Building a Financial Fortress
How to you protect your hard earned wealth, savings and investments? How do you make sure you continue to grow your money? What is the best strategy to implement these objectives?
You can visualize your personal finances as a fortress. A fortress offers you protection and peace of mind from the wild fluctuations of the stock / bond market, the economy, worries about retirement or funding children's educations, life's unexpected expenses, etc.
The graphic to the left depicts the Financial Fortress visually.
The Financial Fortress has 5 components as follows:
Cash / Investment Debt form the base. Adequate levels of cash are needed to protect against uncertainties, for new investment opportunities and sometimes cash offers a superior return to other asset classes. Investment debt ("good debt") allows leverage (other people's money) to buy assets that will generate additional positive cash flow - i.e., a mortgage for an investment property or a personal loan to start a business or make a new investment. "Bad debt" like credit card debt, auto loans, etc. should be paid off as soon as possible. If you have cash earning 0.5% or less in a bank, you can't afford not to pay off "bad debt." A good source of small business loans is Kabbage. I also like Prosper for personal loans that can be also be used to fund investments..
Insurance (Liability, Life and Property) - form the next layer. Insurance provides protection against accidents or lawsuits and also protects your real and personal property in the event of a loss. Life insurance protects your family in the event of death and also provides a nice retirement planning vehicle.
Businesses and Investments form the two components that are outside the fortress; these are like watchtowers, places where you can conduct a business or outside investment with other investors, but they are isolated from the main fortress for liability reasons; these will typically be held in limited liability entities, such as corporations, LLC's, LP's, etc. Everyone should have a business, even (and especially) if they work at a regular job - something you are passionate about that has the potential to make money. You never know, you may need to quit your day job to run your business! What business are you in?
Stocks, Bonds, MLP's and Retirement - form the next component of the fortress. This is where paper assets, including stocks, bonds, master limited partnerships (which are excellent sources of cash flow with commodity upside), 401(k) and IRA accounts are held. The taxable stocks that pay dividends and bonds provide a source of positive cash flow to replenish the base of the Financial Fortress. I would include other alternative investments in this category as well, including music royalties, cryptocurrencies, and private equity.
Hard Assets (Real Estate, Gold/Silver, Commodities) form the top of the fortress. These assets provide long term protection against inflation and in the case of real estate and some commodities, a great way to build wealth while offering a steady source of positive cash flow to replenish the base of the Financial Fortress.
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