The Right Way to Look at Personal Finance: Lifestyle Cash versus Building Equity
Silicon Valley folks has long derided “Lifestyle businesses” which i find dumb, ignorant and close minded. I have friends who either run agencies, IT outsourcing companies, Amazon FBA (Furnished by Amazon), Dropshipping or ecommerce businesses that clear $80-100k usd a month in net cash flow to themselves for very limited amounts of work a week. They are living the ideal of “Four Hour Work Week.” Who does not want this?
A big part of the decision comes down to priorities, your focus and the type of life and business you want to build. It’s all personal preference. Do you want to work the 110 hour work week to build the “Growth at all costs” multi-billion dollar business that Silicon Valley loves? Or do you want to do this at a more sustainable and cash-flow driven business?
Key considerations:
Cash flow versus Equity which is the Exit value at sale or going public: it’s based on the time of Short term versus Long term
Liquidity versus Illiquidity: coldly speaking, it comes down to when you extract value.
The way to wealth is owning and building equity: that’s absolutely true. And it is something I wish I learned much earlier in life. But there is a huge portion of the economy that does not meet this criteria. There are probably more bootstrap businesses than VC funded businesses, as many do not fit the super growth business model that VCs look for. Things like Agency businesses, CPG (Consumer Packaged Goods) businesses like energy drinks or food bars, software business targeting super niche communities or the like. These businesses do build equity value but in my opinion, it’s focus should be about extracting cash flow & dividends.
The Microacquire platform changes some of these dynamics for software businesses. And if you do real estate well, something I have admittedly have not, you can get both equity growth as the value of your property goes up as well as the cash flow from the rental income of tenants. Private Equity has traditionally been like this too, extracting value from cash flow & fees, and massive return and cash at exit too. We also see the rise of the micro-Private Equity firms like Codie Sanchez and Alex Hormozi hoovering up many cash flowing small businesses.
In the future, a key piece of personal finance is balancing this long term monetization versus short term. Balancing cash flow versus equity value. You need both to make it big.
We need to be thinking of short term cash flow needs whether that’s a 9-5 job, consulting on the side or even a cash flow generating bootstrap software or agency business as side hustle. But this also needs to be counterbalanced with parlaying this cash into equity stakes either from investing via angel deals in startups, LP-ing in VC funds, public stock stocks/401k/ROTH IRA or real estate investments. These are all assets that take time to grow and are super illiquid or untouchable until a certain age.
You are basically building a barbell in personal assets. One which is focused on good predictable cash flow that lets you live and support your family. Ie. less risky and liquid.
The other side of the barbell is on the high risk, high gain, long term value that could be life changing wealth down the road. And i should add super illiquid.
My big mistake was an undue focus on building the long term illiquid wealth but not managing my cost structure properly. Basically I did not keep my personal burn as LOW as possible. Something everyone needs to do without wrecking their health and life. I had lifestyle creep and mistook the difference between needs versus wants. I compounded this by not shoring up my short term cash flow and liquid assets.
All it takes is a “Black Swan” event like the GFC (Global Financial Crisis) or a Pandemic to wreck you and cause the cash flow issues that make it hard to survive, so you can realize the value of all the assets you built up. And I should add as we move into the de-globalizing and emerging multipolar world, these shocking surprises are only going to be happening in higher frequencies. Building a balanced portfolio of assets helps make you more “antifragile” and better able to weather the storm. So word to the wise.