Recently, my friend Patrick from Cash Money Life wrote, “Your Greatest Asset is the Ability to Create Income.” In it, he said:
“What is your greatest asset? Most people think it is their house. They are wrong. Bank account? Wrong again. For the vast majority of people, the greatest asset they have is the ability to generate income”
Photo via Kansas City Public Library
What do you think? I agree with Patrick. Now, let’s explore this concept a little further. Your ability to generate income is not only your greatest asset, but also for everyone that depends on your income — i.e., your family. So, how are you protect your greatest asset?
At the foundation of any important process is a well defined disaster recovery plan. This is true financially as well.
These do not directly protect your greatest asset per se. However, living expensive lifestyle and carrying debt handicap you financially by stealing your flexibility. For instance, you can’t do what you want with your money because you are stuck spending all the money and using the rest to pay off debt.
By getting rid of your debt and living frugally, you are giving yourself the flexibility needed to start an emergency fund, invest, and grow your income streams. If you want to see how real people are doing this, check out Paidtwice and her Snowflaking Debt Elimination Primer, how Lynnae is frugally living off $19,000 a year, and 10 things Glblguy did to regain financial control.
Emergency fund helps protect you against unforeseen expenses and lost of income. It allows you to survive financial hardship and pay your bills. It protects you against cascading effects like having to pay late fees, defaulting on loans, ruining your credit score, etc.
It used to be hard figuring out where to keep your emergency fund, but there are actually quite a few options to choose from. When deciding how much to save, a good amount to aim for is 2-3 months worth of living expenses. If you think that is too hard, try to put away just $3 a day — by this time next year, you’ll have over $1,000 saved!
JD at wrote an excellent article, “How and Why to Start an Emergency Fund.” I highly recommend that you read it.
This one is not obvious at first. But I challenge you to do job searches on the web. If you have been with your organization for more than a few years, you will find that the job market is very different and you may no longer have the skills that companies are looking for.
In order to protect yourself against job loss, and recover quickly in case you do, you should periodically monitor the job market and find time to keep your skills and knowledge current.
This is a great way to provide some basic coverage in case you become disabled and can no longer work. My company provides basic short-term disability insurance, and for a little extra money I was able to buy extended long-term disability insurance. For instance, my disability insurance provides 100% salary replacement for the first 3 months, 80% for the 4th and 5th months, and 70% until I turn 62 (when I become eligible for Social Security payments).
If your company does not provide disability insurance, or your feel that the coverage is inadequate, you can always look outside. There are plenty of insurance companies vying for you business.
I discussed the idea of alternative income streams before. I believe that everyone should proactively look for ways to reduce dependence on their day job (i.e., primary income) and build passive income streams. After all, you can’t truly retire until your passive income replaces enough of your primary income to cover all of your living expenses.
A good target is to grow your passive income by 5% of your primary income per year. For example, if your salary is $50,000, try to make $2,500 away from your job, then try to shoot for $5,000 next year, etc. This means your passive income will be the same as your primary income within 20 years. Where to start?
Well, it’s no longer about you at this point, but about whom you left behind. There are a lot of theories on how much life insurance you should buy. After reading a lot of articles on this subject, I believe the right amount of life insurance is 20-25 times your current living expenses (not income). This way the beneficiaries can invest the payout and withdraw 4-5% each year to cover their living expenses. Of course, this requires that your spouse is savvy enough to handle the finances without you, or know who to work with (i.e., professional financial advisor).
What are you doing to protect your greatest asset?