#232： Become the Chief Financial Officer of Family Inc.
Episode Stats
Summary
When it comes to personal finance, most of the advice out there is geared towards goal setting. And goal setting is helpful, but it often comes up short in giving you a big picture view of your financial situation so you can take appropriate tactical steps to improve your wealth. Well, my guest today on the show argues that in order to get this big picture look of your finances, you need to start looking at your family as a business and yourself as the Chief Financial Officer of Family Inc. His name is Doug McCormick, and he s a professional investor and the author of Using Business Principles to Maximize Your Family's Wealth.
Transcript
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Brett McKay here and welcome to another edition of the Art of Manliness podcast.
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When it comes to personal finance, most of the advice out there is geared towards goal
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setting like saving X amount of dollars for retirement or reduce discretionary spending
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And goal setting is helpful, but it often comes up short in giving you a big picture
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view of your financial situation so you can take appropriate tactical steps to improve
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Well, my guest today on the show argues that in order to get this big picture view of your
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finances, you need to start looking at your family as a business and yourself as the chief
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His name is Doug McCormick and he's a professional investor and the author of Family Inc.
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Using Business Principles to Maximize Your Family's Wealth.
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And today on the show, Doug and I discuss the two types of assets that you're managing
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as the CFO of your family and the business principles you can apply in your family's
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We also discuss the metrics that corporate CFOs use to determine the health of a company
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and how you can use the same ones to measure the health of your family's finances.
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Lots of great actionable advice in this podcast.
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After the show is over, make sure to check out the show notes at aom.is slash family inc.
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for links to resources where you can delve deeper into this topic.
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So you're a professional investor managing portfolios for institutions as well as for families.
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And it's all about treating your personal finances like you would a business, right?
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Before we get into what that means and what that entails, let's talk about the way most
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How do they manage the money and why is shifting your mindset to, you know, treating your personal
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Yeah, I think the unfortunate reality is many of us allow kind of life to manage us and the
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money is just kind of a byproduct of working really hard and people kind of pick their head
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up every couple months or every year and kind of check in on their financial progress.
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And, you know, the key premise of the book is that the family or individuals can view themselves
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We're essentially all in the business of converting our labor to financial capital.
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And when you think about it that way, I think it brings a whole new discipline to how people
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can proactively manage their careers, manage the really important decisions in life that
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I'm sure there's people out there who they might own a business and they got that thing
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But then their personal finances are just like a mess.
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And I think just to be clear, what I'm proposing is not that you make all of your personal financial
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decisions like a business would, but that you use that framework to inform you about like
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what the best business decision is, and then you overlay your values and your priorities
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And so I make bad financial decisions all the time, but I'd like to think I know it when
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So let's talk about this mind shift change of thinking of yourself as the chief financial
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officer of your family business, your family personal finances.
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Um, so what are the types of businesses that we're managing with our personal finances at
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the chief as the chief financial officer of our family?
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So essentially, you know, the business is one where everybody's born with a certain amount
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of labor and you can make decisions in life like education and job choices that, um, change
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And so the name of the game for all of us is really about how do we convert that labor
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into social security benefits and financial capital such that when it comes time to retire,
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you've got your, those two assets, your social security and your, your financial capital to
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support your consumption, uh, throughout the rest of your life.
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And I think, um, it's a pretty powerful framework because it allows people to connect, um, all of
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their disparate decisions in kind of a holistic fashion and kind of gives you a North star, if
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And what I mean by that is, um, you know, what you find is your educational choices or
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your career choices impact your investment choices, your insurance needs, your retirement
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And so this really, I think provides a pretty holistic framework, uh, to allow people to
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identify what's really important and understand the interconnections, if you will, between these
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So we got the labor asset and then the capital asset.
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And then I think essentially, uh, social security is, is a, a, a mandatory purchase of an annuity.
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Uh, and so I think that is, becomes a very valuable asset for folks as they get close to
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So, um, the CFOs of corporations, they have objectives or goals, big picture goals of what
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I mean, what are the three main objectives of the CFO, the family, a family?
