the time you spend waiting for that future, and time served shouldn’t correlate directly to compensation, but more toward value returned).

Eventually, I convinced my parents I was right. Although, maybe not fully convinced until I moved, found a much better job, and increased my enjoyment of life and my standard of living by folds. Still, all indications were that I should move and find something that better suited me. Staying at a job that was immensely boring, very constrained by bureaucratic barriers, and my own general mentality as an entrepreneur would never let me be happy there. Delaying the inevitable for the fear of losing money and phantom “job stability” did nothing for my mental and emotional health, nor my long term financial future.

So, finishing on a personal finance note, part of the reason for budgeting or tracking your finances is to create a map that helps uncover potential real life problems, but changing your budget won’t inherently change your life, and it won’t and can’t uncover deep rooted problems. This is why the overall plan is enormously more important than tracking your day-to-day habits. Setting goals that encompass more than your finances is key to proper financial planning because in the end, your financial picture is only a slim snapshot of your real world life.