Your labor assets (your salary + future potential salary) might be your most important financial asset.
Doug McCormick, the author of Family Inc., joins the show and explains how the CFO of your family should manage financial decisions, from labor decisions to estate planning.
Are you the CFO of your family? Do you know how to take a big picture view of your family’s assets? Doug McCormick takes a holistic view that includes all aspects of family finances, including your labor asset – how much you can earn. The key is to think big, identify all your assets, and make sure that they work together.
Does your family need a trust?
Trusts date back to medieval England and the Crusades when knights entrusted the priests of the church to take care of their property while they were gone. The idea behind the creation of a trust is to depend on someone else to look after your property with your best interest in mind.
Listen to learn about the different personalities involved in setting up a trust: the settler and the trustee. Benefits of having a trust include avoiding probate. Trusts also maintain privacy and can make things easier.Read the Transcript
Interview with Doug McCormick
Doug McCormick, author of Family Inc, believes that every family needs a CFO. He also talks about the labor asset that we all have. But what if you no longer have the labor component and only have wealth? Doug McCormick shares his thoughts on this too.
Douglas Goldstein: I’m very excited to have on, The Goldstein on Gelt Show, Doug McCormick, who is not only a professional investor but also wrote a book called Family Inc.
Doug, the interesting thing about your book is that you say that every family needs a CFO to manage wealth, and that the principles of corporate finance apply to normal people. How is that?
Every Family Needs a CFO
Doug McCormick: I think it’s based on the premise that in some way, we are all entrepreneurs. We’re all families. My view is that Family Inc. business is really the fact that we all have this labor asset that we need to manage through a lifetime.
The name of the financial game of life is essentially converting those labor assets into financial assets. If you think of it that way, I think a business paradigm is a really interesting framework to help you tie all the disparate decisions that you need to make throughout a lifetime.
So investments in education, in career; career selection, managing money, retirement, entrepreneurship, all those decisions can be thought of in the context of business decisions.
The Labor Asset That We All Have
Douglas Goldstein: I certainly like that metaphor in many ways. What you’re saying is that the labor asset that we all have is the ability to get a job or start our own company, and so that’s our work.
Then ultimately, we convert that into a financial asset, which is money, whatever people pay us, which we can then invest in building our empire, even more whether it’s in our own education or educating our kids, or buying something that’s then going to create more income. That’s the model we are talking about?
Doug McCormick: Absolutely. I think if I said to you that I have a private business and I have a chief financial officer, everyone would say of course you do. But when it comes to your family affairs, many people don’t think that they need that person with that very broad mandate.
It’s much more than simply budgeting or managing investments, but it’s that big picture. How is the family investing its labor assets? How is it converting that labor into financial assets?
Douglas Goldstein: Let’s talk about the metaphor a little bit more, because I’ve used the same term when I talk to clients. In my day job, I’m a financial advisor. I work with people who live outside the United States who have U.S. investment accounts.
We do a lot of financial planning and talk a lot about how to structure your portfolio. Usually, the way I describe it is I tell people that they’re the CEO or the director. I tell people that they are on the board of directors.
I say, “You are steering the ship, you’re deciding which way to go, and you hire a guy like me to be the CFO. I bring the questions to you to answer, but because you are the one looking at the big picture, you get to decide.”
I guess there are a lot of ways of skinning this corporate boardroom cat, but certainly one of them is looking at an outside CFO, or you’re saying to train yourself on the inside.
Doug McCormick: Yes. The way you’re looking at the world, I think you’re probably defining the CFO as the person that thinks through some of the big financial choices that people make, such as investment allocation or the purchase of annuities, and I’m thinking about it a little more broadly.
So, in my paradigm, the chief financial officer would think about not only managing the family balance sheet and income statement but managing labor decisions. Things like investing in education, things like investment in entrepreneurship, and really the responsibility of assembling your team of experts, which could be more than a financial adviser, but an estate planning capability, a tax adviser, etcetera. In my worldview, it’s a little more holistic.
Douglas Goldstein: If you want to be the CFO of your own family, how do you educate yourself to have the tools to do that?
Educating Yourself to Be the CFO of Your Family
Doug McCormick: That’s a great question. I think you’ve got to buy Family Inc. There’s a shameless plug. But candidly, I think this is a process that needs to start early and it takes a long time to get good at these skills. I think the good news is the principles are pretty basic, and I’m using many principles that are borrowed from best practices in business.
The great news about those is business schools have been studying these best practices for years. They’re well established and they work. They’re relatively straightforward.
I think anybody that has a little bit of business experience or business perspective or education can pretty easily make the transition.
I think the real value is the big framework and thinking about the fact that you have this big labor asset, and for most people the best way to achieve financial security is by maximizing the value of that asset in particular.
