The Art of Manliness - #232： Become the Chief Financial Officer of Family Inc.

00:00:00.000 Brett McKay here and welcome to another edition of the Art of Manliness podcast.

00:00:17.940 When it comes to personal finance, most of the advice out there is geared towards goal

00:00:21.140 setting like saving X amount of dollars for retirement or reduce discretionary spending

00:00:25.300 by a certain percentage each month.

00:00:26.620 And goal setting is helpful, but it often comes up short in giving you a big picture

00:00:30.060 view of your financial situation so you can take appropriate tactical steps to improve

00:00:34.140 your wealth.

00:00:34.820 Well, my guest today on the show argues that in order to get this big picture view of your

00:00:37.880 finances, you need to start looking at your family as a business and yourself as the chief

00:00:42.840 financial officer of Family Inc.

00:00:44.840 His name is Doug McCormick and he's a professional investor and the author of Family Inc.

00:00:48.660 Using Business Principles to Maximize Your Family's Wealth.

00:00:51.640 And today on the show, Doug and I discuss the two types of assets that you're managing

00:00:55.680 as the CFO of your family and the business principles you can apply in your family's

00:00:59.280 business to help grow them.

00:01:00.840 We also discuss the metrics that corporate CFOs use to determine the health of a company

00:01:04.880 and how you can use the same ones to measure the health of your family's finances.

00:01:08.800 Lots of great actionable advice in this podcast.

00:01:10.940 After the show is over, make sure to check out the show notes at aom.is slash family inc.

00:01:15.640 for links to resources where you can delve deeper into this topic.

00:01:20.000 Doug McCormick, welcome to the show.

00:01:22.700 Hey, thanks very much.

00:01:23.540 Glad to be here.

00:01:24.020 So you're a professional investor managing portfolios for institutions as well as for families.

00:01:29.560 And you got a new book out called Family Inc.

00:01:31.340 And it's all about treating your personal finances like you would a business, right?

00:01:36.060 If you, by being a chief financial officer.

00:01:38.380 Before we get into what that means and what that entails, let's talk about the way most

00:01:42.080 families manage their money.

00:01:46.060 How do they manage the money and why is shifting your mindset to, you know, treating your personal

00:01:50.140 finances like a business, a better approach?

00:01:52.280 Yeah, I think the unfortunate reality is many of us allow kind of life to manage us and the

00:01:58.340 money is just kind of a byproduct of working really hard and people kind of pick their head

00:02:03.160 up every couple months or every year and kind of check in on their financial progress.

00:02:07.080 And, you know, the key premise of the book is that the family or individuals can view themselves

00:02:13.760 as a business.

00:02:14.400 We're essentially all in the business of converting our labor to financial capital.

00:02:19.700 And when you think about it that way, I think it brings a whole new discipline to how people

00:02:23.600 can proactively manage their careers, manage the really important decisions in life that

00:02:29.640 can help lead someone to financial security.

00:02:31.620 Right.

00:02:32.240 I'm sure there's people out there who they might own a business and they got that thing

00:02:36.060 just, you know, tight as a ship.

00:02:37.540 They run it perfectly.

00:02:38.840 But then their personal finances are just like a mess.

00:02:41.640 It's just sort of haphazard.

00:02:43.560 Yeah, no, I see that a lot.

00:02:45.320 And I think just to be clear, what I'm proposing is not that you make all of your personal financial

00:02:52.160 decisions like a business would, but that you use that framework to inform you about like

00:02:58.140 what the best business decision is, and then you overlay your values and your priorities

00:03:02.080 onto that.

00:03:03.000 And so I make bad financial decisions all the time, but I'd like to think I know it when

00:03:06.600 I'm doing it.

00:03:08.020 Gotcha.

00:03:08.600 That makes sense.

00:03:09.280 All right.

00:03:09.480 So let's talk about this mind shift change of thinking of yourself as the chief financial

00:03:13.900 officer of your family business, your family personal finances.

00:03:16.960 Um, so what are the types of businesses that we're managing with our personal finances at

00:03:22.720 the chief as the chief financial officer of our family?

00:03:25.160 Yep.

00:03:25.700 So essentially, you know, the business is one where everybody's born with a certain amount

00:03:30.620 of labor and you can make decisions in life like education and job choices that, um, change

00:03:36.920 the value of that labor.

00:03:38.040 And so the name of the game for all of us is really about how do we convert that labor

00:03:42.480 into social security benefits and financial capital such that when it comes time to retire,

00:03:47.740 you've got your, those two assets, your social security and your, your financial capital to

00:03:52.920 support your consumption, uh, throughout the rest of your life.

00:03:56.040 And I think, um, it's a pretty powerful framework because it allows people to connect, um, all of

00:04:03.260 their disparate decisions in kind of a holistic fashion and kind of gives you a North star, if

00:04:07.900 you will.

00:04:08.240 And what I mean by that is, um, you know, what you find is your educational choices or

00:04:14.420 your career choices impact your investment choices, your insurance needs, your retirement

00:04:20.820 choices.

