21 – Roadmap for Cultivating Assets – Part 1


Episode Overview:

Circling back to the IMPACT model, Ken begins the Iteration Process (a roadmap) in order to start Cultivating Assets. Cultivating assets always starts with learning to save; Every dollar that you make and do not spend, is an asset. Ken discusses percent allocation of income and the best approach. Ken walks you through his roadmap including misconceptions about so-called emergency funds and addressing credit card debt. He discusses accumulating cash and creating a sense of security so you no longer feel the stress of living paycheck to paycheck. Ken covers all this and so much more.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy Day to you. This is Ken Kaufman CFO, and I’m thrilled you’re here for episode number 21 – Roadmap for Cultivating Your Assets – Part One. As you recall from episodes two through eight, we hack our net worth by using the impact your net worth model. And as a quick reminder, we use each letter in the word impact as an acronym to identify each of the six key elements of building net worth.

So the I in impact is for iterate, mindset and process. And the cultivate your assets roadmap that we’re discussing today is exactly this iterating mindset and process to be able to start cultivating assets.

Second is M for maximize income, enjoy, cultivating that assets is what we are going to try to do with that maximized income.

P is for prioritize the waterfall, this is a big part of successfully cultivating assets. And I’ll touch on that in just a little bit.

A align with partner and waterfall. so critical that we do what we say we are going to do. And we have buy in and agreement and we’ve negotiated and prioritized in combination with our spouse, not so that we can try to budget every single dollar but so that we can make sure that each other’s and our combined priorities, our highest priorities are being funded the most aggressively.

And then C is for cultivate assets, which is our topic today and for the next several episodes. Every dollar that you make, but you do not spend, is an asset. And each one of those that you add builds your net worth by another dollar.

And the T is for terminate debt. And we’ll get into details about that as well down the road. But every dollar that you use to pay down debt is also building net worth.

So that’s the IMPACT model. It’s how we build and sustain net worth.

I’m going to start from the very, very beginning of cultivating assets. Now, cultivate means to build and nurture and grow. This is exactly what you want to happen with your assets and your net worth. It doesn’t matter where you’re at in life, doesn’t matter where you’re at in terms of your financial journey, or education or literacy. It almost always starts with learning to save, cultivating assets starts with learning to save and starting to save. Unless you inherit a large sum of money or you win a large sum of money, I’m just going to assume because that doesn’t happen to most of us, I’m going to assume that’s not the case.

And it’s up to each one of us to save, or to build our own net worth based on our income coming in and how we take care of that and how we try to build it over time. So you start by saving money out of your income, it could be 1% 5% 10% 20%, there are people that are aggressively following the financial independence retire early to has its own acronym of FIRE. So financial independence, retire early, there are people that are following that movement that are saving 50% or more of their income. It’s pretty impressive.

My wife and I right now we have our goal to save 15% of our income each month and each year. And it looks like this year, we may do a little bit better than that, we may end up really close to 20%, which we’re both excited about.

Even if you’re retired and you say well, I don’t have a job, I don’t have this income coming in, it’s still a great habit to learn to save out of your Social Security benefits or whatever other income sources you have in retirement. I know a couple that’s been retired now for at least two decades. And I love that they are saving money out of the money that’s coming in their income sources in retirement. And they’ve got that built up in a little nest egg. And it makes them feel so comfortable and good that they’ve got this cash set aside, they wouldn’t have to pull any more money out of their retirement that could go there, if they needed. So this is for everybody – learning to save is for everybody.

So if you’re currently saving, it’s probably a good idea to consider how to increase it. I heard the story of a person who started by saving 1% out of their income every month. And then a year later, this person increased from 1% to 2%. And each year for 20 years increased in 1% increments until he was saving 20% of his income. And the interesting thing he said is, I never really noticed I never really missed it. 1% a year it was just almost unnoticeable, or to him it was completely unnoticeable.

So as we talk about cultivating assets, and building a discipline around learning to save, here is where you should start, well actually, maybe I should start with where you shouldn’t start. Don’t start with building an emergency fund, please, I’m not a fan of that advice. In fact, the concept of emergency fund is way too overused, it’s far too generic. And if you stop to think about it, it really doesn’t even make sense. And I’ll explain that a little bit more later and probably even in future episodes.

