This article discusses perspectives on earning income during changing times. These are big, broad topics. We start by focusing on the different ways people earn money — what I call the “money doors.” There are many biases and misconceptions about the relative value of these different doors and more importantly, there are huge differences in the ability, desire and aptitude of different people to walk through the various doors.
Everyone understands the first door. It is money we get in return for working for someone else; it’s pay for service. This door is the easiest and most comfortable to enter. That’s not necessarily because it’s the best door. It’s because from day one, we’ve all been conditioned and prepared for virtually pointed at this door. As infants, pick up your toys and get a reward. In school, do your assignments and get good grades. As adults, do your work, get a pay check, get a good job, then a better job.
But the rules of door one have changed over the years. The rule that you get a job, get promoted, wait for the right old geezer to retire and then get promoted again died. No longer is it reasonable to assume that you will hire on and spend your life with one company as you might with one spouse.
Now there are no vows of permanence, no long term commitments. There are new guiding words: outsourcing, down-sizing, streamlining, consolidating, purging, efficiencies. Many who felt solid and comfortable in their door one position have been shocked and dismayed to find themselves on the outside looking back at the door and asking “What happened?” All age brackets have been hit.
Over time, all have bought into the fact that the rules of door one really have changed. It’s no longer a matter of settling in and riding it out. The challenge now is to stay sharp at the top of your game. Hone your skills and contacts. Keep your eyes wide open and be forever mindful of opportunities to strengthen your position. Everyone should understand that if you’re going to be a door one player, you’re going have to go in and out of the door, perhaps many times.
Door one players have been rocked by the recent long recession. As our economy struggles to slowly crawl out of the longest recession most Americans have ever experienced, the official unemployment number remains above the disastrous 9 percent mark. But that doesn’t begin to tell the story. Millions who have given up their job seeking efforts aren’t even included in the calculation. It’s why many put the real unemployment number at 15 to 17 percent, and millions more who have jobs consider themselves grossly underemployed as they net only a fraction of what they used to earn.
Many door one players should understand what got us to this point. For the past 20 years or so, the focus to fuel the world markets has been to insure that consumers in developed countries keep spending more. This has been done with leverage. That based upon the assumption that assets will continue to grow and support perpetual borrowing and spending increases, government debt escalated, banks and financial institutions leveraged themselves based on derivative base securities, households pumped up debt with refinances based upon escalating home prices, and with easy on-demand credit card access.
Then it all changed. Asset values turned and started heading in the wrong direction spiraling down with less and less demand and fire sales just to stay alive. The largest financial institutions those too big to fail were soon on life support begging the government for a lifeline. The value of just about every home in America, perhaps the world, plummeted leaving millions of Americans under water, that is, with more debt than assets.
In short, the whole private sector has been forced to deal leverage, to reduce debt, and to not buy as much. So, demand dropped and this forced employers to slash payrolls with massive private sector deleveraging. The government and the federal reserve have tried mightily to keep the money flowing, cutting short term interest rates to near zero levels, driving annual federal deficits to unsustainable trillion dollar levels that no one could have imagine just a few years ago, and implementing a scheme known as “quantitative easing.” Basically, printing money to buy government debt.
The big question now is whether this government actions can offset the effects of private deleveraging that drove the buyers to the sidelines without doing untold damage long-term With Ireland, Greece, Iceland and others hitting the wall, everyone has began to fear the risks of massive unsustainable government leverage.
Meanwhile, nothing seriously has reduced the horrendous unemployment rate and the associated pain experienced by millions of American families. The core problem is a huge drop in the global demand for goods and services. Businesses, plain and simple, need more customers. Absent make work government funded jobs — it’s unlikely that there will be any real sustained improvement in the employment markets until the deleveraging stops and the drop in demand bottoms out.
Even that, it may take serious time before private sector companies start hiring real numbers because many may fear that any positive signs are just short-term blips from government manipulation.
