Your Affluence Value | Asset Allocation (Pt. 3)

“Hi. My name is Sean. And I’m an investing addict.”

Over the last month, we’ve been sitting in an AA meeting together.

AA of course meaning “Asset Allocation,” one of the most important (but also one of the most mundane) concepts in personal finance and wealth building.

Your Asset Allocation strategy involves choices about what you should invest in, how much you want invested in each asset, and when you should be investing.

In this piece, I talked about how and why traditional Asset Allocation strategies just don’t work across all times or for all people.

And in this piece, I touched on some of the logic behind when you want to be “risk on” and “risk off.” 

(Spoiler: We’re in a “risk off” period.)

I’m doing this in installments that will eventually be gathered up into a report or resource that lives on diywealth.com…

And it will be, I hope, one of the more helpful resources we have to offer. 

See, this concept is mundane and easy to ignore because it’s not an offensive, “beat the market” strategy. 

It’s a defensive strategy. A “protect your money from your own arrogance and emotions” strategy. 

So right away, I have to tell you that this concept isn’t for the people who want to get rich quick. 

I can’t speak to those people. They’re lost souls. 

You and I… we can’t dissuade these people of their warped notions about money, their gambling mentality, the illogical urgency with which they approach their finances.

Then there are the people who want to get rich slow… or not at all. 

These folks are often the same ones who believe that Social Security will be around for them when they retire (or that it’ll be enough). They might work at jobs that offer a pension. They’re looking for pure stability.

They’ll probably benefit from this conversation a little bit. 

Then there is the third group…

The people like me sitting in between “stupid risky” and “overly conservative” who want a plan that adjusts based on context…

A strategy that allows you to know when to hit the gas and when to tap the brakes.

If you allocate your assets correctly, that’s exactly what you get: A strategy that works no matter what the market is doing, no matter what the economy is doing, and no matter how much wealth you have right now. 

The ultimate goal of all this, beyond simply protecting your money, is to have a portfolio that grows sort of like this:

Multiple investments and stores of wealth that gradually increase over time on average, but which aren’t really in sync with each other.

That way you can buy the cheap assets, sell the assets reaching a peak, and move your money between them accordingly. 

That’s the basic theory. 

But it’s very idealistic. 

Let’s be real:

You might not have a whole lot of money to actually invest. 

And if you have money, you might be sitting on your hands wondering what to invest in.

So let’s do that, here, right now: WHAT you should invest in, and HOW MUCH of it you should own depending on your financial situation.

But before we get into that… we have to cover one last idea. 

Something I think most people get really wrong:

Net Worth: The Most Useless Concept in Finance?

Pick up any Personal Finance for Dummies book collecting dust on the shelf of an abandoned bookstore…

And you’ll be introduced to a concept called “Net Worth.”

If you’re an oil tycoon with a bushy mustache, “Net Worth” makes sense as a measure of your financial wealth. 

It’s just the value of all your assets (the crap you own) minus all your liabilities (your bills and your debt). 

But for most of the folks in the lower, middle, or lower-upper classes… 

Net worth is about as useful as a poop-flavored lollipop.

For example, if you own your house… do you plan on selling it to support your lifestyle before or during retirement?

Probably not. 

In all likelihood, you’re going to want to have other investments or income that support your lifestyle while you’re living in that home. 

Supporting that lifestyle could include paying a mortgage loan, the same way they’d pay for rent.

But if you do own a house with a mortgage, you’re probably going to have a negative net worth. Probably for most of your life.

But if you have an accumulating stockpile of assets and compounding income streams…

Having a negative net worth doesn’t matter much, because the useful and utilizable component of your wealth is growing – that is, your investable income and savings.

Another example: 

Most Americans under 40 are saddled with ludicrous amounts of student debt that can’t be dismissed with bankruptcy. This means that for many people, they’re going to have a negative net worth. 

(Their fault for wanting better financial prospects, I guess.)

Most subsidized student loans have an interest rate less than 6%. But we also know from history that the S&P 500 grows a little faster than 10%.

So should you aggressively pay down your debt to bring your net worth up to $0?

Or should you pay the minimum on your debt while allocating some of your cash to regularly invest in a passive index fund every month?

I would argue that the person with a net worth of $0… who has a bunch of cheap, easily manageable debt… AND a bunch of growing, income-generating assets…

That person is WEALTHIER than the person with a net worth of $0 who aggressively paid off all their debts before they began investing or saving.

Net Worth, as a measure of wealth in this case, utterly fails. 

So what measure should we use? 

Well, two…

Your INVESTABLE INCOME… how much cash you have left over every month after you cover all your mandatory expenses.

And your LIQUID ASSETS… this includes your money in a savings account or hidden in a mattress, as well as investments that you can easily move money in and out of (so… stocks: yes, but paintings: no).  