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So you talked about, I guess one is converting labor assets, your work into capital assets,
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I mean, I think you can kind of break it down into two, um, three, and this is somewhat
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I think the CFO focuses on the immediate term and that is to ensure that he has the cash
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available to fund today's consumption and avoiding financial distress today.
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Uh, kind of ensuring that your family has the basic needs.
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I think the second element is kind of the long-term planning.
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How do you begin to invest today and prepare, um, your assets to support your retirement needs?
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And then I think the third, uh, major area that a CFO focuses on or should focus on is
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And I think this is candidly the one that is, is most, um, you know, kind of underserved
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and that's really about teaching the next generation, the skills and the values to be good
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stewards of the family assets, um, when one generation passes.
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So we'll get into these more specifically here in a bit.
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Cause that's something everyone knows they should be tracking in their personal finances,
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but how should a CFO of family Inc measure their net worth differently than how most people
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So, so just, uh, for everybody's benefit, first of all, net worth is simply, um, something
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that you can determine when you look at your balance sheet and the balance sheet, uh, list
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all of your assets on one side and all of your liabilities on the other side and what's
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left over, um, assets minus liabilities is your net worth, essentially your savings.
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Um, and you see, you see a balance sheet in many business applications.
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It's also very relevant in a personal finance environment.
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I think the difference in terms of the way I look at it or a family CFO should look at
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it is, um, there, you shouldn't just look at your financial assets.
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When you look at your net worth, you should also take a bigger picture to think about the
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lifetime labor value that you have and the expected social security value that you have.
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And when you add those assets, um, you know, it really kind of results in some very interesting
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For example, uh, in many cases you are most wealthiest, uh, when you're young now that
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you may not have a lot of financial assets, but you certainly have a lot of labor assets
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that are available, uh, to be converted into capital over time.
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And so I think that holistic, um, view is an important starting point.
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As you think about, um, the real drivers of wealth, key investment opportunities, things
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So, yeah, the reason why you have, you have higher, uh, net worth just to clarify is because
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you're young, you have time to, you know, I guess capitalize on your, your labor asset.
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So, so just to, you know, give people a little more perspective into how I think about those
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values, you know, your lifetime labor value is simply how old am I today?
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What can I expect to earn over that interim period on an after-tax basis?
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And, um, you know, what we can say for sure is you're going to be wrong when you make that
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But I think it's a really important thought process because it forces people to think about
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We're focused on maximizing lifetime compensation.
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And I think it's a better way to think about, um, you know, good investments in career and
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education and acknowledging that you have that significant asset on the balance sheet.
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So this idea of thinking of your job as an asset is, I mean, when I read that, I was like,
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Um, but in the world of business, labor is an asset.
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Like they, they have that on the balance sheets.
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You know, we've talked, kind of hit on a little bit of how viewing your labor as an asset can
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But if labor is an asset, you can invest in assets.
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What are some of the ways people can invest in their labor asset to get the most out of
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And I think, you know, just to highlight the big aha moment that I'd like people to think
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about is when you start looking at your labor as an asset, you begin not to think about
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But you begin to think about the goal is to maximize the lifetime labor value.
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Um, you do it by obviously earning more per year.
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You do it because you've got a skillset that is more employable.
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And so you're less likely to have periods of unemployment.
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And the last is, um, you can do it by extending your career.
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And so if you, um, are fortunate enough to have a skillset that is not manual labor, in
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many cases, you can work later into your years, uh, because you're selling your intellectual
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So there's, there's lots of different ways to maximize that value of your labor asset.
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Um, and it's not only the amount of education, it's the type of education.
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There's very clear statistics that, um, would suggest that people that focus on business
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or, you know, kind of STEM related fields, science and technology earn substantially more
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Um, and it's the kind of professional choices you make in terms of what industries you pursue,
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what functional areas within a career you pursue and things like, uh, geography, you know,
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the, the employment picture and the compensation is very different in Silicon Valley than it is,
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And so, uh, you know, your geographic preference and choice, um, impacts your, your lifetime labor
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And then I think the last one, which is perhaps one of the very most powerful is entrepreneurship.