What we’ve all learned from this experience of the past is that unrestrained asset-based leveraging is a two-edged sword. It has the capacity to fuel wonderful sustained growth and the capacity to quickly put large financial institutions and millions of families on their backs.
We’ve also learned that when it comes to job creation, creative government monetary policies can’t begin to compete with new technologies and market opportunities that push American companies to build products and deliver services that the world wants and is capable of buying.
Your ability to move up in door one may be impacted by how you look on paper. You’re constantly developing records about yourself — important records that others use to judge you and size up what kind of person you really are. Whether you like it or not, you’re part of the information age. That means that you need to be concerned about the information that exists out there about you.
The starting point is your credit report. Lending and credit institutions report information daily through three major reporting agencies in the United States. The names of these agencies are Experian, Trans Union, and Equifax. Each of this agencies use this information to make a credit report about you. Potential lenders, marketers and others can access this report to see if you timely pay your bills, if you are a credit worthy person. Every time you want credit, buy a car or home, to get a credit card, to secure loan of any type, your credit report becomes the name of the game.
From the information on your credit report, you’re given a credit score, typically called a FICO score. Scores range from 300 to 900, with a great maturity falling in the 600-700 range. Many factors impact the score: How timely you pay bills, how much credit you have, past credit problems, all sort of things.
So the obvious question is, how do you make sure you have a good credit report? Here are a few tips: First, you need to establish some credit to show that you’re a worthy player who pays bills timely. If you have a car payment or periodically use a credit card that you pay off monthly, this will help. You don’t want a completely blank slate.
Next, every so often check your report at all three of the reporting agencies. They’re online. Errors on credit reports are common. Some seasoned lenders estimate that 80 percent of all credit reports contain errors. Jump on in the error you find in your report to get it fixed. It will take some time and little hassle. Just do it.
Finally, be ever mindful of making sure that you pay your bills and obligations on time. Little things can cause big problems. For example, when Jim moved to a new apartment, he failed to leave a forwarding address at his old apartment. He had an extra cleaning and damage charge at the old place that he didn’t learn off until he tried to buy a car and ran into a problem — an unpaid collection charge on his credit report. Little events like these can happen to anyone. The challenge is to be diligent in taking care of the details.
Beyond your credit history, take care in documenting your employment history. Job changes today are the norm. Each change is another part of your employment history, a history that others will be interested in down the road. Beyond the job itself someone would want to know how well you did the job, what others thought of your performance. You can help yourself here by doing just a few simple things:
First, exercise great care when you voluntarily choose to leave a job. Be sensitive to the position and the needs of the employer you’re leaving. Don’t just run out and leave them hanging. Many who do a good job end up destroying much or all of the good will they built simply by bolting with no concern for their employer. It can come back to haunt you.
Second, when your are leaving a job, approach the right person — that someone who knows you and likes what you’ve done and ask them for a reference letter at that time, even if you don’t need the letter right then. This is the best time to get them on paper. Two or three years down the road that person may be long gone or if that person is there may not even remember you, much less the quality of your work.
Let’s move on to door two. The second door is the money you earn from investments. You save some money and then you put it into investments. You collect income from the investments or watch the investments grow or both. Or you watch the investment shrink or perhaps disappear completely.
Some people really immerse themselves in this door. They learn how the inside works and how to play the game. Most are led to this door by others, stand at the opening, and throw their money in.
Let’s stop here for a moment because this is where nearly everyone stops. In fact, my grandparents didn’t even have to go this far. In their day, the universal plan was to just enter door one and ride it to the end. When they got off, the company paid them a real honest to goodness pension that didn’t terminate until they terminated.
But a few years ago, things changed for all future generations. The idea of private company’s funding complicated actuarially-driven lifelong pension plans for an ever aging group of employees began to disappear and quickly become a dinosaur for nearly all except a very few private souls in one big group. That big group is those employees who work for the government.
