Pizza Pizza

mmmm pizza!  Photo courtesy of Mrs. TeePot (

mmmm pizza! Photo courtesy of Mrs. TeePot (

As Mrs. Mase and I have continued our financial journey together, we’ve set some pretty big goals for ourselves.  One of these is being completely debt free.  We’ve made some great progress thus far in the past two years, but there’s this one pesky loan that’s bothering us – our mortgage!  I know people have conflicted opinions on this topic, especially in the personal finance blogosphere, but we’ve determined that owning our home free and clear is super-important to us. Therefore, we’re going all in.  I recently applied for a job at a pizza place down the street from us, and it looks like I’m going to start working as a driver soon.  It’ll be mostly on weekends, during the evening, so it will align well with my current work and school schedule.  Apparently there is big growth within the industry, particularly in my city, so there is a great need for drivers.

Over the past few months I have been deep in thought about what to do to earn some side-income for my family.  Being an engineer, I tend to analyze everything and this case was no different.  Then, I had a realization.  This past weekend my wife and I met a young woman who related to us that she was looking for a part-time job.  This was a young girl who really had some bills to pay, and she needed to get some extra work in order to make progress in her financial life.  She had started budgeting and watching her money, but by her speech and tone of her voice I could tell that it still wasn’t really cutting it.

By listening to her story I realized that I should just go for something that I know I can do rather than twiddling my thumbs trying to find the “optimal” solution for increasing my income.  There are tons of people out there who hustle and work part-time on the side, even if the job isn’t that glamorous. What really motivated me to get off of my butt and fill out an application was by connecting with why I wanted to do it.  In my mind I just visualize the Mrs. and I combining our paychecks and just throwing chunks of money at our loan, with the number eventually going to zero.  Visualizing the end of the journey with the mortgage being paid in full just excites me so much when I think about it.  Not only that, but I can imagine the peace that we’ll both feel when all of our paychecks are truly our own, and not just going out the door to pay other people.  Then, we can really give back in big ways, both to others and to ourselves.

I’m also excited about implementing an investment program for real rather than just reading about dividend stocks throughout the day. Now, could we throw this new stream of income into investments?  Sure, it certainly wouldn’t be a bad idea (let’s be honest, I splurged on some Coca-Cola stock last month).  Even before doing that, we will likely save to move up in house, eventually.  But I believe in making the game of life easy – kill off the debt first and then put great focus into building up cash-generating assets (and allowing yourself to spend some extra money here and there).  People often talk about the benefits of diversifying – we can’t forget however that focus is also very important (more on this in a future post).  Anyhow, I’m really excited to get going at my new job.  It’ll feel good to take action and accelerate the progress that Mrs. Mase and I are already making.  It’ll just bring us to our goals that much more quickly.

Income Based Talmud Asset Allocation

Income TalmudSeveral months ago I read an article on one of my favorite blogs about an approach to asset allocation based on the Talmud, the ancient Jewish religious text.  It essentially espouses the use of three different asset classes: businesses (stocks), real estate, and reserves (cash or cash equivalents).  Directly from the text, it reads: “One should always divide his wealth into three parts: a third in land, a third in merchandise, and a third ready to hand.” (Baba Metzia, 42a)  I was mulling the idea around in my head for a while and thought it might be nice to further refine those allocations based on an income-based approach.

I think a good way to allocate our assets in the long term might be split evenly between dividend-paying stocks, rental real estate (actual real estate – not REITs), and cash.  I like this allocation model because it is diversified yet retains some amount of focus on asset classes that appeal to me.  It also gets my attention because it helps provide the three key metrics that define financial health and fortitude: net worth, predictable streams of income (profit), and liquidity.  These metrics apply both to the financial health of a business of a family’s personal finances.

Capital Appreciation Increases Net Worth

Net worth is the foundation of wealth, really.  If you have a stream of income but now assets – say you are reliant on a paycheck from a job – your income stream can stop at any time.  You may get let go for one reason or another, or you may just quit and leave.  Think about, however, if you had $500,000 in assets and no liabilities when you quit your job, giving you a $500,000 net worth.  Then at the very least you could sell your assets over time, piece-by-piece and live off of the gains.  A Talmud-like portfolio, or any portfolio that you build with assets that grow over time would insure you have an ever-increasing net worth.  The capital-appreciation of dividend growth stocks and rental real estate would accomplish this.

Dividends and Rents Provide Income

This is not the whole picture though.  I’m of the belief that true wealth also consists of the income your investments provide.  If you build up a million dollar nest egg, but it generates no income, then sooner or later you are going to eat through your savings.  This is often how financial planners talk these days when advising an individual or a couple on saving for retirement.  “If you can build a $1,000,000 portfolio, you can sell it off year by year and it will last you two decades if you keep your expenses below $50,000/year!”  No, no, no.  I don’t want to be like that.  I’d much rather have my income increase each year, by at least the rate of inflation.  That’s what preserves my purchasing power.  Dividend growth stocks and rental real estate do this.  They can provide ever increasing streams of cash whether I am able to add to the investments or not, so that I can feed the family even as prices for goods and services increase.

Cash Provides Liquidity

A third, but often-overlooked part of financial success and portfolio management is liquidity.  Small businesses fail everyday because they don’t have the reserves necessary to deal with everyday situations.  This can happen in big businesses too.  Look at Wachovia – an otherwise successful bank disappeared nearly overnight because it couldn’t meet short-term financial obligations (significant losses in its loan portfolios).  If it had a few extra billion dollars in cash reserves, who knows?  It might have been able to weather the storm.  The cash portion of the Talmud portfolio is there to help in situations like that.  If I’m flooded with emergencies one day, I don’t want to feel pressure to liquidate investments to stay above water.

Another key reason for keeping a decent amount of the portfolio in cash is to take advantage of prime opportunities.  If another 2008 happens (really not if, more like when), I want to be able to scoop up shares of the best businesses in the world at bargain prices.  Having liquidity allows you more options and ways to make money when there’s blood in the streets and everyone is panicking.

Overall, I Think There’s a Good Case for An Income-Based Talmud Asset Allocation

Talmud_setAre there weaknesses to this model?  Of course.  By tying up a full third of investments in cash, there is less money being put to work in higher-returning investments.  Also, by focusing on income-producing stocks rather than pure growth stocks, you are missing out on making a hundred times your investment in a short time frame by finding the next Microsoft or Apple.

I’ll take my chances with these considerations in mind, though.  The more I explore and think about the idea, the more I like the Talmud’s approach to asset allocation.  It provides capital preservations (liquidity), growth (a rising net worth), and income.  As for semi-annual or annual rebalancing to keep things in order – I would shy away from selling assets explicitly for this purpose.  I wouldn’t want to generate unnecessary taxes from capital gains.  Instead, I would gradually build up whatever position needs a boost to match the 1:1:1 ratio of asset classes.  Overall, I think this method would provide solid growth, income, and liquidity for the future.