Episode 019 - Is your income SMART?
It has taken me decades of mistakes to come to the realization of all the time wasting business endeavors that I’ve pursued and how stupid they were. Not because they didn’t make money, but because they became an albatross around my neck due to misunderstanding the entire point of Smart Income. In this episode I’m going to tell you the secrets, so you can avoid my mistakes and fast track yourself to financial freedom.
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In life, you will encounter opportunities. And our hope is that you will be best prepared to succeed by taking advantages of those opportunities. Remember what I’ve said in previous episodes:
“Success is where preparedness meets opportunity”
The key here is to be able to see clearly what really is an opportunity and what is a liability. You see, most small businesses that fail don’t fail because they don’t make money. Depending on where you live in the world, you may find yourself in an economy that is hospitable to business or an economy that is not. I found this out myself. Where I grew up (Australia) was not very hospitable to business. They had this term down there - “The Tall Poppy Syndrome”. The idea was that in a field of poppies, if any one poppy grew taller than those around it, those around it would such the lifeblood out of that poppy, forcing it to return back to the level of the crowd or die. That was my experience in Australia. I never lived a traditional life down there, so I found myself constantly being targeted either by local culture or taxes or regulation, etc. to the point where I had to leave. When I found myself in a more hospitable place to business, the United States, I thrived.
Everywhere I looked, I saw opportunities. Driving down the road I’d see retail storefront that could be some business, warehouses near air parks that could be a business, rental property that could be an income stream, etc. And in the world of technology, I was discovering what I thought were business opportunities all day long.
Once in a while, I’d bite and go full-on into a venture or a project. Most of the time I could make money out of them. I was pretty good at sensing if there was any money behind something, so I was happy trusting my gut with the choices.
But after a year or so, I’d find myself being a slave to my ventures. I couldn’t take the family on vacations without having a laptop and cell phone with me at all times. I built monitoring systems that would keep an eye on adverse events and alert me to them. But that was just another albatross around my neck. I had to hire people to keep watch on my things in my absence, which helped for short periods of time, but I could never feel content with that method for the long term. Year after year I realized that I had created businesses, but in reality I had created income liabilities. I couldn’t escape. Eventually I just got so sick of them, that at any sign of a reduction in income, I’d either let them die a natural death or I’d quit them. There was no incentive to refresh them even if they were income producing businesses because you would just have a bad taste in your mouth over what it took to run them.
I’m sure this is one of the key reasons most small businesses fail. If you talk to accountants or consultants, they’ll tell you it was because of competitors, cashflow (or lack thereof), profit, etc. But I can tell you that the #1 reason is that the owners/founders just get sick of it. They feel trapped and they start to resent their businesses. They become employees of their own creation, and realize that they created a job for themselves and not a business. If you want to learn more about this phenomenon, check out Michael Gerber’s E-Myth book. He correctly observes that most failing small businesses were never businesses in the first place. The owner just created a job for themselves, rather than accepting one from someone else. This is not how it is supposed to be.
So after decades of making these same mistakes over and over again, I finally found myself in a position where I could take a 1,000 foot view of what I had been doing and get some perspective on it. And after reviewing my own experiences, and looking at others perpetuating the same mistakes I did, I came up with the Smart Income ruleset.
Normally when I saw an opportunity, I would look at the revenue potential, the costs, the competitors, the timing, etc. This is pretty normal and most entrepeneurs would do this. But what I never did was to put a filter over that in regards to Smart Income.
There are five tests you have to apply to each opportunity and I’ll go into them in detail:
After establishment, can the opportunity be run with less than 5% of my work time?
Can the opportunity be “safely” delegated to someone?
Can the opportunity be run “remotely”?
Does the opportunity service a Maslow’s hierachy of needs low level tier?
Does the income pass the acid tests of being able to generate if I’m sick?
That’s it. If the answer is YES to all 5 questions, then it passes the Smart Income test. On the surface, many would say that few things would answer Yes. But here’s the thing.... If you know the tests in the first place, then you seek out opportunities that do successfully pass through them, and when you look with that perspective, you can literally find thousands of opportunities.