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Uh, I'm a big fan of entrepreneurship as a way to dramatically increase, um, the value of
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Because a lot of our listeners are young guys or they're, uh, parents with kids about to
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go to college, um, education is investment in your labor asset, but it's an investment
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And, you know, there's been a lot of talk in the, the zeitgeist culture, zeitgeist saying
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You know, looking at this as a CFO, what's your argument that education debt is still a
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So, so first of all, I would, let me say a couple of things.
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First, uh, I, I believe that the benefits of education may be decreasing relative to,
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And that's a product of the cost of education is going up and candidly in many cases, um,
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you know, wage, uh, or compensation levels are not going up commensurately.
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So if you, people made the argument that an education is a worse investment today than
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it was 10 years ago, I think there's a, some merit to that, but when you think about is
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an education still a good investment, I think the answer is a resounding yes.
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Um, when you think about a couple of things, the first is, um, you're not thinking about
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the return on that investment over a year or five years, you were thinking about it over
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The second is it assumes that, um, the student is making good choices in terms of what kind
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of career they intend to pursue and what kind of curriculum.
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So I don't think you can universally say that education is a good investment.
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I think education in skillsets that are in demand in the economy and that you intend to
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Um, and then I think there's a real, uh, key element to not just the skills that you
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learn in college, but the skills that you must learn to maximize that value.
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And essentially that's about selling your labor in the marketplace.
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And I think, um, in many cases, uh, we're not doing a good job of teaching our young people,
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whether they be in high school or college about how to navigate these major decisions.
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Arguably, um, an educational investment is, is certainly one of the very biggest investments
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And if it's not the biggest, it's probably the most impactful.
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And I think giving people the tools to evaluate, you know, not only what they have aptitudes
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for and what their passions are for, but what the economic consequences of those decisions
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are, I think is a real key element of that, um, you know, kind of thought process.
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So, yeah, again, it's, people have to look at the long-term view on this to see the benefits
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It's not going to, you know, it might not happen the first 10 years of your career.
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And that is, you know, in today's environment, um, you know, millennials are likely to have 10 different
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You know, job mobility is substantially higher, um, than it used to be, and they're likely
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to work substantially longer, um, than previous generations.
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So, you know, I think, you know, the good news is in a mobile environment, there's lots
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of opportunity to be compensated for those skills you've developed and you've got a lot
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longer period, um, to recoup your investment, if you will.
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So continuing on this idea of treating your labor as an asset, you know, people insure valuable
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assets like their home or car, um, if labor is an asset and it's an incredibly valuable
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I mean, this is going to fund your capital into retirement and fund, uh, consumption
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while you're still, uh, you know, young, uh, how can we insure our labor asset?
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First of all, um, the, the, probably the most neglected insurance of most individuals is
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disability insurance and, you know, from a financial perspective, this is almost the worst
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outcome possible because not only have you lost your potential to earn if you have a
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significant disability event, uh, but you also still have all the costs of, uh, required
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So, you know, I think, um, insurance item number one that's most important is disability
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insurance, uh, in the unfortunate circumstance that you get injured and are not able to earn
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the income and, and people dramatically underestimate this risk.
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If you look at statistics, you know, something like, uh, north of 20% of Americans will experience
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Uh, I think the second element of insuring this big asset is life insurance, uh, and a
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Life insurance is most relevant once you've established a family and they're depending on
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Uh, and I generally recommend that, um, if folks are considering life insurance, they do
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so on a term basis, that's generally the cheapest, um, and ensures the exact need you're looking
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for, which is you, uh, end up dying prematurely and your family loses access to that labor
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And is disability insurance expensive or is it relatively inexpensive?
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It's, um, probably inexpensive relative to the risk.
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And so my whole approach to insurance is I think it's generally a loser's game, meaning
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the expected return is going to be less than the cost to procure it, but you've insured a,
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Um, and you can do things around disability insurance in terms of delaying, um, how long
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you have to be unemployed before you begin to collect your benefit.
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So for example, um, if you get injured the first 30 days, you don't collect anything.
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It's only an injury, um, that exists in excess of 30 days.
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And that would be a cheaper policy than one that starts to pay out immediately.
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And another, um, insurance method you talk about in the book is, you know, self-insurance,
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Uh, uh, uh, what's it called an emergency fund for those instances where maybe you might
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be out of a job for a few months because you got laid off.