00:04:21.800 And so this really, I think provides a pretty holistic framework, uh, to allow people to

00:04:26.740 identify what's really important and understand the interconnections, if you will, between these

00:04:31.600 different choices.

00:04:32.500 All right.

00:04:32.600 So we got the labor asset and then the capital asset.

00:04:36.120 Yep.

00:04:36.560 And then I think essentially, uh, social security is, is a, a, a mandatory purchase of an annuity.

00:04:43.380 Uh, and so I think that is, becomes a very valuable asset for folks as they get close to

00:04:47.020 retirement as well.

00:04:47.920 Okay.

00:04:48.380 All right.

00:04:48.880 So, um, the CFOs of corporations, they have objectives or goals, big picture goals of what

00:04:54.960 they're trying to do.

00:04:55.800 I mean, what are the three main objectives of the CFO, the family, a family?

00:05:00.020 So you talked about, I guess one is converting labor assets, your work into capital assets,

00:05:04.740 which is like retirement.

00:05:06.060 Um, what are some of the other objectives?

00:05:08.100 Yeah.

00:05:08.480 I mean, I think you can kind of break it down into two, um, three, and this is somewhat

00:05:12.820 of a, of almost a time horizon.

00:05:14.320 I think the CFO focuses on the immediate term and that is to ensure that he has the cash

00:05:20.760 available to fund today's consumption and avoiding financial distress today.

00:05:26.060 Uh, kind of ensuring that your family has the basic needs.

00:05:29.200 I think the second element is kind of the long-term planning.

00:05:32.540 How do you begin to invest today and prepare, um, your assets to support your retirement needs?

00:05:39.520 And that's a, a many year process.

00:05:41.740 And then I think the third, uh, major area that a CFO focuses on or should focus on is

00:05:47.720 succession planning.

00:05:48.540 And I think this is candidly the one that is, is most, um, you know, kind of underserved

00:05:53.820 and that's really about teaching the next generation, the skills and the values to be good

00:05:58.400 stewards of the family assets, um, when one generation passes.

00:06:02.620 Okay.

00:06:03.420 That's great.

00:06:03.860 So we'll get into these more specifically here in a bit.

00:06:06.480 Uh, let's talk about net worth, right?

00:06:08.120 Cause that's something everyone knows they should be tracking in their personal finances,

00:06:11.700 but how should a CFO of family Inc measure their net worth differently than how most people

00:06:18.280 go about measuring their personal net worth?

00:06:20.500 Yep.

00:06:20.940 So, so just, uh, for everybody's benefit, first of all, net worth is simply, um, something

00:06:26.080 that you can determine when you look at your balance sheet and the balance sheet, uh, list

00:06:29.740 all of your assets on one side and all of your liabilities on the other side and what's

00:06:34.920 left over, um, assets minus liabilities is your net worth, essentially your savings.

00:06:40.160 Um, and you see, you see a balance sheet in many business applications.

00:06:44.020 It's also very relevant in a personal finance environment.

00:06:47.500 I think the difference in terms of the way I look at it or a family CFO should look at

00:06:51.460 it is, um, there, you shouldn't just look at your financial assets.

00:06:55.600 When you look at your net worth, you should also take a bigger picture to think about the

00:07:00.340 lifetime labor value that you have and the expected social security value that you have.

00:07:05.820 And when you add those assets, um, you know, it really kind of results in some very interesting

00:07:11.740 insights.

00:07:12.120 For example, uh, in many cases you are most wealthiest, uh, when you're young now that

00:07:17.980 you may not have a lot of financial assets, but you certainly have a lot of labor assets

00:07:21.540 that are available, uh, to be converted into capital over time.

00:07:24.940 And so I think that holistic, um, view is an important starting point.

00:07:30.200 As you think about, um, the real drivers of wealth, key investment opportunities, things

00:07:35.520 like asset allocation.

00:07:37.360 Right.

00:07:37.480 So, yeah, the reason why you have, you have higher, uh, net worth just to clarify is because

00:07:41.620 you're young, you have time to, you know, I guess capitalize on your, your labor asset.

00:07:48.840 Exactly.

00:07:49.280 So, so just to, you know, give people a little more perspective into how I think about those

00:07:53.500 values, you know, your lifetime labor value is simply how old am I today?

00:07:58.440 How old am I when I retire?

00:08:00.900 What can I expect to earn over that interim period on an after-tax basis?

00:08:06.280 And it's essentially the sum of that.

00:08:08.560 And, um, you know, what we can say for sure is you're going to be wrong when you make that

00:08:13.620 estimate.

00:08:14.000 But I think it's a really important thought process because it forces people to think about

00:08:18.800 the long game.

00:08:20.160 We're not focused on compensation today.

00:08:21.940 We're focused on maximizing lifetime compensation.

00:08:25.260 And I think it's a better way to think about, um, you know, good investments in career and

00:08:29.900 education and acknowledging that you have that significant asset on the balance sheet.