The end result of doing this is that you don’t have businesses that are liabilities to you. You have businesses you are proud to own, and proud to keep for the long term. That means perpetual income forever. If you can do this without you becoming the liability to the businesses, then you get to enjoy it.
Let’s dig down into each test in detail.
1. The 5% work time rule
Your time is valuable. You have a finite amount of it. If you disrespect it, then you will suffer. If you sell it to someone by the hour for a price, you are literally prostituting yourself. Sure, countries are based around “jobs” and most people have them. But most people have debt, can’t pay their bills, are going underwater fast, and are enslaved to banks. If you want to be like most people, have a job & a career. A career is just an excuse for a contiguous number of jobs joined around offering a certain skill to a certain market. And for most, having a career comes with the expense of paying for an education to get those skills.
You see, the unconstrained throw out these social norms. We know this doesn’t end well. So the key is how can I generate income without sacrificing my time. There are many ways, and the one statement we continually state is:
“The rich don’t have jobs. The rich own.”
So the key here is to own income producing assets. And the Smart Income filter over that is that once those assets are either acquired or created and put “online”, then you should not have to spend more than 5% of your time attending to them.
Let’s talk about “attending”. Attending is something we all do. And in many cases, we do it willingly. Consider the retired person who worked their entire life for a boss and then retired. After travel, it is commonplace to find them toiling in their backyard - planting gardens, vegetables, fruit trees, etc. They take great pleasure in watering them, weeding them, harvesting them.... “Attending to them”. Attending is something we welcome and enjoy if it is not a burden. But if you had to do this everyday, couldn’t leave your property because of the fear of not attending to your garden, etc. it would be a burden and you would not want it any more.
And that’s the key - what you have cannot be a burden. And the first test of that burden is that you shouldn’t need to spend more than 5% of your working time on the asset. Sure, if you enjoy it, you could spend more. You can upgrade, improve, etc. but the fact is that if you were sick and couldn’t work tomorrow, your asset should still be able to survive and generate income.
Sometimes we buy something that begins like that, but due to our own stupid decisions we turn it into something that needs constant attention. If you are doing that, recognize it and stop doing that. The assets we own are not meant to be our personal toys. They are meant to be income producing things. Boring, predictable and all about money. Not about anything else. The #1 mistake I see new rental real estate investors doing is to try and turn a rental property into something that they love. Well fun fact.... No one cares what you love. Your taste, your paint choices, etc. are irrelevant to the tenant. They probably hate your taste and have their own. So be neutral and be efficient. Because if you start to put all these nice “touches” to the rental property, you will be sore when you see the tenant abandon and steal them, or break them, or show other forms of disrespect to them. You will take it personally and you will be butt hurt.
And that’s ok because the property isn’t there for you to enjoy. It is there to provide a roof over the heads of your tenant. Nothing more. Your relationship is simple a lease and the tenants have rights under law. They have the right to feel secure in their own home, and the key here is that it is NOT your home. During the lease, it is there’s. You need to respect that.
So returning back to the 5% rule, the only way to know if the asset conforms to that rule is for you to log your time attending to it. The more disciplined you are, at least within the first year of putting it online, the more realistic you can be to the long term potential for keeping it online. Most of us will be disciplined at tracking income & expenses for an asset, but we don’t track our time dealing with it. Remember, time is MORE valuable than money. Your time tracking should be as disciplined as your financial tracking here.
And assets that are best suited to low time commitments will likely have some sort of automation to them. That means they are either mechanical, electronic or digital. Examples might be vending machines, web sites, eCommerce, etc. Additionally anything that has some deferred but perpetual form of income to them would also qualify. This might include commissions that are ongoing or income that is tied to revenue over time, as long as you don’t have to generate the revenue or that there is any ongoing time cost involved.
2. Can the opportunity be delegated safely?
Delegation is valuable as it provides a job for someone else. Of course, they might choose to be paid for their time, but you would never do that. However in the case where you need somenoe to attend to your assets in your absence, this is important.
There are two key parts of this test - you must be able to document a “procedure manual” for the asset and you can’t have any risk of theft or competitive threat here.