And also don’t start paying off debts you have including credit cards. Definitely keep up with your payments. But don’t start with an emergency fund. And don’t start by saying I’ve got to pay down all my debt.

Here is where you need to start first, if you use credit cards. Now if you don’t, you can skip to step number two, but I’m going to take a minute here on step number one, if you use credit cards, the first place your savings should go is to cover your current credit card float until it is eliminated, and you have a process in place to keep it eliminated. Now I did an episode on this, it was Episode 13, Beware of credit card float. And you could go back and listen to that. Because it gives you more detail.

But here’s the main point and the main mechanism that I’m talking about. When you buy something with your credit card, you should be setting that money aside. So it can’t be touched for any other purpose. You set that money aside so that it can be there ready to pay your credit card statement or credit card bill, when it comes, it just is going to pile up there.

Each time you’re spending money, you’re actually going into debt, you’re spending money on a credit card. So you will as you are going into debt, you’re setting the same amount of dollars aside in savings or checking, where you are offsetting that in or not allowing yourself to be more in debt, you’re actually causing a positive net worth growth by having that dollar set aside and holding on to it specifically until it’s time to pay that credit card bill. Now, it may take you a month or two to build this up, or three or 10. Whatever it takes, I’m going to tell you, it’s worth it. And here’s why. Because this is actually the best way to start building excess cash, you give it a very specific purpose, not a generic purpose like emergency fund. And you have it there ready for that purpose. And you know not to touch it for anything else. I mean, unless there was a tragedy or real emergency that came up. Each dollar that’s going there is building your net worth. It’s directly offsetting your debt, and it has you completely out of credit card float. Once you get there, it’s absolutely worth it.

Step number two, still don’t work on an emergency fund. Don’t save for an emergency fund, please. And don’t pay down any of your debts other than just keeping up with your payments. Regardless of how much interest you have on those debts or, or anything else, just stay with me here with these first two steps. They’re so critical and foundational. This is going to take discipline the step number two, and it flies in the face of what most financial pundits recommend. But you keep saving money in your bank account until you don’t need to leave live on this month’s income anymore. You want all of your income this month to pile up in your bank account, and be there ready for you to use next month.

When you you’ve done this, your bank account is going to be flush, you are going to feel something that you may have never felt before. You’re no longer living paycheck to paycheck. This is an amazing feeling. And it’s more important than saying I have an emergency fund over here, or slamming as much money as you can into debt right away. Let’s just slow down for a minute. And let’s get into this habit of saving, we will get to terminating debt, and I promise we will get aggressive at terminating debt. But let’s prove to ourselves and let’s build up this really wonderful cushion of credit card, offsetting our credit card float with cash in the bank. And with learning to live on last month’s income this month, and this month’s income piling up ready for you to allocate and use in the future month.

Now the interesting thing, when you do this, you actually are prepared for a lot of emergencies. If something should happen, you could dip into some of that money that’s been saved for now this month, or you could potentially take some of that money set aside for credit card float. Now, those things, those issues are still going to be there, you’re still going to have that credit card flow to cover and you’re still ultimately going to want to get to where you have your living on last month’s income. But you’ve got a really, really nice cushion.

Here’s some common criticisms in some common questions that I get about these two steps when I explain this.

The first one always is well Dave Ramsey says that the first baby step is have $1,000 in an emergency fund. Okay, you’re saving money. You’re just earmarking it for a better purpose than this generic emergency fund, you’re building up enough cash to cover your credit card flow. And if there is an emergency, it’s there to help you. But you still have the credit card balance to deal with. You can iterate, but the value of this is you have a very specific, purposeful intent for that money that’s being set aside, not random, generic. And now you can start changing definitions of Hey, going and buying that article of clothing was a quote unquote, emergency.