00:08:34.260 All right.

00:08:34.820 So this idea of thinking of your job as an asset is, I mean, when I read that, I was like,

00:08:40.060 wow, that's, I never thought of it that way.

00:08:41.820 Um, but in the world of business, labor is an asset.

00:08:44.840 Like they, they have that on the balance sheets.

00:08:47.300 You know, we've talked, kind of hit on a little bit of how viewing your labor as an asset can

00:08:51.540 change how people approach their career.

00:08:53.220 But if labor is an asset, you can invest in assets.

00:08:56.580 What are some of the ways people can invest in their labor asset to get the most out of

00:09:00.940 it?

00:09:01.500 And I think, you know, just to highlight the big aha moment that I'd like people to think

00:09:06.280 about is when you start looking at your labor as an asset, you begin not to think about

00:09:11.420 this year, what am I going to make this year?

00:09:14.040 But you begin to think about the goal is to maximize the lifetime labor value.

00:09:18.220 And there's a couple of ways you can do that.

00:09:20.040 Um, you do it by obviously earning more per year.

00:09:23.000 You do it because you've got a skillset that is more employable.

00:09:26.160 And so you're less likely to have periods of unemployment.

00:09:28.940 And the last is, um, you can do it by extending your career.

00:09:32.580 And so if you, um, are fortunate enough to have a skillset that is not manual labor, in

00:09:39.120 many cases, you can work later into your years, uh, because you're selling your intellectual

00:09:42.900 capital.

00:09:43.360 So there's, there's lots of different ways to maximize that value of your labor asset.

00:09:48.580 Um, so some specifics are obviously education.

00:09:51.740 Um, and it's not only the amount of education, it's the type of education.

00:09:55.400 There's very clear statistics that, um, would suggest that people that focus on business

00:10:00.340 or, you know, kind of STEM related fields, science and technology earn substantially more

00:10:05.640 than those that focus on liberal arts.

00:10:07.820 Um, and it's the kind of professional choices you make in terms of what industries you pursue,

00:10:12.560 what functional areas within a career you pursue and things like, uh, geography, you know,

00:10:18.380 the, the employment picture and the compensation is very different in Silicon Valley than it is,

00:10:23.780 uh, you know, kind of the Midwest.

00:10:25.720 And so, uh, you know, your geographic preference and choice, um, impacts your, your lifetime labor

00:10:32.160 value.

00:10:32.640 And then I think the last one, which is perhaps one of the very most powerful is entrepreneurship.

00:10:38.520 Uh, I'm a big fan of entrepreneurship as a way to dramatically increase, um, the value of

00:10:44.260 your labor asset.

00:10:45.120 Okay.

00:10:45.620 Let's talk about education, right?

00:10:47.060 Because a lot of our listeners are young guys or they're, uh, parents with kids about to

00:10:51.620 go to college, um, education is investment in your labor asset, but it's an investment

00:10:56.740 you make using debt, right?

00:10:58.700 It's debt funded, take out student loans.

00:11:01.200 And, you know, there's been a lot of talk in the, the zeitgeist culture, zeitgeist saying

00:11:05.060 that college simply isn't worth it anymore.

00:11:07.880 You know, looking at this as a CFO, what's your argument that education debt is still a

00:11:13.440 good investment?

00:11:14.840 Yeah.

00:11:15.040 So, so first of all, I would, let me say a couple of things.

00:11:17.360 First, uh, I, I believe that the benefits of education may be decreasing relative to,

00:11:26.280 um, you know, history.

00:11:27.620 And that's a product of the cost of education is going up and candidly in many cases, um,

00:11:34.000 you know, wage, uh, or compensation levels are not going up commensurately.

00:11:38.020 So if you, people made the argument that an education is a worse investment today than

00:11:44.280 it was 10 years ago, I think there's a, some merit to that, but when you think about is

00:11:49.500 an education still a good investment, I think the answer is a resounding yes.

00:11:53.880 Um, when you think about a couple of things, the first is, um, you're not thinking about

00:11:58.540 the return on that investment over a year or five years, you were thinking about it over

00:12:02.940 a lifetime.

00:12:04.020 The second is it assumes that, um, the student is making good choices in terms of what kind

00:12:10.800 of career they intend to pursue and what kind of curriculum.

00:12:14.060 So I don't think you can universally say that education is a good investment.

00:12:17.660 I think education in skillsets that are in demand in the economy and that you intend to

00:12:22.900 use is a very good investment.

00:12:25.480 Um, and then I think there's a real, uh, key element to not just the skills that you

00:12:30.820 learn in college, but the skills that you must learn to maximize that value.

00:12:35.440 And essentially that's about selling your labor in the marketplace.

00:12:38.580 And I think, um, in many cases, uh, we're not doing a good job of teaching our young people,

00:12:43.940 whether they be in high school or college about how to navigate these major decisions.

