At the end of the day, the number one goal of personal finance is to Cover Your Ass (CYA). Think about it. Budgeting, saving, debt, investing, insurance – these topics don’t just involve money, they can dictate the amount of freedom you have in your life.
- Budgeting helps ensure you won’t spend more money than you make or have and won’t overdraw your bank account, go into debt, or bounce the rent check.
- Saving and investing, whether in an emergency fund or for retirement, helps ensure that if you have an accident or lose your job you won’t end up on the street. At the bare minimum, a retirement account is essentially a bigger emergency fund – the emergency is that you’ll reach a point in life where you can’t work any more.
- Debt reduces your ability to CYA. Credit card debt, student loans and a car payment are obligations that don’t go away if you lose your job or have a health issue.
There’s a reason debts are referred to as liabilities when evaluating your wealth.
Any progress towards financial stability is a step towards being more self dependent – better equipped to cover your own ass.
This idea can be visualized any number of ways. The most popular seems to be the transition from Employee to Employer.
Employee (Doing) vs. Employer (Owning)
Essentially, by buying productive assets (like stocks and real estate) you generate income from OWNING rather than DOING (like a regular employee). Owning productive assets is one of the best ways to CYA.
Think of all the liabilities you face as an employee – layoffs, wage stagnation, increased workload, relocation, changes in management, mission and direction – all of these make your primary source of income, which you use to CYA, more volatile, or at the very least less than pleasant ways to spend a good chunk of your waking hours.
As an owner, your income isn’t immune to outside actors. Recessions and housing crashes still happen. Prices can go up. And you can still have health problems. But when it comes to covering your ass, having multiple income streams is about as good as it gets. In good times you can bank the excess, which accumulates quicker when you have a lot of people working for you. In bad times, where one or more falters, you can live off those savings or rely on the incomes that aren’t as affected.
Basically, ownership translates into flexibility, and flexibility makes it a whole lot easier to CYA. Ownership and flexibility scale. $500 in a savings account might give a 21 year old a ton of flexibility. For someone 55 years old with a family and a mortgage, $500 is nowhere near enough coverage.
Which brings up my last point…
Are You A Shareholder Or A Stakeholder?
According to Investopedia:
A shareholder owns part of a company through stock ownership, while a stakeholder is interested in the performance of a company for reasons other than just stock appreciation. Stakeholders could be: employees who, without the company, would not have jobs.
Shareholders are Employers and Owners. They are flexible and rely on multiple sources of income. Their liabilities and obligations are easily covered, either directly by them or indirectly by what they own.
Stakeholders are Employees and Doers. They are wedged into the ground like a tent stake. Their liabilities and obligations are covered only by them. Their debts keep them wedged into the ground. They are limited by their time, energy, health, and resources.
In general, being a shareholder sounds like a much easier life. In the years since the Great Recession, companies have rebounded, posting record profits and touting higher share prices of their stock. Shareholders have been rewarded.
Likewise, employees have seen stagnant wages and increased demands on time, effort, and productivity. Their stakes are being driven deeper into the ground.
Most Americans can’t cover their asses nowadays (over half can’t cover an unexpected emergency costing $500). They are destined to be stakes forever, wedged into that hole until they can no longer hold out, their obligations slowly crushing them.
You can only last so long as a stake. Between a shareholder and a stakeholder, which one do you want to end up being?
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