The Life Business™ Blog

Move over “Rule of 72”, here comes the “Rule of 4”

John Eckblad

This article speaks specifically to 3 Life Business™ tenets
(see below in our Blog - What successful businesses teach us about…. money-management - for a review of the 21 life-rich Life Business™ money-management tenets.)

1. focus on improving your life’s “net worth”, NOT your money’s.
2. commit to bringing life satisfaction forward in time, DON’T save for a rainy day.
3. optimize cash flow, NOT wealth creation.

The Rule of 72
Most of us have not only heard of the Rule of 72, we’ve used it at one time or another in reviewing our financial plans. The Rule of 72 lets us determine either how many years it will take to double an amount of money at a specific rate of return or the complement – what rate of return it will take to double an amount of money in a given number of years. To get answers we divide either an interest rate or a number of years into 72.

Example
I want to know how many years it will take me to double, say, $50000 at a 3% rate of annual return. I divide 3 into 72 and I find that it will take me 24 years.

Or, I know I want $100000. (double $50000.) in 6 years time and I want to know what rate of return I’ll need to achieve this goal. Here I divide 72 by 6 and find that I’ll require a 12% annual rate of return.

This, of course, is all quite useful. If I’ve worked through my Life Business™ Gameboard I know how much money I have today and I think I know how much I’ll need Long-term, say, in 8 years. If the amount I need is double the amount I have, using the “Rule of 12″ I know my current stash will need to grow by 9% (72 divided by 8 years) a year to achieve my goal.

Unfortunately, the “Rule of 72″ is often associated with exercises in pishful winking, as in, “Wouldn’t it be great to have double what I have today – wonder how quickly I can do that?” In the end, If we don’t know what we want to achieve in 8, or any other number of years, we really can’t ever answer the question – “How much is much enough?” and in trying to find an answer to this question the “Rule of 72″ isn’t any help.

The Rule of 4
Let’s explore the possibility that not only do many of us not need to double our financial assets going forward but, quite possibly, we are not leveraging the assets we already have to help us achieve the maximum amount of satisfaction available to us today.

Take, for example, the easy case of the over 60 year old. Numerous financial commentators have made the point that our guy has at least an 85% chance of not using up his (or her) financial resources in his lifetime if he spends down up to 4% of those resources annually for the rest of his born days. This, my friends, is the Rule of 4.

This is comforting news for those of us who depend on our nest eggs for helping to support us in retirement. It is particularly comforting if our Gameboard (see Blog articles below describing the Life Business™ Gameboard) indicates that an annual distribution of 4% of our current financial assets will indeed “float our boat”, i.e. enable us to achieve our life plans.

The Plot Deepens
Yet the real Life Business™ challenge comes when our life plans do not currently require a 4% annual distribution of our financial assets to fund them. In this situation we can accurately be said to have more money than we have life. For example, some folks can live their lives without ever calling on their retirement funds. Often people in this situation just let their funds grow and then at their death they gift their offspring and/or favorite charities with, what has become, an ever-increasing pile of potential resource; That’s potential energy, not kinetic energy. Who got the benefit of this resource from the time it was earned until the time it was given; Citibank, Merrill Lynch, Credit Agricole? Life Business™ work challenges its participants to think about themselves and their money in a different way.

The Life Business™ “Rule of 4” requires that each of us, starting at age 60, take an annual distribution of 4% of our financial assets, whether or not we think we need these funds to live on. The challenge is to figure out what it is we can best do with these resources now, today, to increase our satisfaction and the life satisfaction of those closest to us. If it’s a good idea to give away money or something that money could buy, at the time of our death, why is it a less good idea to do it now when we may get the chance to see the actual benefit of our gifts. Lives and capabilities expanded today return individual, family and community benefits today rather than at some future time.

Example
Bob is 62 years old. His Life Business™ work has helped him understand that he hasn’t really retired but is now working on achieving other goals, not all of which are tied to earning a living: time with his wife doing things they now are taking the time to do, assisting his children during employment crises, building up his skills and confidence in his hobbies, actively supporting young people in gaining the skills and opportunities that have enriched his life.

Bob’s Gameboard shows him that he needs about $55000. per year to both “invest” in these Life Businesses and meet his irreducible overhead “expenses”. Between Social Security payments of about $12000, income from real estate rentals of about $24000, and his wife’s contribution of $13000. towards ½ of their shared overhead expenses, Bob is short about $6000, (55000 -12000 -24000 -13000 = 6000). Bob’s taxable and tax-deferred financial assets come to about $350000. Instead of taking $6000. out of these accounts to make up his annual short fall, Bob operates the “Rule of 4” and annually distributes to himself $14000. i.e. 4% of his financial assets (350000 x 4%). Thus the “Rule of 4” challenges Bob to find $8000. of additional life satisfying projects to invest in annually. Ah, the life of the venture capitalist!

