AskDong

I’ve talked in the past about earning more money. I’ve blogged about blogging, dividends, rental income, and getting a raise. What I haven’t explicitly talked about is what earning money really means. I’m a capitalist in the Adam Smith kind of way. I believe that capitalism adds value, and funadamentally we are only paid when we add value to the world. There are of course nasty externalities and market power problems that make capitalism not as straight forward as some would like to believe, but that’s a topic for another day.

Too often we approach a money making venture, be it our day jobs or be it our alternative incomes with a focus on the numbers. How much rent can I get? What’s the dividend yield. These are not the wrong questions to ask, but they may not be the questions that truly need answering. We I really should be asking myself is, “What value am I adding?”, “What value can I add that someone else can’t or doesn’t?” Being able to answer these questions is more important than figuring out what the payday is.

For example if I think I can make money picking stocks, I shouldn’t be worried about making 20%. I should be worried about what makes me more skilled at picking stocks. Do I understand the industry better than other people, and therefore can identify companies that the general populace doesn’t properly value? Am I skilled accountant who understands balance sheets and income statements far better than the average investor? Do I associate with CEOs and know which ones are principled and disciplined? When I take the time to answer those questions, I realize I don’t have very many of the necessary skills. And that’s why on the most part I try to avoid making individual stock picks.

The same principle can be applied more generally to any endevour. People who have successful careers are people add significant value in their work. In some cases as with a salesperson, this value is easy to discern and quantify. A good sales person sells more than his or her peers and that’s the value. However for most jobs, the distinction is harder to quantify. However, to be successful it’s not just about doing your job. Almost anyone can be trained to perform a given set of tasks. Succeeding is about creating value. Too often we think of our jobs as about finishing in assignment when we really should be thinking about new ideas. We live in society that rewards those who think of and implement new ideas.

I was forwarded this . Rich Dad, Robert Kyosaski, is coming to Boston. He know is if you’ve been naughty or nice. Robert himself has been mostly naughty. He’s not really coming to Boston. Instead one of his flunkies will be coming to Boston to peddle his wares. Robert and his wife, Kim, have gotten rich off the lecture circuit and preying are the get rich quick desires of many Americans. While this particular lecture, “Learn to Be Rich” is billed as free, I’m sure there is angle in it for him to make money.

I’ve registered for a session against my better interest, but if I’m going to criticize I should at least attend a session and give it a chance to convince me otherwise. I’m curious also to see what the mindset of most of participants will be. Are people actually interested in learning real lessons about being financially secure? Or are people more interested in getting rich quick? I fear the latter even as I hope for the former.

I got my girlfriend an iPod Touch for Christmas. Her Palm Pilot and iPod Nano were both getting long in the tooth. I had given her the Palm Pilot for her birthday 3 years ago, and the Nano about 2 years ago as a Valentine gift. I thought the the Touch would be great replacement for both devices. I thought about the iPhone, but she’s on contract with Verizon. In addition much of her family and friends are on Verizon including myself. The touch seemed like a good compromise.

One problem currently with the iPhone and the iTouch is the lack of 3rd party applications. Apple has so far locked down the device, though it has promised to deliver an SDK in February. For those non-geeks in the audience, a SDK is a Software Development Kit, basically a set of tools and applications that allow programmers build programs for a given device. Without the SDK, programmers can’t officially build applications for the iPhone. This lack of an SDK and official support from Apple has meant a relative dearth of iPhone applications.

One of the programs my girlfriend uses on her Palm is inExpense. It’s a basic personal finance tracking program. It’s not much more than online checkbook, but it works great for her because she’s organized and meticulous. It’d be utterly useless for me as I’m neither organized or meticulous. I need things to be as automated as possible. I can’t be bothered with having to enter my expenses. My time is too valuable, or so I like to believe. The only available, non web, personal finance application I know of is PocketMoney which is in beta. Given that SDK is due for imminent release, I think it might be best to hold off a bit.

In all of this there is a larger issue of what the role of mobile personal finance applications are? Personally the only area I need to track is my cash expenditures, but at the same time I do like the idea of tapping into my overall financial picture on the go. Realistically however, there’s really no reason for me to know exactly what my net worth is at any given time. If my sense is off by a couple hundred dollars that’s not make or break. In my younger years knowing what my balance was on any given day would’ve been more important. I think a good portable personal finance application augments a larger system. For example while I don’t use Quicken anymore being able to note cash transaction on the go and then being able to reconcile them within Quicken is a useful feature.