00:12:49.520 Arguably, um, an educational investment is, is certainly one of the very biggest investments

00:12:54.240 that a person will make over a lifetime.

00:12:56.060 And if it's not the biggest, it's probably the most impactful.

00:12:59.260 And I think giving people the tools to evaluate, you know, not only what they have aptitudes

00:13:04.700 for and what their passions are for, but what the economic consequences of those decisions

00:13:09.440 are, I think is a real key element of that, um, you know, kind of thought process.

00:13:13.520 Right.

00:13:13.680 So, yeah, again, it's, people have to look at the long-term view on this to see the benefits

00:13:19.040 of an education.

00:13:19.880 It's not going to, you know, it might not happen the first 10 years of your career.

00:13:23.120 It'll come 30, 40 years into your career.

00:13:26.400 And that is, you know, in today's environment, um, you know, millennials are likely to have 10 different

00:13:32.120 jobs.

00:13:32.560 You know, job mobility is substantially higher, um, than it used to be, and they're likely

00:13:37.480 to work substantially longer, um, than previous generations.

00:13:40.460 So, you know, I think, you know, the good news is in a mobile environment, there's lots

00:13:45.500 of opportunity to be compensated for those skills you've developed and you've got a lot

00:13:49.260 longer period, um, to recoup your investment, if you will.

00:13:52.540 Gotcha.

00:13:52.880 All right.

00:13:53.180 So continuing on this idea of treating your labor as an asset, you know, people insure valuable

00:13:59.460 assets like their home or car, um, if labor is an asset and it's an incredibly valuable

00:14:05.700 one, right?

00:14:06.340 I mean, this is going to fund your capital into retirement and fund, uh, consumption

00:14:10.200 while you're still, uh, you know, young, uh, how can we insure our labor asset?

00:14:17.240 Yeah.

00:14:17.740 So, so I think, um, two things.

00:14:19.220 First of all, um, the, the, probably the most neglected insurance of most individuals is

00:14:23.900 disability insurance and, you know, from a financial perspective, this is almost the worst

00:14:28.280 outcome possible because not only have you lost your potential to earn if you have a

00:14:34.180 significant disability event, uh, but you also still have all the costs of, uh, required

00:14:39.460 consumption.

00:14:40.280 So, you know, I think, um, insurance item number one that's most important is disability

00:14:45.380 insurance, uh, in the unfortunate circumstance that you get injured and are not able to earn

00:14:50.180 the income and, and people dramatically underestimate this risk.

00:14:54.020 If you look at statistics, you know, something like, uh, north of 20% of Americans will experience

00:14:59.340 a period of disability, um, over a career.

00:15:02.440 Uh, I think the second element of insuring this big asset is life insurance, uh, and a

00:15:07.720 couple of things there.

00:15:08.540 Life insurance is most relevant once you've established a family and they're depending on

00:15:14.500 that income.

00:15:15.620 Uh, and I generally recommend that, um, if folks are considering life insurance, they do

00:15:20.100 so on a term basis, that's generally the cheapest, um, and ensures the exact need you're looking

00:15:26.040 for, which is you, uh, end up dying prematurely and your family loses access to that labor

00:15:31.860 asset.

00:15:32.840 Gotcha.

00:15:32.920 And is disability insurance expensive or is it relatively inexpensive?

00:15:37.340 Um, well, you know, I'd say it this way.

00:15:39.360 It's, um, probably inexpensive relative to the risk.

00:15:43.340 Uh, and there are ways to minimize the cost.

00:15:46.520 And so my whole approach to insurance is I think it's generally a loser's game, meaning

00:15:51.820 the expected return is going to be less than the cost to procure it, but you've insured a,

00:15:57.680 a significant risk.

00:15:58.960 That's like a going out of business risk.

00:16:01.100 Um, so it's still a prudent investment.

00:16:03.160 Um, and you can do things around disability insurance in terms of delaying, um, how long

00:16:08.960 you have to be unemployed before you begin to collect your benefit.

00:16:11.940 So for example, um, if you get injured the first 30 days, you don't collect anything.

00:16:17.380 It's only an injury, um, that exists in excess of 30 days.

00:16:21.360 And that would be a cheaper policy than one that starts to pay out immediately.

00:16:25.340 Okay.

00:16:25.860 And another, um, insurance method you talk about in the book is, you know, self-insurance,

00:16:30.340 just having a safety net, right?

00:16:32.700 Uh, uh, uh, what's it called an emergency fund for those instances where maybe you might

00:16:36.280 be out of a job for a few months because you got laid off.

00:16:39.140 Yep.

00:16:40.500 Yeah.

00:16:40.760 So, uh, two things.

00:16:41.740 First of all, I think, um, one of the highest financial priorities, um, for anyone is establishing

00:16:48.100 that rainy day fund, uh, whether it be that you experience, um, you know, a car accident,

00:16:53.600 um, a required repair at your house or unemployment to, to be able to ensure that you can, um, not

00:17:01.060 experience financial distress.

00:17:02.580 So that is one form of insurance.