I touched on all this briefly when I described how to level up your wealth building.

You need the income so you can pay for your lifestyle and get assets…

And you need the assets so your wealth continues to grow independently of your work.

So let’s combine these two numbers and call it your, I don’t know, AFFLUENCE VALUE, or AV. 

(I’ll come up with a better name one day.)

The bigger your AV, the wealthier you are. 

You can have a very high AV and a really rockin’ lifestyle while still having a technically negative Net Worth and a bunch of assets you never plan to sell. 

So let’s go through what your Asset Allocation should be at the first and lowest stage of your AV:

Stage 1: Your Affluence Value is Less Than $5,000

This is the situation that most average Americans find themselves in. 

They barely have any wiggle room in their income to spare… 

And they certainly don’t own much in the way of liquid assets.

At this point, there’s really not much you can control that will make you wealthier. So if you’re in this category, you need to think about just three things…

1) Your income. 

It would be intellectually dishonest for me to say that everyone in America can get a good job with high income or lots of upward mobility. 

But if building wealth and getting richer is a priority of yours, you have to do everything within your power to expand your income. 

Nothing else will help you.

It is FAR easier to increase your income than it is to cut expenses from your life. 

So if you are at this level and you do not make enough income such that you have some left over to invest… 

Increasing your income HAS to be your priority. 

If you don’t do this, you will die poor. No ifs, ands, or buts about it.

That could be getting a promotion or a different job, as I explain here. Or it could be getting a side hustle, which we’ll have resources about in the future on diywealth.com. Or it could be learning a new skill that opens up jobs and career paths to you.

Either way, there are only two ways to increase your income: Work more hours, or get paid more per hour. 

Whatever you need to do to accomplish either one or both of those things… do it.

2) Your expenses.

It would be unfair to say that most people have expenses they can cut. 

Folks in America and all over the world are living pretty lean these days. 

And it’s not like people with a low AV can just… up and move if their rent goes too high. Moving, it turns out, costs money.

So for the majority of people who might be reading this, Cutting Expenses? Don’t worry about it.

Your mental energy is better spent figuring out how to bring in more income than living life without a Disney+ subscription. 

Now. On the other hand… 

If you’re a single person bringing in over $25,000 per year, or a family of 4 bringing in over $45,000…

…and there are no crazy health issues or loan sharks or ridiculous cost of living involved…

…and it really is just a matter of irresponsible spending and no other factor…

…and your Affluence Value is still less than $5,000?

You’re the type of person who needs to get the avocado toast smacked out of their mouth.

Be ashamed of yourself. And then fix it.

Yes, increase your income. But also find anything… ANYTHING in your life that you can put aside and treat as Investable Income. 

Order one less coffee per week. Buy cheaper food. Put your spare change in a jug. 

Seriously. Find any one space in your life to cut back and put that toward:

3) Your emergency savings.

Until your assets and investable income, combined, total over $5,000, this is the only asset you should really focus on. 

(The only exception to this might be people who get employee matching on their 401(k). If that’s the case with you, contributing just enough of your paycheck to get that employee matching is a free way to increase your Investable Income, and you should do that.)

Here, you should be beginning your “Start Over Again Fund,” as Mark Ford calls it. Not even for rainy days… but CATACLYSMIC events, such as the loss of a job or destruction of a home. 

Your “Start Over Again Fund” is your lifeline. Ariadne’s Thread leading you out of a labyrinth of catastrophe. 

This is the money you want to carry you through the hardest times to smooth out any problems you encounter.

For that reason, you don’t want your Start Over Again Fund to be volatile or hard to access. So I recommend keeping this money in cash or something as close to cash as you can get, such as a savings account. 

(Forget Bitcoin for now, you degenerate.)

Your Start Over Again Fund should be at least enough to cover three to six months or so of living expenses.

For people with a low Affluence Value, it might have to be less than that. 

That’s not to say it’s any less important… 

In fact, people who make very little income and have very few assets are the MOST vulnerable to these cataclysmic disasters. 

Layoffs. Closures. Demotions. Natural disasters. Etc.

You can’t build wealth if you’re getting the rug pulled out from under you every time you make some headway. 

Your Start Over Again fund can help with that. So this is the most important asset you can possess. 

If you find yourself with three to six months’ worth of expenses saved up but your AV is still less than $5,000…

Then I’d recommend you begin working up to putting aside at least $10 per day into additional savings or into a brokerage account. 

It might take time… but you’ll realize quickly enough that saving money this way… seeing the numbers on the screen go higher, or the pile of money you have socked away get bigger…

It’s addictive. 

And before you know it, you’ll be ready to begin deploying that capital when you enter the next stage of your Affluence Value…