But for the rest of us, the money formula for life had changed. It used to be work, retire, collect the pension, and die. It has become work, save, and invest. Pray like hell your investments grow, retire, live off your savings, don’t outlive your money and then die — and this change of who assumes the risk of funding retirement change or two in a very big way. From my grandparents, pros entered this door knowing that they had to perform because if they didn’t, the company, not the employee, would be on the hook. The employees’ monthly pension would be paid like clockwork in any event. The company would just have to cough up more if the investments didn’t work.
Now with the big change, masses of uninformed, financially illiterate employees were heading for door two usually led by self-proclaimed professionals who had only a half tablespoon of more knowledge than the flocks they were herding. Door two ballooned with excitement. Never before had it seen such action. The actors grew exponentially in number along with the amounts of invested capital. Things skyrocketed during the nineties as hoards of baby boomers and others moved towards door two to start funding their retirement nest eggs. Door two had gone crazy. Demand was forever outpacing supply. Price earnings ratios began to move up then out of sight, often out of existence because there were no earnings on which to calculate the ratios.
Everybody’s monthly investments statement showed growth each month. The only question was: How much growth? The Internet was becoming the reality and promised the future. Companies with an internet strategy but no earnings and meager revenues could attract investors, then more investors, and then watched their stock prices ballooned as the demand fed on itself. It was up, up, and away!
Then in 2000, things shifted. Some began to suggest than predict that maybe the high tech stuff would never make money, then more said, it than more. The masses became confused than nervous and some began to run from door two. Then more ran faster. Things began to plummet. All the herders, most of whom had never seen a down market, nervously saying in unison, “Hang on! Hang on! It will all turn around. It always does.”
Then came Enron, Worldcom, Arthur Andersen, and their counterparts. These weren’t just about crooks; these weren’t flaky, no revenue, pie in the sky tech dreams. These were real companies that had manipulated in a big way what was supposed to be an age-old, proven capital formation system — a system that is a huge essential foundational part of the strongest economy the world has ever known.
Then comes 9/11, and the stark realization, and the horrid wakeup call that ugly forces really do threaten our fundamental freedoms. We all vividly witnessed that these forces have the power, the limits of which are undefined and unknown to everyone to force change, destroys companies, and permanently alter major industries.
So now door two, not long ago everyone’s darling as the biggest happiest show in town, had become ruthless, scary and downright destructive. The tech-heavy NASDAQ Composite lost 78 percent of its value, and even the stalwarts, the S&P 500, the big secure stuff got hammered losing forty nine percent of their value during the same time frame. Trillions of dollars and equity value had gone up in smoke in a few short years.
But for those who sucked up the hit, it wasn’t about a trillion dollars. It was about not having the nerve to open and look at monthly statements, to see the losses that mounted every month. For many older players, it was about dashed retirement dreams or, at best, long delayed retirement hopes. For younger players who anxiously first entered the market in the late 90s with expectations of riding the upward momentum to riches, it was about getting KO’d in the 1st round.
Slowly the return began and then strengthened, strongly prodded by big tax cuts and the lowest interest rates most of us can ever remember. Foreigners rejoined the party with big money and always back on track until everything tanked again in 2008. Our capital markets were once again brought to their knees. But this time, it was much worst because the cause was a very scary combination of some deadly forces: a perilous subprime mortgage market created over many years by government mandates to make mortgage loans to those who could not possibly afford the payments, a massive drop in home values that wiped out all home equity for millions just put them under water, and a multi trillion dollar completely unregulated shadow banking industry backed by flaky derivatives and tainted mortgage securities, an industry that put billions in the hands of Wall Street tycoons while exposing the entire world to the biggest financial scare since the Great Depression.
The Federal Reserve, to a large extent, and Congress, to a lesser extent, pulled out all their guns to restore liquidity and avoid a massive collapse. The result has been a very long recession with skyrocketing unemployment. And now we hope a recovery that no doubt is anemic. These thrill rides over the past 10 years — very scary — have caused all door two players to look very differently at the future and to be mindful of some very painful lessons.