00:17:04.960 Um, it's also possible that at some point you acquire enough wealth that you don't need

00:17:10.300 disability insurance or you don't need life insurance.

00:17:12.780 Um, the problem is most people, very few people in our economy, um, achieve that level of wealth

00:17:18.540 because that's a significant asset.

00:17:20.320 And so, um, while that's a good investment, if you have enough capital or enough wealth,

00:17:25.080 that's not available to most folks or it's not prudent for most folks.

00:17:28.240 Okay.

00:17:28.760 So let's shift over to our, this other business asset that we're managing, our capital, which

00:17:33.840 is there to fund a retirement after we've depleted our labor asset.

00:17:39.100 Um, so let's say what's the best investment strategy say for a young person who's just 0.63

00:17:43.680 starting out in life to ensure that their retirement fund can cover the time they're not

00:17:47.720 working.

00:17:48.120 So, so I think the first thing that folks should think about taking advantage of is, uh, company

00:17:54.820 sponsored retirement programs like a 401k.

00:17:58.080 Um, these are really important for a couple of reasons.

00:18:00.320 The first is they're tax deferred.

00:18:02.040 So essentially what that means is you're not paying tax on the income.

00:18:05.560 It goes directly into your retirement account.

00:18:08.240 And that's significant.

00:18:09.740 It's essentially like if you're having an effective tax rate of 25%, it's essentially like 25

00:18:15.360 cents on every dollar you invest at that is free money working for you in your retirement

00:18:20.180 account.

00:18:20.740 The second thing is many companies offer some kind of matching program.

00:18:24.540 Um, so for every dollar you put in, they put in another 10 cents.

00:18:27.920 And so I recommend to folks that you should be maxing out on those retirement accounts.

00:18:33.280 The combination of tax deferral, uh, combined with the matching program ends up being very

00:18:39.220 significant.

00:18:40.400 Um, the second thing is you got to start early.

00:18:43.220 Um, wealth is really created by compounding, you know, it's not the 2% or the 5% this year.

00:18:49.340 It's the 5% over 30 or 40 years that really drives wealth.

00:18:54.260 Um, and that accumulation of assets.

00:18:57.300 And, you know, the last thing I would say about this element of, of the family Inc is,

00:19:02.740 um, these retirement assets are something that have a very long duration.

00:19:07.840 And what I mean by that is if you're 25 or 30, you're not going to retire until you're

00:19:12.380 65 or 67.

00:19:14.280 And then those assets are going to, you know, be used by you until you're 85 or, or plus.

00:19:20.540 And so you've got a great long-term time horizon.

00:19:23.920 And if you have that kind of time horizon, you can afford year in and year out volatility.

00:19:29.000 The market's up 10%, the market's down 20%, uh, because you're invested for the long-term.

00:19:34.940 So my recommendation is that folks, um, take significant equity exposure in these kinds

00:19:39.860 of retirement accounts.

00:19:40.960 Okay.

00:19:41.040 And you also recommend a passive investment strategy for the, yeah, I think the goal here

00:19:47.460 is to maximize after tax, after inflation, after fee returns.

00:19:53.720 And when you look at it that way versus just nominal returns, um, generally, uh, it's very

00:20:00.180 hard to beat passive investing.

00:20:01.900 There's less tax leakage, there's less fees and inflation you're going to experience regardless

00:20:07.580 of your investment strategy.

00:20:09.380 Okay.

00:20:10.420 Um, how should someone who's getting close to retirement, how should their strategy towards

00:20:15.360 retirement change?

00:20:16.900 Well, um, so, so as you approach retirement, essentially you are losing one significant asset

00:20:25.000 and that's your labor asset.

00:20:26.400 Uh, and so I think you have to essentially acknowledge that you've got less degrees of

00:20:31.240 freedom.

00:20:31.500 You've got a little bit less, um, opportunity to assume risk.

00:20:35.960 Fortunately, um, for most of us, we'll have a social security, um, program.

00:20:40.760 So that is a significant asset that will compensate us.

00:20:43.420 Um, but I think the key elements of, um, you know, approaching this part of, of the family

00:20:50.260 life cycle are continue to stay, um, reasonably invested in equities.

00:20:55.680 Your time duration is relatively long.

00:20:57.600 And by the time you're ready to retire, you have significant visibility on things like

00:21:03.940 how much wealth you have, um, what your health is.

00:21:07.460 And you can begin to think about things like additional annuities or, uh, additional insurances

00:21:13.840 for healthcare liabilities.

00:21:15.240 And so, you know, I really, at the time of retirement, you've, you've kind of got a lot

00:21:20.440 of, um, unknowns that you've begun to answer and it allows you to make a much more informed

00:21:25.020 decision about your asset allocation.

00:21:26.440 Let's talk about going to that, the insuring your retirement asset, your capital asset.

00:21:30.760 You mentioned annuities as a way.

00:21:32.380 Can you, um, talk to me a little deeper into that topic?

00:21:35.500 Yeah.