Once you have done all the hard work to create or put an asset online, your goal is to keep it running and generating revenue. Think of a gold mine - to establish the mine, once you find ground and discover gold in it, you have to have equipment setup that runs 24 hours a day, 7 days a week. When the mining equipment stops, you don’t earn revenue. Therefore you need to be able to keep it running. But you can’t do it, because that would break rule #1. Therefore you need others to do this, but you have to train them. If they leave, they let you down and then you have to attend yourself. Therefore the key is to remove any complexities and make it so that you can train and retrain quickly to handle staff turnover. Because there will be turnover. Thinking they will stay with you forever is a fool’s errand.
When you invest in documenting how to keep something running, how to handle adverse events, how to maintain and measure it, etc., you find yourself becoming objective about what you create. You can quickly see where you insert yourself into the process unnecessarily and where you can replace that with automation.
For example, let’s say there are regular bills that are predictable and need to be paid monthly for something. That is better serviced by an automated bill paying service, and if you are really smart and you use credit cards to generate travel rewards points, you would want to use a service like Plastiq.com to do this and tie it to a points generating credit card. Plastiq.com will mail out checks and pay your vendors based on a schedule you setup, and just charge your credit card. You just clear the balance on the card before the monthly statement date and avoid interest & fees, and for a small percentage of the expense, you don’t need to attend to it.
See, there’s an immediate way to reduce time in rule #1 and also to be able to remove a human from the process. Thereby removing the need to delegate anything. You could be traveling and you know the bills will be paid. Or you could be sick and your vendors won’t shut you down.
Documenting things also allow you to see things more clearly from an objective position. You will see ways to improve things by just leveraging time better or by changing the order of things. You can get more pro-active rather than reactive, meaning your costs of repairs, etc. go way down and you maximize the online time to the asset. You also can schedule ahead any regulatory or tax payments needed, and with documentation, you can then delegate it to someone and if they run into trouble tell them “Go read the manual”. It empowers them to be better at their job and that just means you get better return on their time and they stay longer because they feel empowered and appreciated.
Now on the subject of delegation, here’s something really important. You SHOULD delegate tasks to someone where possible, but in the case where there is CASH involved, that’s where you do not want to delegate. Cash is a risk. Employee theft is rampant, and you will be disappointed at least once in your asset’s life if you allow staff or delegated people to handle cash. Family members are probably fine here as they share the same goals with you, but if at all possible remove cash from the equation. Sometimes that is just impossible - vending machines, for example, need their coin & bill drawers emptied. But if you can deal with electronic payments or checks, that is way better. Even checks though need to be taken to the bank, so electronically receiving payments is always preferrable - even if you have to pay for merchant services, bank fees, etc. It just isn’t worth exposing the income of your asset to a delegated party.
Also if you have staff seeing just how much income the asset is making, wouldn’t that just make them more interested in competing with you for the same thing? Sure, it might be that they don’t have the capital to start, but you are teaching them how to do it, so you shouldn’t disclose all of it to them. By using ways to receipt income that is out of their purview then you can keep some of the “secret sauce” secret.
3. Can the asset be operated remotely?
I travel a lot and this means I have to spend a lot of time in preparation of that. Since it seems to be a never-ending cycle of preparation for travel and returning, there are two key metrics I have to look at in my quest for Smart Income.
- How much time does it take to setup for travel?
- How much damage is found when I return from travel?
If the answer to these questions is “minimal”, then you have a winner. But this is rarely the case. Setup for travel means you need some sort of feedback loop of information that allows you to be notified if there are issues. The key here is that it should be notification by some form of “push media”. What I mean from this is that you have to be notified either immediately, or daily. Daily is best done with email because you can typically pick this up anywhere on the planet that you have Internet access. And when you feel like it. You might be in transit and you do it while you are waiting. Or when you get up in the morning.
Immediate notification is best done by SMS or text message. Since we all carry mobile devices with us, they are perfect for this. But there is one small problem - the carriers in different countries require SIM card changes periodically and you will have a different phone number when you do this. That means it is better if you find a way to be notified anywhere using Data rather than SMS.
