Many people feel tremendous stress regarding financial
matters and this often has detrimental effects on their relationships and is
one of the leading factors for divorce. Like a doctor who elucidates an
extremely negative diagnoses I somewhat dread explaining The Great Credit
Contraction to people because of the massive effects it is having upon both
the individual and the world. When I do take the time to explain it I
am usually asked: What
should I do?
Of course, the answer is unique to every individual
based on their utility calculation but I think it is important to
understand the different forces at work in the finance universe, have tools
to measure your own financial vital signs and then build solid, healthy and
strong personal financial statements as you enjoy the quality of life you desire.
Important principles to understand are (1) opposites, (2) self-sufficiency
for survivalism in the suburbs and (3) preparation.
The American consumer has begun to strengthen their
financial statements with a tremendous increase in the savings rate. While
this is good for the American consumer it will continue to weigh on revenue,
earnings and the general economy because of the nature of the debt-based
monetary system.
YIN AND YANG
At the heart of many branches of classical Chinese
philosophy and science is the concept of yin and yang. The yin and yang
is used to describe how seemingly disjunct or opposing forces are
interconnected and interdependent in the natural world and give rise to each
other in turn. According to the philosophy yin and yang are
complementary opposites within a greater whole. Everything has both yin and
yang aspects which constantly interact and never exist in absolute
stasis. An excellent example in Western culture is Star Wars with the
Jedi among the Light side of the Force and the Sith among the Dark side of the
Force.
So likewise in finance this principle of opposites
is present:
Light
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Dark
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Equity
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Debt
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Tangible Asset
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Financial Asset
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Cash-Flow
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Capital Gains
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Investing
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Speculation
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Gold & Silver
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FRN$ & Euros
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Commodity Currency
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Fiat Currency
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Freedom
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Slavery
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Bailment
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Fractional Reserve Banking
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Honesty
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Fraud
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Earned Income
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Passive Income
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Long
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Short
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FINANCIAL VITAL SIGNS
In financial accounting there are a few basic ratios
that are used to analyze financial health. Applying the principles
behind these ratios to your personal situation can be extremely helpful in
measuring your financial health.
Of course, this presumes you keep financial
statements which I doubt the vast majority of Americans do, in written
format, which is a primary reason they are in their current situation.
One of the reasons the American consumer based economy has been shattered to
pieces is because of the weakness of their balance sheets. Even worse
is that most American’s neither know nor understand the true state of
their financial health.
Companies usually issue annual financial statements and therefore
assets and liabilities are generally divided into current or long-term. To
distinguish current from long-term the standard is whether the transaction
comes due within one
year. Three important ratios are:
1. Net worth
which is assets minus liabilities.
2. Current ratio
which is current
assets divided by current liabilities.
3. Debt-to-equity ratio which is total
liabilities divided by stockholder’s equity.
Because most individuals go through monthly
financial cycles, such as paychecks, rent, mortgages, cell phone, cable,
insurance, etc. I recommend shortening the standard for distinguishing
current assets and liabilities from long-term; perhaps use 1, 3 or 6 months
as the standard instead of a year.
The use of these ratios for financial vital signs
will give a quick snapshot of your overall net worth, liquidity and leverage.
You can quickly build a spreadsheet using Google Docs and have most of this automatically calculated.
IMPORTANCE OF GOLD AND SILVER
The FRN$ has no definition, is an illusion and
merely a figment of people’s imagination. Do you know the answer
to what is a dollar? The owner’s of FRN$ are guaranteed no
purchasing power.
By contrast, an ounce of silver or half of a gram of
platinum will purchase approximately 2-4 gallons of gasoline or a nice steak
dinner and with tools like GoldMoney you can even pay for the good or service
with the physical bullion as the currency. I recommend gold as the unit
of account for the most
accurate mental calculation of value. Also, you will
need to determine your own gold standard.
EARNED VERSUS PASSIVE INCOME
Work is a wonderful activity which can lead to
personal development. Sometimes work can interfere with one’s
satisfaction, happiness and lifestyle balance.
When designing one’s lifestyle there are many
risks that responsible people plan for by using instruments such as life or
fire insurance. The failure to plan can lead to financial
destruction. So likewise it is wise to plan one’s financial
situation to include not only earned income but also passive or residual
income.
Passive or residual income are earnings an individual derives from a rental
property, dividends, interest payments, limited partnership and etc. in which
he or she is not actively involved. If part of your income is derived from
passive or residual sources then should you become incapacitated through
injury or disease, decide to take a cruise around the world, etc. then your
income would not cease.
Therefore, I think it is important to distinguish
between earned and passive income when measuring one’s financial vital
signs.
NET WEALTH
You can buy gold with time through your labor but you
cannot use your gold to buy time because time moves on wings of lightening
never to be returned. Likewise as Randy Pausch observed in his Last
Lecture, “We do not beat the Reaper by living long but by living
well.” When your financial condition is extremely solid then you
can pursue those hobbies, activities, etc. that will bring you the
fulfillment you seek.
Net wealth is a function of three variables, (1)
number of months, (2) standard of living and (3) without
‘working’. To determine your ’standard of
living’ you need to examine your current expenses to determine your
total monthly expenses. Once your passive income or passive cash-flow
exceeds your expenses then your net wealth can approach infinite but keep in
mind that managing your financial condition will always require some of your
time and attention.
PERSONAL APPLICATION
Every individual will need to determine whether they
want to measure their financial vital signs and what values they want to
seek. As with our physical vital signs there is no one that cares as
much about them as ourselves and each of us intuitively knows the true state
of our condition.
Being fairly conservative, extremely debt adverse
and having an affinity towards sound money, cash-flow investments and
self-sufficiency my ratios may be different than others who may have less
financial responsibility. I recommend (1) a positive net worth, (2) a
current ratio greater than 10, (3) a debt-to-equity ratio below 10% and (4)
net wealth in excess of 24 months. Achieving these type of financial
vital signs may require significant discipline but it is possible.
There are many benefits such as the freedom to live location independent, protecting your financial privacy and personal
privacy, having control over who, when and where you interact with others,
etc. You also will have much more margin for error and not be in the
financial condition of many Americans of being two paychecks away from
insolvency. How stressful!
The issue is not whether working 100 hours a week as
an investment banker is better than doing yoga, scuba diving in exotic caves
or playing with grandchildren. Everyone has their own preferences.
The issue is having the personal freedom and financial soundness to be
able to do what
you want, when
you want, with whom
you want and where
you want.
CONCLUSION
The American consumer increasingly stressed over
monetary matters and the economy. This is changing behaviors as
evidenced by the rising savings rate will slow GDP and may turn into habits
which last for years if not decades. A teenager whose parents get
evicted will likely be permanently affected by the experience.
In your case I would recommend keeping financial
statements and calculating ratios to track your financial vital signs.
For those that want to have an extremely solid financial condition I
recommend (1) a positive net worth, (2) a current ratio greater than 10, (3)
a debt-to-equity ratio below 10% and (4) net wealth in excess of 24 months.
Then you will be in better financial condition to weather The Great Credit Contraction.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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