00:21:35.740 So essentially, um, an annuity is simply a contract and basically it's where I today give,

00:21:42.980 um, the insurance company a lump sum of money.

00:21:45.840 And in return, they give me an annual payment for as long as I live.

00:21:51.300 And there's all kinds of variations.

00:21:52.560 It can be indexed to inflation.

00:21:54.040 That payment can be something that happens for you and your wife or just you.

00:21:58.360 And so you can really structure it, um, commensurate with your unique needs.

00:22:03.520 Um, and so I find that annuities are relevant for folks who have not saved a lot and don't

00:22:09.660 have a lot of room for error.

00:22:11.720 Um, and it helps ensure that you don't run out of money because, uh, one of the big risks

00:22:17.540 that we all face is we don't know how long we're going to live.

00:22:19.580 And, you know, from a financial perspective, living long actually creates greater financial

00:22:24.780 needs.

00:22:25.140 Um, so it's, you know, it's, it's a great thing, uh, personally, but from, um, a achieving

00:22:30.920 financial, um, independence, the longer you live, obviously the more you've got to save

00:22:35.760 and the annuity can be a valuable tool to help bridge that gap as, as, um, you, you take

00:22:42.180 risk on how long you're likely to live.

00:22:44.080 The problem with annuities is I view them as very expensive.

00:22:48.760 Um, and so in general, if you think about what the return on an annuity is, it's low

00:22:54.460 single digits.

00:22:55.420 Uh, I think you're likely to experience a better return in the equity markets.

00:22:59.660 Um, but the equity markets also come with substantially more risk.

00:23:03.860 Okay.

00:23:04.000 And at what point in someone's life should they might consider annuities?

00:23:07.880 I mean, this is something.

00:23:08.800 As late as life.

00:23:09.420 Yeah.

00:23:09.780 Yeah.

00:23:10.160 As late as life as possible.

00:23:11.360 Because, uh, I think the purchase decision becomes a lot more informed when you have

00:23:16.340 a better sense of the balance sheet, you have a better sense of your retirement benefits,

00:23:20.500 you have a better sense of your health and how long you're likely to live.

00:23:23.320 Okay, great.

00:23:24.520 So CFOs in a business use a variety of tools and metrics to measure the health of their

00:23:29.420 business.

00:23:30.380 Uh, what sorts of metrics should a family CFO look at?

00:23:33.960 Yeah.

00:23:34.680 You know, so, so if we, if we go back to the analogy that, you know, every family is a business,

00:23:38.620 I think many of the financial tools that CFOs use in a business context can be applied to

00:23:43.600 the family.

00:23:44.400 So obviously the two most significant would be an income statement, which is essentially

00:23:49.700 the same thing as a budget.

00:23:50.700 It simply lists how much you bring in minus all your expenses for the year.

00:23:55.440 And in a budget context, what's left over is called savings and an income statement.

00:24:00.000 That's called profits.

00:24:00.920 It's really the same thing.

00:24:01.920 Um, and then a balance sheet.

00:24:04.680 And as we talked about before, a balance sheet, um, simply, um, lists all the assets minus

00:24:09.960 all the liabilities and what leftover what's left over is your savings or your net worth.

00:24:15.420 Um, you know, I see a lot of people spend a lot of time, um, creating very detailed budgets

00:24:21.000 and I'm not a big fan of this because what I find is people spend a lot of time tracking

00:24:25.260 it and not a lot of time, um, taking action to improve it.

00:24:29.660 So I think a high level income statement at a high level balance sheet, uh, tell me all

00:24:35.140 I need to know.

00:24:36.060 So in a given period, call it every quarter.

00:24:38.740 If you looked at your income statement, you can determine how much you saved.

00:24:43.200 And if you compare those two balance sheets, you can determine how much your net worth,

00:24:47.360 um, or your wealth has grown.

00:24:50.180 And in my mind, those, those are kind of the big, uh, indicators of progress.

00:24:55.000 Uh, just one more thing on this topic.

00:24:56.860 Um, you know, I do have a website, it's called familyinc.com.

00:24:59.660 And I actually provide a bunch of tools that allow someone to build their own income statement,

00:25:04.620 build their own balance sheet, and then provide some analytics around what that should tell

00:25:09.240 you.

00:25:09.880 Awesome.

00:25:10.400 Yeah.

00:25:10.520 We'll link to that in the show notes for sure.

00:25:13.140 Um, great.

00:25:13.940 Let's talk about the, this third objective you mentioned earlier of a family, of a CFO is

00:25:18.740 planning for succession, right?

00:25:20.660 Businesses have succession plans in the event the CEO or the CFO steps down.

00:25:25.020 What sort of succession plan should a family Inc.

00:25:28.340 CFO have in place?

00:25:30.220 Yeah.

00:25:30.420 So first of all, let me say, I think this is, um, one of the most challenging areas of

00:25:35.640 creating multi-generational, you know, kind of financial security.