The bulk of my income (98%) comes from my job, however like many other personal bloggers I’m actively concerned with growing my other income streams. Earlier in the year I detailed some methods of making money. These income streams are primarily:

• Rental Properties - I have just one right now, my old condo. (.5%/-6%)
• Interest and Dividends (4%)
• Peer to Peer lending via Prosper (13%)
• And pulling the rear in dollar terms, Blogging (30%)

The number in parentheses is my return on investment for the year. This is the first year I have income from each of these sources. Without question, making money off dividends and interest has been by far the “easiest”, but is also the most difficult one to earn out-sized returns (at least for me).

Rental Property
I reported two number as my return, both are calculated as function of the money I put down (the down payment). The lower number, -6%, reflects that on cash flow basis I’ve lost money. I don’t generate any income on this property as I have to augment the rent I receive to cover the mortgage payment, condo fee, and taxes. The higher number, .5%, reflects increased equity.  Given that a portion of what I’m paying towards the mortgage is applied to the principal, I am in effect also paying myself.  That should count for somethig, though I doubt seasoned real estate professionals would ever count it.

Interest and Dividends
I’ve earned the most money in dollar terms via interest and dividends and expect this will continue to be case in 2008. My 4% return is reflective dividends and interest paid as a function of the amount invested. It does not reflect higher (or lower) stock prices.  I am expecting a dip in dividends and interest in the coming year given the lower interest rates, and the tough economic climate especially as related to banking stocks. Bank stocks are some the best paying stocks out there, but some like Washington Mutual have already cut their dividends. They are amongst the hardest hit companies by the ever expanding housing and subprime crisis. I would expect a dividend cut from many a bank.

Prosper
I haven’t put much money into prosper, only a few thousand, and have been lucky to have had no defaults as of yet. The 13% return is reflective of the total I’ve put into prosper, not just what I’ve deployed which is only 2/3rds of that amount. While it’s still early, I think I’ve been able to keep my default rate fairly low by both being selective on the borrowers I’ve lent to and actually reading each profile in detail.  Even though I’ve been lucky with defaults, I should anticipate that a few of might lons may not pan out, and pre-emptively earmark amount as an expected loss which would reduce my rate of return.  The biggest problem for me is how I approve loans, it’s hard for me to scale as I don’t want to dedicate all my free time bidding on loans.

Blogging
This is the income source I’m most interested in growing.  Not because I think I can earn the most money - the fact I’ve been able to cover my costs has already made me happy. I expect dividends and rental properties will be my primary sources of alternative income later in life.  Blogging however is the one I have the most fun doing, and earning more by it really gives me a great sense of satisfaction. It’s primarily my hobby, and secondly an income earning venture.  That said I’ve made a great return on capital (though not labor) as I’ve spent less than $50 on hosting for the year.  I would still have a computer and Internet connection even if I wasn’t blogging so I haven’t included those as part of my cost.

I like many bloggers have aspirations to have a decent stream of “side” income.  Lazy Man and Money calls this Alternative Income. Others call it passive income.  Jonathan at MyMoneyBlog questions if it (being passive income) exists at all. He offers a great breakdown of typical income streams that many of us might define as passive, and asks how passive are they really?

I agree, I think many of the income streams that are typically defined as passive are hardly passive. Rental properties can be ton of work.  Effectively picking good dividend paying stocks is hardly without substantial risk.  Writing the next number one hit doesn’t just happen.  All these “passive” incomes are however unrelated to any kind traditional employment.  Being a landlord is a form of self-employment. As is being a stock or mutual fund picker.  These passive income streams are all in some way or another a form of entrepreneurship.

I think the labels “passive” and “side” do not fully convey the entire purpose of having additional income sources. In my mind these additional income sources form the bed rock of what I consider “sustainable” income. I use the word sustain to convey two meanings.

1. To bear up under; withstand
2. To supply with necessities or nourishment; provide for

Even if you’re in stable job, employment (other than self-employment) is always at the whim of someone else.  For that reason I think it’s not only important to have an emergency fund, but additional income from other sources. Self-employment is not necessarily stable, but those who are self-employed generally enjoy a level of control that conventional jobs can’t give.  Ideally this income becomes large enough to sustain us.  In that light the day job becomes the “side” income.