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First of all, I think, um, one of the highest financial priorities, um, for anyone is establishing
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that rainy day fund, uh, whether it be that you experience, um, you know, a car accident,
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um, a required repair at your house or unemployment to, to be able to ensure that you can, um, not
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Um, it's also possible that at some point you acquire enough wealth that you don't need
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disability insurance or you don't need life insurance.
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Um, the problem is most people, very few people in our economy, um, achieve that level of wealth
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And so, um, while that's a good investment, if you have enough capital or enough wealth,
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that's not available to most folks or it's not prudent for most folks.
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So let's shift over to our, this other business asset that we're managing, our capital, which
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is there to fund a retirement after we've depleted our labor asset.
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Um, so let's say what's the best investment strategy say for a young person who's just
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starting out in life to ensure that their retirement fund can cover the time they're not
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So, so I think the first thing that folks should think about taking advantage of is, uh, company
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Um, these are really important for a couple of reasons.
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So essentially what that means is you're not paying tax on the income.
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It's essentially like if you're having an effective tax rate of 25%, it's essentially like 25
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cents on every dollar you invest at that is free money working for you in your retirement
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The second thing is many companies offer some kind of matching program.
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Um, so for every dollar you put in, they put in another 10 cents.
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And so I recommend to folks that you should be maxing out on those retirement accounts.
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The combination of tax deferral, uh, combined with the matching program ends up being very
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Um, the second thing is you got to start early.
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Um, wealth is really created by compounding, you know, it's not the 2% or the 5% this year.
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It's the 5% over 30 or 40 years that really drives wealth.
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And, you know, the last thing I would say about this element of, of the family Inc is,
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um, these retirement assets are something that have a very long duration.
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And what I mean by that is if you're 25 or 30, you're not going to retire until you're
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And then those assets are going to, you know, be used by you until you're 85 or, or plus.
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And so you've got a great long-term time horizon.
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And if you have that kind of time horizon, you can afford year in and year out volatility.
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The market's up 10%, the market's down 20%, uh, because you're invested for the long-term.
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So my recommendation is that folks, um, take significant equity exposure in these kinds
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And you also recommend a passive investment strategy for the, yeah, I think the goal here
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is to maximize after tax, after inflation, after fee returns.
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And when you look at it that way versus just nominal returns, um, generally, uh, it's very
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There's less tax leakage, there's less fees and inflation you're going to experience regardless
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Um, how should someone who's getting close to retirement, how should their strategy towards
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Well, um, so, so as you approach retirement, essentially you are losing one significant asset
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Uh, and so I think you have to essentially acknowledge that you've got less degrees of
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You've got a little bit less, um, opportunity to assume risk.
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Fortunately, um, for most of us, we'll have a social security, um, program.
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So that is a significant asset that will compensate us.
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Um, but I think the key elements of, um, you know, approaching this part of, of the family
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life cycle are continue to stay, um, reasonably invested in equities.
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And by the time you're ready to retire, you have significant visibility on things like
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how much wealth you have, um, what your health is.
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And you can begin to think about things like additional annuities or, uh, additional insurances
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And so, you know, I really, at the time of retirement, you've, you've kind of got a lot
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of, um, unknowns that you've begun to answer and it allows you to make a much more informed
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Let's talk about going to that, the insuring your retirement asset, your capital asset.
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Can you, um, talk to me a little deeper into that topic?
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So essentially, um, an annuity is simply a contract and basically it's where I today give,
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And in return, they give me an annual payment for as long as I live.
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That payment can be something that happens for you and your wife or just you.
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And so you can really structure it, um, commensurate with your unique needs.
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Um, and so I find that annuities are relevant for folks who have not saved a lot and don't
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Um, and it helps ensure that you don't run out of money because, uh, one of the big risks
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that we all face is we don't know how long we're going to live.
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And, you know, from a financial perspective, living long actually creates greater financial
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Um, so it's, you know, it's, it's a great thing, uh, personally, but from, um, a achieving
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financial, um, independence, the longer you live, obviously the more you've got to save
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and the annuity can be a valuable tool to help bridge that gap as, as, um, you, you take
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The problem with annuities is I view them as very expensive.