John Eckblad

One of the most important values successful businesses teach us is to bring satisfaction forward in our lives…. and one of business’ greatest teachers of this value is Warren Buffet.

Most of you, I’m sure, have noted Buffet’s $31 billion gift to the Gates Foundation about 3 weeks ago. Actually, the $31 billion is just the largest chunk of a $37.4 billion basket of gifts to Gates and Buffet’s own family’s foundations.

There are a number of thought-provoking aspects of this incredibly generous act:
1) Buffet gave this gift now rather than at his death
2) Buffet gave this gift to a foundation, not to his own descendants
3) The sheer size of Buffet’s gift

What can we learn from Mr. Buffet’s behavior? In effect, Buffet is teaching us to….

• Give our gifts now

Buffet saw a trade-off…. the funding of important social goals today or accruing the largest possible personal fortune today. In making his gift, Buffet has decided that the achievement of these social goals is more important to him than having the largest possible personal fortune.

Whether or not we would have made this same decision there is something very important that we can learn from Buffet’s act. Buffet is telling us that given that achieving social goals is more important to him than amassing great personal wealth, he is bringing this satisfaction forward in his life. This way Buffet gets to actually feel the satisfaction now while he is alive rather than only satisfying others when his estate is eventually paid out.

This is classic good business. An industrial client of mine, a Welsh managing director of a large chemicals division, first asked his reports whether or not it made sense to be in a particular business 10 years hence. When the answer to this question was a resounding “no”, my client then asked “why then does it make sense to be in this business today?” The push was to bring the satisfaction, or rewards, of running a more efficient business as far forward in time as could be made possible.

Interestingly enough. increased inheritance tax exemptions, now applicable in the U.S., reward tax payers for making life time charitable contributions. Tax advisors often recommend that any giving be done before death when any deduction from income reduces one’s income taxes (International Herald Tribune, Some heirs won’t like tax bill before Senate, Floyd Norris, June 28, 2006.) And, because inflation undermines the long term value of money, tax deductions taken sooner often are more “efficient”, i,e, rewarding, than tax deductions taken later.

• Invest our resources where they will give us the most meaningful return

“ ‘I love it when I’m around the country club, and I hear people talking about the debilitating effects of a welfare society,’ he (Buffet) said. ‘At the same time, they leave their kids a lifetime and beyond of food stamps. Instead of having a welfare officer, they have a trust officer. And instead of food stamps, they have stocks and bonds.’ ‘I’m not an enthusiast of dynastic wealth, particularly when 6 billion others have much poorer hands than we do in life.’” (International Herald Tribune, Buffet always intended to give it away, Jeremy Peters, June 22, 2006).

Is Buffet’s act a blind selfless casting of riches in a random whirl? No, it’s an “investment”; an investment in what Buffet has found personally rewarding. Buffet has learned that supporting social progress is rewarding to him; more rewarding, in fact, than further enriching his heirs. In a way similar to how he has historically committed his resources to the purchase of companies, Buffet is betting big on the satisfaction he believes he can get today from more than doubling the resources of the Gates Foundation.

• Commit big to what gives us meaningful returns

The papers have been a buzz now for several weeks with Kirk Kerkorian’s proposal that would bring Renault, Nissan and General Motors into closer collaboration. The detail has Renault and Nissan purchasing 20% of General Motors for about $3.3 billion. This is less than 10% of Buffet’s commitment to social improvement. It looks like Buffet could have purchased 2 corporations the size of General Motors for the amount of his gift to the Gates Foundation. Obviously. rebuilding car companies is less rewarding to Buffet than improving education and healthcare in poverty-stricken countries.

Not only is $37 billion a large number, it represents 85% of Buffet’s personal fortune. Buffet’s challenge to us is - If you have identified where your satisfaction lies, go after it in the biggest possible way.

Achieve your highest life priorities in a world of scarce resources

by John Eckblad

In the Life Business™ approach to active life management, our life planning matrix, a fairly sophisticated spreadsheet we call the Gameboard, is the anchoring document on which all subsequent action is based and against which all actions subsequently taken are evaluated.

This matrix is the product of figuring out what’s centrally important in your life; deciding what, now and in the future, you intend to do to guarantee and improve your life satisfaction; and budgeting time, money, talent, and/or motivation in support of these dreams.

Never really completed, your Gameboard models your best thoughts at any given moment as to your life priorities and the investments they will require over your likely life span.