00:25:40.040 Um, and I don't know if it's because people just have a hard time thinking about, um, you

00:25:46.000 know, kind of their own, their own death or it's a product of delicate conversations.

00:25:51.300 But I find this to be, um, very often neglected.

00:25:54.100 You know, I think there are really three, um, you know, different levels of financial

00:25:58.860 preparedness as it becomes a succession planning.

00:26:00.920 You know, the first, and a lot of people get this one right is, you know, it's the emergency

00:26:05.280 stuff.

00:26:06.300 Uh, you know, what financial advisors does someone need to call when, uh, a family member

00:26:11.500 has passed away to figure out where everything's located?

00:26:14.600 Um, you know, who helps them figure out, uh, what is available in the estate?

00:26:19.620 The second one, which I see, um, you know, kind of less success with is clearly a clear

00:26:27.080 communication of the intent.

00:26:28.800 And so that addresses things like, how does the deceased want their estate disposed of?

00:26:34.560 How do they want their inheritance distributed?

00:26:37.060 And these are often really tough discussions, but my view is, you know, wouldn't it be better

00:26:41.360 to make this very clear when you can talk to folks about it and ensure they understand

00:26:46.580 your rationale as opposed to having a family members fight about it or argue about it or

00:26:51.040 never really know, you know, what, what the intent was.

00:26:53.840 I've seen a lot of, you know, kind of hurt feelings and strained relationships because

00:26:57.980 people have failed on the second level of preparedness.

00:27:00.700 And then lastly, the third one, which I think is, is probably the most important, but the

00:27:05.040 hardest to achieve.

00:27:06.460 It's really the ability to impart skills and values into the next generation so that they

00:27:12.880 can be, uh, you know, good stewards of, of the family.

00:27:16.000 And so, you know, I see in many cases, families work an entire lifetime to accumulate wealth.

00:27:22.060 They turn it over to the next generation and that next generation has not been prepared

00:27:26.140 with the right skills.

00:27:28.080 And so this is not only, you know, the skills to manage money, but it's imparting the values

00:27:33.300 that are consistent with the way, you know, you manage the money.

00:27:37.320 Uh, and my only advice on this one is it takes a long time.

00:27:40.220 Uh, it's a product of a lot of failure.

00:27:42.280 And so the best way to prepare is to start that conversation early with your kids and

00:27:48.220 use real life opportunities as, as examples to allow them to learn and allow them to fail

00:27:55.200 in controlled environments.

00:27:56.220 Because I think we all have had many, um, experiences where we failed with managing, um, you know,

00:28:03.060 money.

00:28:03.460 And I think there's, you know, valuable learning that occurs when you do that, especially in

00:28:07.200 a controlled environment where it doesn't cost you too much.

00:28:09.200 Right.

00:28:09.720 Yeah.

00:28:09.880 My wife and I just finished our estate planning.

00:28:12.740 Um, I've been putting it off for such a long time, but now that I have it done, it feels

00:28:16.340 great.

00:28:17.140 There's that comfort that if I were to go, like things would still transition smoothly.

00:28:21.900 Yeah.

00:28:22.340 And the reality is that the unfortunate thing about the estate plan is the minute you do

00:28:25.940 it and finish it, it's probably out of date, but you know, you've probably got a 95%

00:28:30.780 solution today.

00:28:31.520 And in the next three years, it'll still be an 80% solution.

00:28:34.180 And so it does require revisiting as your circumstances change, but you've certainly, you know, made

00:28:41.100 it well down the path of laying out broad strokes of how, how you think things need to happen.

00:28:45.540 Right.

00:28:45.820 Well, let's talk about this.

00:28:46.500 I'm sure there's a lot of people listening there.

00:28:48.080 They got baby boomer parents who are, you know, getting up there.

00:28:51.160 They're retiring.

00:28:51.980 They're getting close to, you know, you don't want to think about like, my parents are about

00:28:55.060 to die, but that's, you know, it's on your mind as they get older.

00:28:57.620 How do you bring up this conversation about your parents' personal finances, right?

00:29:03.620 Like, you know, is mom and dad going to have enough to support themselves in retirement?

00:29:07.580 Because you read all these statistics where baby boomers like don't really have that much

00:29:11.640 in savings in terms of retirement.

00:29:15.160 So how do you have those conversations with your parents?

00:29:17.620 I mean, it could be kind of touchy.

00:29:19.600 Yeah.

00:29:19.900 So I think they are touchy for starters.

00:29:21.640 So I don't have any good recommendations on how to avoid the sensitivity.

00:29:25.520 And I think every relationship is different.

00:29:28.380 I think two things that I've seen as important elements to a constructive conversation here.

00:29:34.220 You know, the first is opportunity for two-way learning.

00:29:39.620 And I think, you know, younger generations can go to older generations and say, hey, I'm

00:29:44.460 trying to understand your financial situation because I'm trying to understand my own.

00:29:51.100 You've had a lot more experience at it.

00:29:52.840 You've had a lot more, you know, kind of real world decisions to make.

