Friday, July 17, 2009

Diagnosis and Recovery of a Financial Problem

Hum, a review of my current financial situation shows that I'm broke today because I spent to much for to many years buying to much stuff to impress to many people, including myself. I need to make some drastic changes in order to correct my current financial situation (being broke) and begin to change my long term financial position. I am literally starting with less than I had when I moved out of my parents home at 20 years of age 25 years ago. Through a thorough dissection of my financial statements I've been able to gain great incite into where I am today, how I got here, and where I need to go in order to begin a financial recovery. In very overly simplistic terms you will find below a rough diagnosis of my financial problems and a rudimentary plan for recovery.

Diagnosis #1 Not Enough Income

Simply straightforward, in present I do not have enough income coming into the household. I've already written much on this issue so I won't belabor the details of a slow economy, bla, bla, bla. I will however comment on how I plan on increasing income.

Diagnosis #2 No Assets

I no longer have any assets left which have any value. The only things of value which can be realized right now are my possessions (piano, limited jewelry as we're not real big on jewelry, a Waverunner, one car) and I estimate the real sale value of all these possessions to be less than five thousand dollars. I do also technically own a sailboat, but I have not paid the slip fee to the private dock owner in over one 1/2 years so I guess I could sell the boat but I am liable to the dock owner for past slip fees which run $550.00 per month. From a net asset value position I think I'm negative on the sailboat by several thousands of dollars. I no longer have any real estate outside of two small postage stamp size land lots which have not sold (300 and 2,000 sq ft commercial lots), no stocks, bonds, or any other type of securities, and no life insurance or annuities. My wife's 401k is empty, and my SEP account was cleaned out trying to save my former business. In essence I'm broke and starting with nothing and need to start accumulating assets again.

Solution to #1

#1 Income

A) I plan on continuing to work in my current industry. Although I have been looking for employment with companies outside of my industry, so far unsuccessfully, I have decided against leaving my current industry and instead re-working my business plan to account for the economy related lack of business activity and alter my business plan to delivery services to a wider business audience and prioritize projects categorize by size and the prospect for an increase in business volume.

B) My wife is starting her own franchise business in the financial sector. She has been studying for and has received the required licenses needed in order to begin this business. While this is in a professional practice business and not a typical entrepreneurial start up we are planning to use her income to help us move forward with our plan for financial recovery.

C) My wife and I together are starting a business we will both work part time in the evenings and on weekends. The business will be the manufacturing of body care products. This business will produce a line of all organic products serving a niche in the body care products market. While technically a mfg company we do not plan on manufacturing the product lines ourselves. As we begin the venture we will produce small hand made batches of products to perfect our "recipe" and then engage a contract mfg company and separately a logistics company to remove the physical handling aspect of the business. We essentially want to capitalize on our strengths in sales and marketing and want the company to be a product development and marketing and sales organization. We will leverage the use of technology as a platform for commercial and consumers sales of our products.

Solution to #2

I need to acquire income producing assets and appreciating assets as quickly as possible. Much of my investment experience and most of my former wealth was a result of owning assets producing a substantial passive income, and subsequently a substantial increase in asset value. A divergence can occur when you are considering which type of assets you want to acquire to meet your investment objectives. You can acquire assets to achieve an increase in their value or you can acquire assets for the income you can earn on the assets. While both are desirable I am going to focus the majority of my efforts on acquiring assets for income. Personal experience has taught me I can't spend appreciated assets when I need to access money. And when I do need to access money and I need to sell illiquid appreciating assets to gain money I usually need to sell them at a discount. My goal is to acquire both assets that produce income and assets that appreciate in value but are of a liquid nature. The investments in appreciating assets will be in liquid assets that can be converted into currency quickly.

The more assets we have earning income the more assets we will be able to acquire. At this juncture we will only use income from assets to buy other assets. No asset income will be used for living expenses or any other personal or business needs. We will live off of our business earnings or we will cease to exist, but one thing we will not do is use asset income to buy anything other than more assets. One of my lesser, but equally important goals, is to be able to have all of my asset income pay for my living expenses. While not yet written in stone, my target date is January 2012. This date is 2 1/2 years away, and plenty achievable providing we follow this rudimentary plan which will be modified before a final financial recovery plan is written and signed by us. My family and I lived off of passive income like this for a decade. I know this can be done again, and relatively quickly.