My preference for this is to use a service like Google Voice or Hangouts. Google have a nasty habit of terminating a lot of their services, especially the free ones, but so far I’ve been able to get a Google Voice number and I can pickup my SMS messages on it anywhere that I can get a data connection - whether by Wifi or cellular. This has been invaluable with long flights, particularly over the Pacific ocean when I’m in the air for 15 hours straight. Even on those flights I can get notification of anything that may need my immediate attention and attend to it while in an airplane. This is getting better and better, although not perfect. But as time moves on, more carriers are being forced to offer Wifi in long flights and I just build the cost of Wifi into my airline ticket pricing. It normally isn’t that expensive.
In the case of digital income assets that I have, I setup a server with Nagios (an open source monitoring system) that I can use to test the uptime of Internet services. If there is a problem (like a web server goes down on a smart income producing asset) I can just log remotely through my phone (using a VPN of course) and reboot it. Over time this reduces as you start to work out the issues with things and harden them, but still it removes the stress of having to worry about things while you travel.
Therefore having a good phone that can work internationally is critical. This also means you should NEVER get a phone that is locked to a carrier. You need to be able to swap out SIM cards all the time, or you will be paying a premium for international roaming and coverage. I like Android devices best for this because they tend not to be locked down as much. I use my phone to tether access to laptops if needed, and I need to know my plan allows me to do that.
If you get a phone and pay for it each month on a carrier plan, there is a high chance that the phone is locked to only that carrier. For that reason, you should never do that. Not only will it cost you more in terms of interest payments, etc. when you go to travel, you will come face to face with the limitation.
Physical smart income assets are less likely to be able to be remote controlled. So they go with the delegation part here. You need a way to be contacted by your delegated people. This just means they are humanly filling the role that some notification service would give you. In the case of rental real estate, we try and do all of our interfacing with tenants through our website which means that a “contact us” form can generate a SMS message or email depending on urgency, and we have a team of contractors who do maintenance and repairs, and if there is an event (ie. plumbing leak, tenant loses their keys, etc.) then we can have staff intervene in our absence. But best if the tenant is as self-managed as possible, so we try and incent the tenant to be self-sufficient. Our leases include clauses in which we discount the rent a little if the tenant takes care of smaller repairs on their own. That means we don’t have them calling us all the time. This is important and removes the need to remote control the properties.
If you find that you are traveling extensively, it may be that using a 3rd party property manager is best here. That will cost you 10% of the rents or so, and probably some “onboarding” fee to get a lease initiated, but depending on your situation that could be money well spent. In the case of remote rentals, there probably isn’t much of an option here.
4. Is this a Low tier Maslow’s hierachy item?
Maslow’s hierachy of needs is an important psychological study on how we move from survival to enlightenment. That we begin with the basics that we must all master - food, shelter & clothing. Physiological things that we all need to survive. After those are mastered, we move upwards to things that are supportive of a less stressful life, like energy, healthcare, communications, etc. Further up we move to higher learning and eventually being able to transcend struggle and give back to society.
But with these levels, we move up and down the pyramid based on external, adverse events. For example, if times are good (ie. we are making good money), we can splurge and buy a new TV or a new car, etc. We can invest in learning new skills, etc. We evolve. But if the economy falters, and we find that we are now in a bear market, we tend to “hunker down” and focus our attention back on survival needs.
Why is this important to Smart Income? Because if your smart income assets are focused on low level Maslow’s areas, you will get paid all the time. When your tenant lost their job and they are delving into their savings (let’s hope they have some), and they have to choose whether to pay their store credit bill for furniture or their rent, they will most likely choose rent. Because that’s a survival thing. Sure, some debt collector could come knocking to take away their couch, but if they get evicted, they are living in their car and the couch is pretty much not something they are caring about at that time.
So would you want to be renting them furniture or real estate? For me the answer is simple. Real estate. I want the power of eviction to be able to incent them to choose to pay me first - not second. Of course there are always fools out there who just pay the loudest creditor first and they are the ones that WILL be evicted. You can avoid renting to them entirely by doing proper due dilligence with reporting services because that behavior typically repeats over and over and you’ll see it not in low credit scores, but more in serial evictions on their record. And they are NOT the tenants you want.