00:29:57.920 And so I would like to learn from you.

00:30:00.960 And conversely, I think in many cases, you know, younger generation is realizing this

00:30:05.080 is an increasingly important life skill and can bring to bear what they've learned.

00:30:08.900 So I think if you can structure this conversation in the context of how do we all learn from

00:30:13.760 one another, I think that's very valuable.

00:30:15.160 I think the second is, and this one can be challenging, but this is a conversation that's

00:30:21.860 best done outside of traditional family roles.

00:30:25.340 And so, you know, when I'm talking to my father, for example, I try not to be coming

00:30:30.980 at it, you know, in a father-son context, but more as, you know, two adults who are trying

00:30:37.000 to think about a complicated issue and make sure that we're making the best of our circumstances.

00:30:44.720 And so, you know, that's a hard one, but I think the key is try to get outside of your

00:30:49.300 traditional communication patterns.

00:30:51.040 Okay.

00:30:51.100 That's great advice.

00:30:52.880 So Doug, let's say we've hit on some really great ideas here, but let's say there's someone

00:30:57.360 listening to the show right now whose finances are, you know, a mess.

00:31:00.080 You know, the value of their labor asset isn't where they want it to be.

00:31:04.040 They don't have positive cashflow, the retirement asset is zilch.

00:31:07.700 I mean, what's some things that people can start doing today to get going on the right

00:31:12.380 path?

00:31:13.860 Yeah.

00:31:14.400 So the first thing I would say is, you know, focus on today first.

00:31:19.300 You know, a lot of us have tremendous anxiety about, am I going to safely retire?

00:31:23.680 You know, can I accumulate enough wealth that I'll feel secure?

00:31:26.600 And that's obviously a great long-term goal, but you never get there if you experience financial

00:31:31.360 distress today.

00:31:32.200 You know, one of the most significant obstacles to overcome is something like financial distress

00:31:37.560 where you're forced to declare bankruptcy.

00:31:39.840 And so if you find yourself, you know, kind of in that point where you're really struggling,

00:31:44.340 you know, be clear on what the priority is.

00:31:47.000 The priority is avoiding financial distress today.

00:31:50.760 And in some cases that creates some tough decisions.

00:31:55.460 You know, you mentioned someone that has negative cashflow.

00:31:58.800 I mean, I think if you have negative cashflow, somehow you've got to stop the burn rate.

00:32:03.300 And generally the first and fastest way to do that is take a hard look at your expenses

00:32:08.840 and figure out how to reduce anything that is, you know, kind of not absolutely mandatory.

00:32:14.760 Once you normalize your cashflow such that you're not digging a bigger hole for yourself, I think

00:32:21.320 that's when you can begin to think about how you begin to accumulate wealth.

00:32:25.480 You know, as we, as we talked about earlier, by far and away from most families, your largest

00:32:29.620 asset is your labor.

00:32:31.120 And so it's beginning to think about how you deploy that labor in a more effective way.

00:32:36.520 And that's not just about working hard.

00:32:38.280 It's about working smarter.

00:32:39.880 And it's not just about, you know, your compensation, like what you made this week or this month,

00:32:44.720 but it's about what skills you're developing, what relationships you're establishing that

00:32:49.760 are going to allow you to grow that income over time.

00:32:53.340 Great.

00:32:53.460 That was some great advice.

00:32:54.360 Well, Doug, this has been a great conversation.

00:32:55.940 Where can people learn more about your book and your work?

00:32:58.980 Well, first of all, thanks very much for having me.

00:33:00.980 Um, you know, so I've got a website, familyinc.com, um, and you can see the tools there and a

00:33:07.320 little bit more about the philosophy of the book.

00:33:09.240 Uh, and it's obviously, um, available on Amazon and Barnes and Noble.

00:33:13.340 Awesome.

00:33:13.700 Doug McCormick, thanks so much for your time.

00:33:14.980 It's been a pleasure.

00:33:16.180 Hey, appreciate it.

00:33:17.020 Have a great one.

00:33:18.180 My guest today was Doug McCormick.

00:33:19.380 He's the author of the book, Family Inc.

00:33:21.280 It's available on amazon.com.

00:33:22.780 You can also find out more information about his book at familyinc.com and make sure to check

00:33:27.160 out the show notes at aom.is slash familyinc.

00:33:30.580 Where you can find links to resources, where you can delve deeper into this topic.

00:33:43.640 Well, that wraps up another edition of the Art of Manliness podcast.

00:33:46.860 For more manly tips and advice, make sure to check out the Art of Manliness website at

00:33:50.300 artofmanliness.com.

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

00:33:54.640 a review on iTunes or Stitcher.

00:33:56.240 Really helps us out a lot.

00:33:57.340 As always, I thank you for your continued support.

00:33:59.100 And until next time, this is Brett McKay telling you to stay manly.

The Art of Manliness - September 06, 2016

#232： Become the Chief Financial Officer of Family Inc.

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