You might ask why the extreme focus on asset accumulation? Well very simply the more assets I have working for me the more income I'm going to earn. At this point in time I'm not to concerned about increasing net worth but rather in increasing my monthly spendit worth. This helps me to buy more assets which means more income. You see the point. The more assets you have working for you the bigger your income. I like to think about passive income like this, every asset dollar is like 100 hundred little itty bitty worker men working away earning me money. The picture in my head when I think about these itsy bitsy workers is of the little umpa lumpa's in the old movie Charlie and the Chocolate factory. Can you picture those little blue guys happily working away day in and day out. I see my assets having itsy bitsy workers working away earning me more money every single day. They have no brakes, no days off, and no personal time. They work each and every minute of everyday exclusively for me 24/7. And you know what, I don't feel a bit guilty about it. For example, if my investment is $100 earning a 7% return then I have 100 workers working away while training 7 more workers for a year how to work for me. And next year I'll have 107 workers working and training an additional 7.5 more workers how to work for me the next year. Then in this third year I have 114.5 workers working for me. This process just continues for as long as I remain dedicated to keep all of my passive income reinvested.

Considering we are again starting from scratch with no assets we will acquire assets listed below beginning with soft assets and simultaneously acquiring hard income producing assets. Below is the list of asset types in the order in which we will begin to acquire them:

A) Stocks. Acquire stocks paying a high yielding dividend. Each company will be a leader in its industry and have financial statements that are rock solid with prospects for continued reliability of the dividend payment. The stock itself will be a rock solid soft asset in and of itself having the prospects of asset appreciation. The primary driver for the purchase of the stock will be the income from the dividend. In addition, income will be increased through the sale and management of covered options contracts.

B) Commodities. I will buy silver coins, or silver ETF's, for the appreciation I expect to see in silver. Silver is a rare commodity and given its propensity and use as a conductor in electronics is commercially near exhaustion. This will cause a shortage in this commodity. The purchase of this liquid hard asset will allow me to access currency when and if it is needed.

C) Rentals. I plan to invest in multifamily housing. I think there are better opportunities in multifamily real estate right now. First the current capital markets crises has been debilitating to commercial real estate such as office, industrial and retail properties. Although most of my previous real estate holding where in these types of assets as I stated I think there are better acquisition opportunities in multifamily.

The capital markets crises has been less of a factor for multifamily properties. The demand for rental units remains high, and should only continue to increase given the expected increase in the American population. I will buy anything from duplexes to 100 unit apartment houses. There will be a time when more opportunity will come from other commercial real estate but the acquisition of multifamily will provide the capital to capitalize on these opportunities at a later date.

This is a preliminary schedule for the acquisition of multifamily units:

Year 1 - 20 units
Year 2 - 40 units
Year 3 - 60 units
Year 4 - 100 units
Year 5 - 200 units
Year 6 - Industrial, Office & Retail Buildings
Year 7 - Business Parks
Year 8 - Private Equity Co Formation

D) Tax Liens. I will invest in tax liens to achieve the higher out-sized investment returns you can get from these very secure investments. These investments are illiquid for an undetermined period of time but there is a maximum time horizon for each investment which is usually no more than 5 years. They are completely and totally protected by the full value of the under lying property. They stand ahead of any financing on the property and as an investor in tax liens I would have the right to sell the property for the full value of the property and keep the proceeds without obligation to anyone other than closing costs. Underwriting the strength of the underlying assets is important and will be a priority completed prior to investment.

E) Land. I will acquire land that is/can be productive in the growing of fruits or vegetables. This land will either have an existing operation on it or will have the prospect to easily begin the process of increasing and making the land income producing. The land ideally will be in either San Diego county growing avocados or in Santa Barbara county growing wine grapes.

I hope you find my preliminary plan for financial recovery interesting.

To your

Health, Wealth, and Happiness.

The information contained in this site consist of a series of articles which comprise "My Story and I'm Sticking to it". The information contained herein is sole opinion of the Baron Von Savings. The Baron is not a professional money manager, tax expert, accountant, attorney, or stock broker. You should consult with an appropriate professional before making decisions concerning your personal finances.

1 comment:

  1. Oh wow, this got every one going - fascinating input mixed with a good read.