All now know that the past is not an automatic blueprint for the future and that confidence in America’s core institutions is the name of the game. That confidence must reside in huge masses of individual account owners, not just professional pension managers. And that all important confidence can be shaken to its core by many forces including crazy terrorists, greedy corporate charlatans, and gutless politicians.
Smart door two players know their limitations and never lose sight of the basics. They’re careful to clearly define their long-term objectives and to avoid knee-jerk reactions to short-term market swings. Bumpy rides are the expectations. They understand the futility of buying when things erupt and it is popular to buy, and selling when things are down and it is popular to sell, all the while missing the real returns that come with smart consistency. They know that inflation kills purchasing power that historically annual inflation rates have hovered around three percent, that $1 today likely will be worth only about $.42 in thirty years, and that a portfolio that generates a 5 percent yield usually produces a real annual return of only about 2 percent.
They appreciate that since 1926 stock markets have produced an average annual yield of about 9.7 percent that stocks have outperformed bonds in 97 percent of the 20-year time frames since 1926, and that long term horizons and smart patient consistency pays off with stocks. They know that over 50 percent of the world’s public stock companies are outside the borders of the United States. That many of the fastest-growing and best run companies are abroad, and that the US stock markets have been countered among the best five in the world only twice in the last 15 years. They take steps to ensure that either through their own hard work or the skilled work of professional advisers, their portfolio decisions are the product of hardcore research and smart analysis, and they are careful to not short circuit the length of their projected needs and suffer the plight of so many who end up outliving their money.
The 55-year-old knows that today the average life expectancy of a 55-five-year old is nearly 27 years. That medical advances and smart lifestyle choices are forever lengthening that average and that, by definition, over half of the population beats the average, so to speak.
I have observed in my years of existence that the happiest most financially secure, most energetic, most interesting, most fun-to-be-with people were not door one people.
Please carefully note that I did not say the most educated. These people have more time for themselves and their family. They had more freedom. They had more financial independence and flexibility. They didn’t have to worry about a pink slip but they had to think, they got to think. They were smart at what they did. They experienced the endless joy and wonder of self-discovery. They, plain and simple, just had more fun and made more money.
Most of them were at a point in doing a thing that they could have never dreamed of years earlier. A few were really educated PhD types, but many never graduated college, and some never finished high school. These people built private businesses, which is door three, along with their door two stuff.
Most successful door three players at one time had fuzzy notions about the world of door three and never dreamed that it could be a home for them. They thought, as many do, that door three is only for hard nose business types, risk-taking entrepreneurs, couldn’t be a smart place for a person concerned about financial security. But as they grew in their door one position, they kept their eyes wide open. They kept learning and learning and learning. They stayed flexible. They saw an opportunity and then got excited. They made it all work — the challenges, the ups and downs, the solution. Their strength, wisdom and expertise grew all along the way. The money side of their life surpassed all their expectations while the most important non-money things in their life just got better along the way.
As you experience your door one challenges, you like many others, may develop a longing to play in door three — to have your own business and to run your own show. The key is to find a niche, something that you can do extremely well, and that others want or need. Then through experience and study you need to learn everything you can about that niche. Then you need to study the details of running a business, attend seminars, read books, and talk to seasoned business pros. Most of them love to talk. Then, write your plan – a real business plan that you and trusted others can critique and really beat up. Think hard about your plan carefully analyzing each assumption, success factor, and risk. Be brutally honest with yourself through the whole process. Then repeat the cycle again and again until the plan in your eyes is a masterpiece that you honestly believe that will work.