Douglas Goldstein: We’re talking with Doug McCormick, who wrote a book called Family Inc. His focus is on giving people the skills to be the chief family financial officer. Doug, let’s dive in a little more on this because you mentioned a minute ago that the CFO of the family has to think big and look at the big picture.
It seems to me, and nothing against the thousands of people that I’ve spoken to in my career as a financial advisor, that thinking big is very hard for people.
They tend to look at, how am I going to pay my bills? Do I have more month than money? How do you get them to begin to think bigger?
Doug McCormick: People should start from the right framework. If I define the asset pool that I have to achieve financial security as both my labor assets and my financial assets, I think that’s a really important starting point.
Because by far and away, for most people, when they’re starting out, the preponderance of their wealth is in their labor. So when I say “thinking big,” I’m really saying identify all the assets that you have to play with. And I think you’re probably right.
There’s a tendency for people to get caught up in the details, but if we can keep them anchored on this very large paradigm which highlights labor as your largest asset, and that your time horizon is generally very long; If you remember those two principles, I think you’re well-served in making some of the good technical or tactical decisions you might encounter.
Douglas Goldstein: Is there a tricky thing to teaching this idea to kids?
Teaching the ‘CFO’ Concept to Kids
Doug McCormick: I think so. Not that kids are going to get every nuance of the concept, but I think early on, if you’re reinforcing that educational choices are really investments in your labor capital and by making those investments you expect to maximize the lifetime value of your labor, if you can have some of those conversations, I think that’s a great starting point. It also reinforces the importance of using education as an investment tool to maximize the value of that large asset.
Douglas Goldstein: Does this paradigm apply to retirees who no longer have the labor component and all they have is some wealth?
Doug McCormick: Yes. I think that fundamentally, the financial game of life changes at retirement because you’ve exhausted that significant asset. In my view, the labor asset behaves a lot like a fixed income instrument.
You get paid every year, year in year out, kind of like an annuity, and when you retire, you lose that. The good news is you’ve probably accumulated financial assets, and in many countries, you’ve also achieved some sort of social benefit like Social Security, which is also a fixed income instrument.
But I think acknowledging that you have less degrees of freedom, you’re less prepared to endure risk, has implications for how you spend, how you think about insurance products like long-term care and health care, and then also how you allocate your assets between stocks and bonds.
Douglas Goldstein: What’s the second thing that people should do? I say the second thing because obviously the first thing they should do is to buy Family Inc. What’s the second thing they should do if they want to become a successful CFO in their own family?
Focus on the Big Asset
Doug McCormick: I would say, focus on the big asset. That has a couple of follow on things that are very tactical. One is, as you think about career management, think about maximizing lifetime labor value, not annual compensation. A lot of times people will talk to me about career choices and they want to talk about what they’re getting paid this year and that’s really the wrong question; it’s what opportunities present the greatest lifetime compensation. I think people think too narrowly about the forms of compensation.
The way I look at it, career management is not only about getting paid but it’s about acquiring skills, developing a personal brand, and developing experiences that hopefully allow you to sell your labor at a later point for good value.
I think if you get people focused on managing that asset correctly, you’ve gone a long way. I like to tell people, I think it’s a lot more fun to grow wealth than save your way to wealth, and the primary way to do that is through managing your labor and entrepreneurship.
Douglas Goldstein: Wow. That is great. That sounds like excellent advice and advice that you’d also want to give young people.
I’m thinking about it because my daughter just got engaged and will be getting married in a few months. I think as she and her fiancé are going to be starting their own life, they need to think about what’s important now.
Not for this year to pay the bills but what’s going to help them in 10, 20, 30 years and more.
Doug McCormick: Yes. It’s a real challenge, right? Because you think about most financial products, most financial advisors start talking to people when they’ve begun to accumulate wealth, so let’s say mid-30s.
Unfortunately, a lot of the wealth impacting decisions that people make occur between high school and their mid-20s in terms of what have you studied in college, where you have gone to college, and what career choices you have made.
One of my big recommendations is you can’t start talking about this stuff too early with folks. To give young people an opportunity to make thoughtful decisions about their labor is life impacting.
I’m not saying that there aren’t great career choices that don’t necessarily provide the highest compensation. That could be a good choice for someone. I’m suggesting that people need to make those choices fully informed about what that career looks like, and what the economic consequences are of those choices.
Douglas Goldstein: Yes. I think that’s a great lesson. Doug, we’re just about out of time but in the last few seconds, how can people follow you and follow your work?
Douglas Goldstein: We will put links to that at the show notes of today’s show. Doug McCormick, thanks so much for your time.
Doug McCormick: Hey Doug, appreciate it. Thank you.