Archive for January 20, 2009
In The Flow of Time and Money Dr. Lloyd Watts aims to help his readers create a full and prosperous life. The book is equally devoted to discussing wealth and fulfillment and although it contains a lot of common and familiar advice I like that the book focuses on both of these themes.
Dr. Watts begins his book by comparing the flow of middle class money to a leaky bucket, in which money is poured in through employment income and out via taxes, purchases and expenses. According to the author individuals typically spend money on triggered expenses, expenses that trigger additional expenses. For example, a car requires gas, insurance and maintenance costs in addition to the initial purchase price. As income rises individuals tend to buy more and more items that trigger more and more expenses. These items quickly cause the monetary bucket to drain.
In an effort to stop the bucket from leaking the author suggests paying yourself first, by putting money aside in an investment account. As money accumulates in the investment account the author encourages purchasing assets that create passive income. The list includes stocks, bonds, real estate, intellectual property and businesses, which provide passive income in the form of dividends, interest, rent, royalties and business cash flow.
This passive income is first added to the bucket as a small trickle, but as passive income grows it can produce more income than that earned through traditional employment. The goal is to reach financial independence by producing enough passive income to cover all living expenses.
Dr. Watts describes a similar leaky bucket analogy in his discussion of time. In this case the bucket is filled with a weekly allotment of hours and a hole in the bottom of the bucket leaks out time in the form of sleeping, eating, and working. Some of these time expenses behave in much the same way that the triggered monetary expenses behave. For example, you may spend time traveling and commuting in addition to the time spent working at your job. In an effort to save time Watts suggests making investments in life assets. These include education, relationships, health and organization, which save time and increase effectiveness.
He bridges the gap between time and money, by suggesting that financial independence will allow you to spend time in whatever ways fulfill you. To reach this goal you must attain a larger net worth, invest beyond your home (because you still need a place to live), lower expenses and produce a large amount of passive income.
According to Watts a number of financial traps prevent individuals from meeting this goal. They include:
- Borrow & Spend – Buying new possessions on credit and getting bogged down with high debt payments.
- Save & Spend — Consistently saving money but immediately depleting savings once the savings account reaches a certain number. Thereby forcing the individual to start back at $0 every few months.
- Confusing Saving & Investing – Putting money in a savings account rather than an investment account. Money in a savings account will be used for a new purchase. Money in an investment account will be used for investing.
- Buying Expense-Generating Expenses — Buying homes, cars and other items that require additional maintenance costs well beyond the original sticker price.
- Failing to Invest Beyond Your House — Buying the largest house you can afford, rather than buying the smallest home that fits your needs. (If you buy the largest home you can afford you won’t have any money leftover to invest elsewhere.)
- Confusing Investing and Gambling — Throwing money at a hot stock, business, or other asset without clearly understanding what you are investing in.
According to Dr. Watts we fall for these traps for the following reasons:
- The Need for Status — You desire to be looked highly upon for others.
- The Need for Immediate Gratification — You simply cannot resist the urge to buy something now.
- Weak Financial Education — Piggy Bank & Allowance – You learned all you know about saving from an allowance and a piggy bank. You save money so you can spend it once the total reaches a certain amount.
- Weak Financial Education — Fear of Numbers – You find math frustrating and confusing.
- Feeling Entitled to Stop Learning – You stop focusing on learning shortly after graduation.
- Fear of Risk – You fail to invest beyond your house because you are afraid of losing your money.
- Abdicating Financial Responsibility in a Relationship – You allow a partner to make all financial decisions or you make all financial decisions for a partner.
- Fear of Wealth - You perceive the accumulation of wealth as selfish.
- Difficulty with Sustained and Intermittent Effort – Ebbs and flows of life make it difficult for you to remain entrenched in your own personal finances.
Dr. Watts walks readers through the necessary steps to accumulate wealth, including how to get out of the traps discussed above and how to continue to expand passive income. The initial advice includes common actions like pay off debt, open an investment account, pay yourself 10% first in regular transfers, invest in financial education and keep your expenses low, but it does add extra details for those who wish to expand beyond general investing including big and small deals such as real estate and corporations.
In the final section of the book Dr. Watts focuses on creating long term financial and time related goals. He suggests writing down goals and posting them in a place where you can see them every day. He also suggests creating routines around your financial activities so you’ll form habits that keep you on track towards your goals.
In the end he reminds readers that this book is not just about the accumulation of wealth. He writes, “how you spend your money and how you spend your time determines your fate, and ultimately determines how you will be remembered. Invest heavily in yourself so you will have strength and wisdom to share with others, and leave a legacy of people who have been influenced by your time here on earth.”
The book contains a lot of common advice that can be found elsewhere, but at just over 100 pages it’s an interesting and quick read that focuses on the importance of both time and money.