The underpinnings of this essential belief must be based on hard, objective, factually sound analysis, and not just wishful thinking. Then move forward to assemble the money, the people, and the organization that you’ll need to make it happen. There’s no question that today the big picture for private businesses in America looks rough. Our economy is struggling to slowly crawl out of a protracted recession that has delivered chronic unemployment numbers in excess of a horrendous 9 percent has brought our largest financial institutions to their knees and has forced many privately own businesses to close their doors.
Debates rage over the effectiveness of unsustainable annual trillion dollar deficits, near zero percent interest rates, and the Federal Reserve’s quantitative easing strategy — the practice of pumping trillions into the economy to help offset massive private sector deleveraging and a debilitating drop in global demand for just about everything. In order to aggressively to play to win, businesses need to know the rules of the game and have confidence that market forces are headed in the right direction. And there’s no question that today the rules and forces are anything but certain.
Massive health care legislation has frightened nearly everyone who must meet a payroll, with have the nation trying to figure out what the law means and the other half fighting just to get back to square one either through the courts or the Congress. Temporary extension is the new normal and slogan for taxes. Many business owners shook their heads in disgust as Congress and the White House ignored for months the witching hour for the sunset of the Bush tax cuts, and then engaged in shameful 11th hour political theatrics to just kick the can down the road.
For business owners, the only certainty is that everything will be up for grabs again in 24 months against the fear, once again, that no action will trigger huge tax increases that will cripple many businesses. Half of our leaders are screaming for more regulations on all fronts and policies that foster social justice redistribution while the other half proclaim that downsizing government and unleashing free market forces are the only hope.
Meanwhile, the long term business impacts of massive federal spending, unprecedented deficit, and extreme monetary policies are completely unknown even as we witnessed the economies of other nations implode in the entire global economy struggle to find the footing. But all the uncertainties, political maneuvering, and ideological haggling have simply confirmed a basic truth that no one can responsibly deny and that nearly all now accept as a given. The stability of American families, governments, political institutions, and charities is dependent on the strength of America’s private businesses — and America’s private business sector is the only hope for any real recovery from the current mess.
My purpose here is not to entice you to go out and start your own business. It is to encourage you to keep your eyes open and to continually try to broaden your horizons. You’re going on a journey. Make it one of self-discovery of reaching higher. Don’t get so locked up, so fixated, so stressed on one path, that you shut out the other possibilities. Don’t be so anxious for a clear 40- or 50-year blue print that you miss the other pages.
The great majority of people play in door one but the thinking and mindset of door one people, very significantly, many don’t think at all. They have their door one position and their two programs — and that’s all she wrote. Others keep their minds open for more door one options or a potential jump to door three. They know that the key to their door one experience is to gain knowledge, expertise, and knowhow. They do a great job, usually much better, than their non-thinking counterparts because their focus is on being good, learning more, and by no means are the real thinkers and doers limited to high-end executive of door one types.
Many lower paid, blue collar door one players have put little brain power and capital behind an expertise or know-how they acquired in their job, and then spring boarded themselves into a door three world that they would have never dreamed possible.
Security sometimes is a fickle concept. Nearly everyone will tell you that you have to give up opportunity if you want security. The universal perception is that security and opportunity are opposing forces that work against each other, not with each other. And that’s all true in the world of door two. A really secure investment offers less opportunity for a high yield than a more risky investment. But with the changes that have occurred in door one, it’s not so clear that the old security opportunity trade-off absolutely holds true for everyone in the worlds of doors one and three.
Some would never consider giving up the security of a job that they readily admit offers no real security. So they couldn’t possibly consider a real door three idea (or better still, some sort of creative destruction to rock the financial world), which might provide the type of real security they have never felt before because it would interfere with their comfortable plan of banking on their present insecure job, as sound twisted it is. For many, their upbringing and their reluctance to broaden their way of thinking and step out of their comfort zone allows them to use this notion of security as an excuse — an excuse for laziness, an excuse for not learning more, an excuse for not acknowledging and not educating themselves out of the ever present, very normal fear of failure. The result is that they often end up less secure. Work to be real honest with yourself on this one.