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Um, and so in general, if you think about what the return on an annuity is, it's low
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Uh, I think you're likely to experience a better return in the equity markets.
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Um, but the equity markets also come with substantially more risk.
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And at what point in someone's life should they might consider annuities?
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Because, uh, I think the purchase decision becomes a lot more informed when you have
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a better sense of the balance sheet, you have a better sense of your retirement benefits,
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you have a better sense of your health and how long you're likely to live.
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So CFOs in a business use a variety of tools and metrics to measure the health of their
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Uh, what sorts of metrics should a family CFO look at?
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You know, so, so if we, if we go back to the analogy that, you know, every family is a business,
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I think many of the financial tools that CFOs use in a business context can be applied to
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So obviously the two most significant would be an income statement, which is essentially
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It simply lists how much you bring in minus all your expenses for the year.
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And in a budget context, what's left over is called savings and an income statement.
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And as we talked about before, a balance sheet, um, simply, um, lists all the assets minus
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all the liabilities and what leftover what's left over is your savings or your net worth.
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Um, you know, I see a lot of people spend a lot of time, um, creating very detailed budgets
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and I'm not a big fan of this because what I find is people spend a lot of time tracking
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it and not a lot of time, um, taking action to improve it.
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So I think a high level income statement at a high level balance sheet, uh, tell me all
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If you looked at your income statement, you can determine how much you saved.
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And if you compare those two balance sheets, you can determine how much your net worth,
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And in my mind, those, those are kind of the big, uh, indicators of progress.
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Um, you know, I do have a website, it's called familyinc.com.
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And I actually provide a bunch of tools that allow someone to build their own income statement,
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build their own balance sheet, and then provide some analytics around what that should tell
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Let's talk about the, this third objective you mentioned earlier of a family, of a CFO is
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Businesses have succession plans in the event the CEO or the CFO steps down.
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What sort of succession plan should a family Inc.
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So first of all, let me say, I think this is, um, one of the most challenging areas of
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creating multi-generational, you know, kind of financial security.
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Um, and I don't know if it's because people just have a hard time thinking about, um, you
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know, kind of their own, their own death or it's a product of delicate conversations.
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But I find this to be, um, very often neglected.
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You know, I think there are really three, um, you know, different levels of financial
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preparedness as it becomes a succession planning.
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You know, the first, and a lot of people get this one right is, you know, it's the emergency
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Uh, you know, what financial advisors does someone need to call when, uh, a family member
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has passed away to figure out where everything's located?
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Um, you know, who helps them figure out, uh, what is available in the estate?
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The second one, which I see, um, you know, kind of less success with is clearly a clear
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And so that addresses things like, how does the deceased want their estate disposed of?
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How do they want their inheritance distributed?
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And these are often really tough discussions, but my view is, you know, wouldn't it be better
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to make this very clear when you can talk to folks about it and ensure they understand
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your rationale as opposed to having a family members fight about it or argue about it or
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never really know, you know, what, what the intent was.
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I've seen a lot of, you know, kind of hurt feelings and strained relationships because
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people have failed on the second level of preparedness.
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And then lastly, the third one, which I think is, is probably the most important, but the
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It's really the ability to impart skills and values into the next generation so that they
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can be, uh, you know, good stewards of, of the family.
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And so, you know, I see in many cases, families work an entire lifetime to accumulate wealth.
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They turn it over to the next generation and that next generation has not been prepared
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And so this is not only, you know, the skills to manage money, but it's imparting the values
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that are consistent with the way, you know, you manage the money.
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Uh, and my only advice on this one is it takes a long time.
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And so the best way to prepare is to start that conversation early with your kids and
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use real life opportunities as, as examples to allow them to learn and allow them to fail
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Because I think we all have had many, um, experiences where we failed with managing, um, you know,
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And I think there's, you know, valuable learning that occurs when you do that, especially in
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a controlled environment where it doesn't cost you too much.
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My wife and I just finished our estate planning.
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Um, I've been putting it off for such a long time, but now that I have it done, it feels
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There's that comfort that if I were to go, like things would still transition smoothly.