In our opinion, a Gameboard-like personal life planning matrix is the only truly meaningful statement of due diligence, i.e. what your life is all about, the actions you have chosen to take to achieve your goals and the resources you are committing to this achievement.

Within the Gameboard’s planning environment anything is considered possible. But when all the resources required to make your Gameboard come to life are summed up, you may well find that you have more life than resource. Should this be the case one or more “Trade-offs” may be in order.

A Trade-off is the value to you of one thing in terms of the value to you of some other thing. In the same way that there is surely more than one way to skin a bear, any specific priority can be achieved in any number of ways, some of which will be more efficient in the use of resources than others. Similarly, any particular resource may be used to support the achievement of any number of priorities, the achievement of some of which may be more important to you than others.

Making the point again, Trade-offs can be discovered both among: 1) your priorities – what, if you were able to achieve it, would give you the highest personal reward? and 2) the means of achieving a given priority – what is the resource that will have the most impact and/or be the most efficient in realizing my priority?

In this series of articles we will look at:

• #1 Trade-offs: Use the “right” resources at the right time; Fund with time, money, talent, motivation or drudgery.
• #2 Trade-offs: Realize the value of scarce resources; Reap the powerful existential rewards of making choices concerning which goals to pursue.
• #3 Trade-offs: Consider a 3-year planning strategy for couples; Turn scarcity into satisfaction.

Look for the first of these articles in this space during the month of November. To learn more about the Life Business™ Gameboard contact john@lifebusiness.com or vic@lifebusiness.com

The Inappropriately-timed Mixed Metaphor of the Month Award goes to…..

“The family at the end of the day cannot sit on the fruits of the fraud.”
Anonymous

International Herald Tribune, p. 14
July 7, 2006

Certainly, advice we should all keep in mind in planning our own estates.
Spoken upon the death of Kenneth Lay, past, and last, Chairman of Enron.

“The chief part of human happiness arises from the consciousness
of being beloved.”
Adam Smith

as quoted by David Brooks
International Herald Tribune, p.7
July 4, 2006

Is this really the “invisible hand” speaking?
What would an economy look like that truly embraced this value?

Would Adam Smith see a contradiction between “laisser faire” economics and valuing “being beloved”? The Larousse Dictionnaire defines “se laisser faire” as “to let oneself be taken advantage of”.

As my stepson has often said – “that goes huh.”

There must be some real magic in it somewhere as it was Adam’s book that Bill gave to Warren in exchange for a $31 billion bean contribution to the Gates Foundation.

What successful businesses teach us about…. money-management

• focus on improving your life’s “net worth”, NOT your money’s.

• identify and legitimize your life-enriching dreams.

• commit to bringing life satisfaction forward in time, don’t save for a rainy day.

• distinguish between dream-required investments and necessary support expenses.

• invest in your dreams and fund support expenses as efficiently and tightly as possible.

• continue to squeeze resources out of support expense.

• invest these found resources in the achievement of your dreams.

• invest in your dreams short, medium, and long term for a more satisfying life.

• live your life as an entity; consider dreams and means concurrently.

• budget your energy, time and money to enable, not limit, your plans.

• strive to meet your budget – it’s problematic to go over or under.

• project your budget over at least 10 years to establish a modeling environment.

• experiment within this environment with the implications of nearly limitless choices.

• plan a “0” in the last cell of your projection, its problematic to be over or under.

• understand the difference between risk and volatility.

• learn that your only real risk is not having funds when your dreams require them.

• employ both the asset and liability sides of your financial life to realize your dreams.

• fund with any combination of earning, saving and/or borrowing that floats your boat.

• optimize cash flow, NOT wealth creation.

• determine the allocation of your assets by how much you need and when you need it.

• develop the analytic and reporting tools that assure that the above things happen.

™Life Business Development Corporation www.lifebusiness.com

“Life is short. The last check you write should
be to the undertaker….and it should bounce.”

Bob Hudson
67 year old American explaining why he sold his XKE for $26000 and then used his $14000 savings to hunt polar bears in the arctic.
International Herald Tribune, p.4
May 29 2006

Life Business International runs both 1-day and 3-day Workshops based on our 13-Step individual, couple and family empowerment process.

Over the last 25 years, more than 3000 people from many countries have attended these Workshops in the US, Europe and the UK.

• For information on dates, places and fees for our 3-day Workshops please contact Vic@lifebusiness.com

• For information on dates, places and fees for our 1-day Workshops please contact David@lifebusiness.com

• If Your Life Were a Business Would You Invest in It? - The 13-Step Program for Managing Your Life Like the Best CEOs Manage Their Companies. by John Eckblad and David Kiel (McGraw-Hill 2003)

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