Each year almost twenty million students enroll in some type of higher education program following the tried and true path of their parents and grandparents in pursuit of the American Dream. While the details vary by person, the basic dream is the same: Go to college, get a good job, climb the ladder of achievement and compensation, find a partner, build a home, build a family and retire early enough to enjoy your health with your loved ones in blessed financial security. This dream is dead -- wake up!
Education is more important than ever, but it is a small part of the skill set required to achieve the American dream today. Millennials face a new game compared to their parents: job mobility is higher and they will likely hold over ten jobs throughout a career; they will endure a greater burden of health and education costs; they will navigate a more complex financial landscape of investment, credit and insurance choices; they will live longer and they will manage these risks with less-generous retirement plans and smaller safety net programs like social security.
This is not to say that the future is all bad for this generation. While the new reality facing young people today is different, it can be just as attractive. The new American dream is about viewing yourself as the owner of a business -- what I call "Family Inc." -- and realizing that you are responsible for managing Family Inc.'s two primary lines of business: your labor and your financial capital. The labor business involves "selling" your skills and energy for money, while the asset management business involves growing that money to support your spending needs today and in the future, long after you retire.
Seeing yourself as a business owner responsible for managing and maximizing these two assets will lead you to make more intentional decisions about both in order to secure your financial future. Here are a few key principles that will help you stay focused on the big choices that drive financial security related to managing your labor and financial capital.
Managing Labor Capital
Your objective in this business is to convert your labor into money as efficiently as possible to support the spending needs of your family throughout a lifetime. A few principles to help you maximize this asset:
1. There is greater opportunity to create significant wealth from investments in your labor and career management than investments in financial assets. This means making strategic decisions about education -- investments that, if managed intentionally, will help you increase your earning power and ability to work longer, which gives your money more time to grow.
2. Your labor must be actively managed, and the principles of investing can be applied to your career choices to increase your expected lifetime compensation. Look for career opportunities that help you acquire new skills, be more flexible and work across industries, work later in life, and build a financial cushion with retirement benefits in addition to today's compensation.
Managing Financial Capital
Your objective for this business is to maximize long-term, after-tax, after-inflation, after-fee purchasing power to support your spending needs today and in retirement. A few principles to help you maximize this asset:
1. You must have a cash reserve (at least three months) and liquidity to buffer your family from unexpected setbacks like unemployment. This is the most important role of your financial assets.
2. Your asset allocation program must consider labor, social security and real estate assets -- not just the value of your investments.
3. You should be heavily invested in equities (stocks) versus fixed income (bonds). In the long run, equities are likely to deliver greater expected purchasing power with less risk than fixed income.
4. Low-cost, passive index funds are generally the best way to implement your investment strategy. Do not try to beat the market.
5. Not all debt is bad! Debt can minimize taxes and finance appreciating assets like real estate or investments in the market.
6. Buy real estate as a home -- not an investment. The risks and returns are likely unattractive compared to your alternatives.
Because we all play the same "financial game of life," this framework can be applied to your circumstances regardless of your age, education, financial sophistication, or wealth. It also allows you to develop a holistic, customized, financial plan that includes all of a family's assets, while understanding the impact of disparate decisions and how they affect one another such as choices in education, career, investing, insurance and retirement.
Financial security is not achieved through saving tricks and stock picks, but through a lifetime of better decisions about the major factors that impact long-term financial security: education, career, spending, investing, insurance and retirement. The Family Inc. paradigm guides you toward decisions that will help you win the financial game of life. The "American Dream" your parents and grandparents had no longer exists. Today's dream is necessarily comprised of seeing yourself as an owner of your labor and financial assets -- Family Inc. -- and developing and managing these assets to secure your personal plan of financial independence.
Douglas P. McCormick is the author of FAMILY INC: Using Business Principles to Maximize Your Family's Wealth (Wiley; April 2016). www.familyinc.com