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And the reality is that the unfortunate thing about the estate plan is the minute you do
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it and finish it, it's probably out of date, but you know, you've probably got a 95%
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And in the next three years, it'll still be an 80% solution.
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And so it does require revisiting as your circumstances change, but you've certainly, you know, made
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it well down the path of laying out broad strokes of how, how you think things need to happen.
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I'm sure there's a lot of people listening there.
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They got baby boomer parents who are, you know, getting up there.
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They're getting close to, you know, you don't want to think about like, my parents are about
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to die, but that's, you know, it's on your mind as they get older.
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How do you bring up this conversation about your parents' personal finances, right?
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Like, you know, is mom and dad going to have enough to support themselves in retirement?
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Because you read all these statistics where baby boomers like don't really have that much
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So how do you have those conversations with your parents?
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So I don't have any good recommendations on how to avoid the sensitivity.
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I think two things that I've seen as important elements to a constructive conversation here.
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You know, the first is opportunity for two-way learning.
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And I think, you know, younger generations can go to older generations and say, hey, I'm
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trying to understand your financial situation because I'm trying to understand my own.
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You've had a lot more, you know, kind of real world decisions to make.
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And conversely, I think in many cases, you know, younger generation is realizing this
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is an increasingly important life skill and can bring to bear what they've learned.
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So I think if you can structure this conversation in the context of how do we all learn from
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I think the second is, and this one can be challenging, but this is a conversation that's
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And so, you know, when I'm talking to my father, for example, I try not to be coming
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at it, you know, in a father-son context, but more as, you know, two adults who are trying
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to think about a complicated issue and make sure that we're making the best of our circumstances.
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And so, you know, that's a hard one, but I think the key is try to get outside of your
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So Doug, let's say we've hit on some really great ideas here, but let's say there's someone
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listening to the show right now whose finances are, you know, a mess.
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You know, the value of their labor asset isn't where they want it to be.
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They don't have positive cashflow, the retirement asset is zilch.
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I mean, what's some things that people can start doing today to get going on the right
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So the first thing I would say is, you know, focus on today first.
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You know, a lot of us have tremendous anxiety about, am I going to safely retire?
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You know, can I accumulate enough wealth that I'll feel secure?
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And that's obviously a great long-term goal, but you never get there if you experience financial
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You know, one of the most significant obstacles to overcome is something like financial distress
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And so if you find yourself, you know, kind of in that point where you're really struggling,
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The priority is avoiding financial distress today.
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And in some cases that creates some tough decisions.
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You know, you mentioned someone that has negative cashflow.
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I mean, I think if you have negative cashflow, somehow you've got to stop the burn rate.
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And generally the first and fastest way to do that is take a hard look at your expenses
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and figure out how to reduce anything that is, you know, kind of not absolutely mandatory.
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Once you normalize your cashflow such that you're not digging a bigger hole for yourself, I think
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that's when you can begin to think about how you begin to accumulate wealth.
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You know, as we, as we talked about earlier, by far and away from most families, your largest
00:32:31.120
And so it's beginning to think about how you deploy that labor in a more effective way.
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And it's not just about, you know, your compensation, like what you made this week or this month,
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but it's about what skills you're developing, what relationships you're establishing that
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are going to allow you to grow that income over time.
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Well, Doug, this has been a great conversation.
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Where can people learn more about your book and your work?
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Well, first of all, thanks very much for having me.
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Um, you know, so I've got a website, familyinc.com, um, and you can see the tools there and a
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little bit more about the philosophy of the book.
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Uh, and it's obviously, um, available on Amazon and Barnes and Noble.
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You can also find out more information about his book at familyinc.com and make sure to check
00:33:30.580
Where you can find links to resources, where you can delve deeper into this topic.
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Well, that wraps up another edition of the Art of Manliness podcast.
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For more manly tips and advice, make sure to check out the Art of Manliness website at
00:33:51.340
And if you enjoy the show and have gotten something out of it, I'd appreciate it if you give us
00:33:57.340
As always, I thank you for your continued support.
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And until next time, this is Brett McKay telling you to stay manly.