The second criticism I get is, but my checking account doesn’t pay any interest, I don’t want money piling up in there. If it’s not going to be making interest, this is a great problem. And I actually think we get ahead of ourselves when we say that, how about, let’s stop, let’s prove to ourselves that we can save this money first, before we start worrying about maximizing an interest rate. As we get there, at a maximum, what does work great is to have a savings account at the same bank where your checking account is and the savings account. Hopefully that pays a nice high yield. And you can transfer back and forth between the two, instantly, it’s not some high yield savings account that you have to wait two or three days for your money to show up. Or to transfer out, you have immediate access to it. That’s the point because this is money that you need immediate access to the maximum that it’s going to sit is maybe 30 or 45 days before you’ve got to live on your income from last month, or that credit card statement comes and you’ve got to make that payment. So the next question that I get around this is how in the world do I keep track of all this? I am a huge fan of you need a budget or YNAB software, it is fantastic for keeping track of both of these things. In fact, when you set it up correctly, it will automatically when you spend money on credit cards, it will automatically set those dollars aside and get you completely out of your credit card flow. It’s a great, great tool for that. Also, it’s a great tool for saving up this month’s income and then using it in the following month. So how do you keep track of it? I would recommend YNAB fantastic tool, if you don’t want to go to that extreme or get that into it. simple spreadsheet would obviously do or I’m sure there are other tracking mechanisms that you could, that you could work with. The key is to follow the concept.

Another question I get is how does living on last month’s income actually work? Well, here’s how it works. You save all your income for the month. And then you spend it all the next month. And this is where the prioritize the waterfall that I mentioned earlier comes in. In the impact your net worth model you intentionally spend based on priority. And saving more money should be toward the very top of your waterfall. One of those very first priorities is and as you recall, we prioritize the waterfall by saying here’s all my income, and it’s going to come over the ledge of the waterfall, and it’s going to come down and fill up the first pool. And then as it fills up, it spills down to the second pool and the third pool. Those pools represent our priorities. What’s the first pool? Is it savings? Is it tithing? Whatever it is that your goal is I won’t try to speculate on that. And you let that money fall all the way down. how you’re going to spend it that month, you should be spending every dollar and and include. If you’re putting money in savings or in a 401k that’s spending it, you’re saving it up and then you’re spending it and it’s gone. Having a put away and savings is a great way to go.

And then another complaint or criticism of this is a say hey, this is too much detail. Do I have to pay this close attention to all of this? Here’s my response.

Saving money is a deliberate choice. If you’re not going to be deliberate, and give your money a specific priority and keep track of it, it’s going to quickly disappear. It’s happened to all of us in the past, it’s happened to me a lot when I haven’t been as disciplined about tracking it. This is one reason why some people even struggle to have an emergency fund because it’s not a specific enough place for it to be or doesn’t have a specific enough role in your financial life. And so it slowly starts to get eroded away, and all of a sudden, everything becomes an emergency. By definition, the concept is just too vague. And it’s not nearly as deliberate as it could be. And as it should be.

So is it too much detail? My response is just very simply, it needs to be detailed, we need to pay attention to these things, our financial lives and a lot of our emotional stress. And so many other things are dependent on us successfully paying attention to some of these key details.

So there are the first two steps of cultivating assets, we start by picking a percentage or an amount that we can save every month, and then we put it toward first covering our credit card float. And once we get that covered, then we move toward the place where we can live on last month’s income and the income coming in this month is all saved up piled up in the bank account ready to be used for the next month.

There are lots more steps in this roadmap. And I think that your that you’ll find that I continue to break from the advice of these traditional personal finance gurus that are out there. I think you’re going to like the roadmap, I think it’s going to make a lot of sense to you. It’s something that I’ve implemented in my life, and have found a tremendous amount of success with it. So make sure you subscribe to the podcast so you don’t miss any of these upcoming episodes on cultivating assets and the roadmap to do so.

And wherever you’re at in the process. This is my challenge. I’m going to keep launching this challenge to you – either start or carry on in your roadmap for cultivating assets. If you’re already past these two steps, the next episode will probably going alk to you and then the next one after that, and will lay out this whole roadmap here in the next several episodes. Many many thanks to you for joining today. This is a wrap for Episode 21. Happy day.

Transcribed by https://otter.ai

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.


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