Today’s topic is The Stock Market Is Not Your Economy!

If you go back to January 2, 2020, before COVID-19 was even part of our vocabulary, the Dow Jones Industrial Average (Dow) was at 28,868 and had been on a steady climb for a number of years.  If you watched any financial news, the commentary was that the stock market is rising, therefore the economy is strong.  I often doubted that this was true because even though the stock market was rising, there was also some troubling but less-talked-about information out there, things like:

• Social Security is underfunded
• The Pension Benefit Guarantee Corporation is underfunded
• Many state and local government pensions are underfunded
• 19% of Americans have $0 to cover an emergency expense
• 31% of Americans have less than $500 in emergency savings
• Half of Americans live paycheck to paycheck
• The Federal Government has a massive amount of debt that it will never be able to repay

Those don’t sound like the statistics of a strong economy for the average man or woman on the street.

Here we are in May 2020; and while the Dow plunged to 18,591 on March 23 (down 55% from January 2), it has since climbed to 24,597 as of May 18 (32% increase).  During this time while the Dow rose 32%, unemployment also rose from 4.4% in March to 14.7% in April; and May will be even worse once those numbers are released.  I think it’s now safe to say that the value of the stock market in no way represents the health of the economy in general or that of the average American.  It disturbs me that the value of stocks is rising while so many Americans are hurting financially.  This might be a good time go review Blog #5 – What’s Wrong With The Stock Market Anyway?

So, if we want to be in charge of our own financial destinies, we should have metrics for our own personal economies, metrics that actually show how each of us is doing financially.  My suggestions are as follows:

• Know your net worth by having a balance sheet
• Know your monthly spend – the total amount of your monthly bills
• Know your monthly cash flow from investments

1.  Net Worth – Create A Personal Balance Sheet
Everyone should have a personal balance sheet.  This is like a report card for your finances.  A balance sheet is simply the value of your assets minus value of your liabilities.  Assets are things like stocks, bond, mutual funds, patents, copyrights, trademarks, and investment real estate.  The result of your balance sheet – assets minus liabilities is your net worth.  If you have $1.3M in assets and $300K in debts (liabilities), your net worth is $1M, for example.

A balance sheet, however, only tells you part of the story.  If you had a portfolio of stocks, bonds, and mutual funds totaling $1M, and no debt, you would be a millionaire.  Unless all of the assets in this portfolio produced regular dividends, you couldn’t live off this portfolio. You’d be asset rich but cash flow poor; you’d still need a job to pay your bills.  The only way to live off of this portfolio, is to sell portions of your assets at regular intervals (through up and down markets) to generate the desired cash flow and hope that the portfolio lasts as long as you live.  This is the way most Americans plan to fund their retirement, what I call the mountain-of-cash method.

It would be similar to owning a $1M apartment building free and clear that produced enough cash flow to pay all the building’s expenses but no extra cash flow for you. You would, again, be a millionaire but would need a job to pay your bills.  Unlike with the example above, however, you can’t sell off a portion of the building every month to produce the desired cash flow.

The alternative to the mountain-of-cash method is to acquire assets that actually produce income (income-producing assets).  The two simplest examples are dividend-producing stocks, and investment real estate.  This is where the next two metrics come into play.

2.  Monthly Spend – Total Amount Of Your Monthly Bills
Your monthly spend is the amount of money that it takes to pay all your monthly bills. There’s an easy and a hard way to do this. The hard way is the bottom-up method whereby you keep track of all of your expenses during the month, and add them up.  The easy way is the top-down method.  If your net monthly pay is $7K (what’s left after taxes and social security), and of that $7K you save $1K and spend the rest, your monthly spend is $6K.  Hold on; we’re going to use this number in the third metric.

3.  Monthly Cash Flow From Investments (Passive Income)
What is passive income anyway?  According to Investopedia, “Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved.”  Unlike active income, which is the type you earn on the job when you trade your time for money, passive income is the kind that just comes in the mail (or today, gets automatically deposited in your bank account every month).  Passive income comes from dividend-paying stocks, royalties from patents, trademarks, and copyrights, and investment real estate.  Here is the big problem; if you’ve been following conventional wisdom, you might not have any assets that produce passive income!  Acquiring these types of assets isn’t advertised on television, radio, or social media because they’re not as an easy source of assets-under-management fees for stockbrokers and financial planners to suck out of your portfolio.  Don’t worry.  If you don’t have any passive income, now is as good a time as any to get started.  This might be a good time to review Blog #15 – Alignment Within Your Investments where I discuss how financial planners get paid.

Why is monthly cash flow so important?  Because as soon as this number equals or exceeds your monthly spend, you never have to work again regardless of whether you are 35, 45, or 55 years of age; you’ve achieved financial independence and freedom.

PASSIVE INCOME = MONTHLY SPEND = FINANCIAL FREEDOM

The bottom line is, if you want to make work a choice instead of a necessity, you need to know the state of your personal economy by having a balance sheet, knowing your monthly spend, and knowing your monthly cash flow (passive income).

And if you don’t have any assets that produce passive income, I suggest you shift your investment philosophy and start acquiring some.  Limited partnerships and investment real estate are how I’ve chosen to supplement things like pensions and 401Ks.