Also remember if you are investing in smart income assets that are more luxury items, you will do very well with them when there is a bull market. When there is high employment levels, people have more disposable income, etc. they will pay you for the use of your assets whatever they may be. But if the economy winds shift, and they always do, then you will be left out in the cold at that point. Predictability is something you should strive for because it ensures you can keep the assets generating income perpetually. They shouldn’t only work within certain market cycles.
Things you might want to consider here on low level Maslow’s hierachy would be rental real estate, energy production, food production, etc. Those things are always needed and they always will have a market - whether bull or bear.
5. Does the income pass the acid test of being self-generating if I’m sick?
This is probably less of a specific property of smart income, and more of a QA step in assessing an income source as smart. But this is real world stuff. Imagine that you had to go into surgery and you had a 12 week recovery time afterwards. Most of us in our lives will go through this once or twice. Most of the time if your excuse for not getting medical care for elective procedures is that you can’t afford time off work, then you are 100% constrained. But to be purely constrained you need to ask yourself if you were sick and laid up for 12 weeks, could you still make money?
So for each opportunity that you are assessing, you must ask yourself that question. Remember the income opportunity is there to support an increase in the quality of you and your families lives. That means freedom, and being unconstrained. But if it can’t pass the acid test of operating while you are sick, you have not created anything special here - you’ve just created a job for yourself rather than a true smart income source.
So those are the acid tests. If you find an opportunity that checks all those boxes, you should have a winner. Of course there are many variables here, not least that you have the skills as an operator to put them online and run them profitably. That’s going to come down to your willingness to do what is needed when it is needed. But if you are smart, and you follow these rules, you should have assets that you are proud of, that you keep for the long term, and that generate you income when you sleep.
And that you don’t give up your time to have. With that, you retain the freedom to do everything you want out of life, spend time with family, travel, have experiences and live a rich life.
Once you have a few of these, it can get addictive. You probably want more. I mean if you are doing this right, you have spare time and you will see opportunities that others who are stressed out, on the work treadmill and don’t have the energy to see, will miss.
Let’s put this to the test. Recently I met a guy who had an interesting business. He rented plastic storage boxes to people that were moving. As I record this, we are remodeling our house and that means all the flooring is being replaced. We have to move all of our furniture and belongings out of rooms into storage and then back. I don’t believe in single use plastics simply because of environmental disposal issues, so I would prefer to pay someone to use their storage boxes rather than buying cheap ones at Walmart and creating landfill afterwards. My wife found this company that does that.
When I met the proprietor, I told him how impressed I was that he had found an opportunity. Most of his business comes from college students moving into or out of dorms at college. But for us, it was a perfect solution for short term storage needs.
I wondered if this might be a business I wanted to invest in. So I decided to apply the Smart Income filter to it. Here’s how it looked....
1. 5% time involvement - FAIL. The problem here is that in order to generate the income, you have to deliver and pickup the boxes to the customers. Although you could delegate it, the problem is the cost of doing this, gas, vehicles, transport, wages, insurance, etc. is prohibitive.
2. Able to delegate - SUCCESS. You could have entry level staff doing the delivery & pickup work, much like pizza delivery drivers. And they don’t touch cash because all of the business is done on the Internet with bookings & credit card payments.
3. Can this be operated remotely? SUCCESS. Yes, it can because the Internet is your sales force and you can make it so that it would automate the scheduling of drop off and pickup with staff. But still the staff need to be paid, vehicles need maintaining, etc. so there would need to be some hands on, but this could be done proactively and therefore it could be done remotely.
4. Low level Maslow’s hierachy. FAIL. This is a service that could be replaced with something like borrowing boxes, using cardboard, making multiple trips, etc. if needed. It isn’t critical in that people, in hard times, will find a way to move things without spending money on a luxury item here. My choice to not litter the planet with plastic is simply a luxury choice - consider it a “first world problem” solution. But if you were being evicted from your rental and needed to move quickly, this is not something you would spend money on. You’d prefer to pay your rent and not be evicted, so it doesn’t really fit with a low level item.
Therefore on analysis, I would pass. That’s me. Your mileage may vary as they say. But by demonstrating this process, you can see how the filter works in action.