In honor of financial literacy, I wanted to share on a topic that I think is one of the most important things to know financially. Learning this can be the difference between financial security and financial devastation, but unfortunately few people are taught this. In fact, most people are unwittingly taught the opposite. This topic is How to Create Crisis-Proof Finances and was the topic of my recent TEDx talk.
Check it out in the video below. (Please note that the sound gets a bit wonky around 8'14 for about 10 seconds and then comes back.)
I remember the day my boss called me into his office.
I was excited for this talk! I thought all those nights of working past midnight at the law firm had finally paid off and he was going to give me the bonus I’d been expecting. I also thought the conversation would touch upon my maternity benefits. I was five-and-a-half months pregnant and the previous week I told him I was expecting.
I walked in with a smile on my face, but my smile soon turned to shock. Instead of a bonus or generous maternity leave, I got fired.
Because I was so visibly pregnant and didn't think I would get hired in my state, I decided to wait until after I gave birth and took a short maternity period before I looked for another job as an attorney. We had some savings and my husband was a self-employed graphic designer. It would be tight, but I thought we would be fine.
My daughter was born in late August of 2008. And then the floor fell out from under our feet again.
Less than a month after her birth, the markets and my retirement account went into free fall. My husband’s graphic design business fell by 90%. We had already spent most of our savings and now I faced a non-existent job market. We were in a major crisis, and our finances were not crisis-proof.
As the months went by, we spent the rest of our savings. We racked up over $60k in credit card debt. We did a short sale on our house. We had to borrow from our kids' bank accounts. We started using food stamps. I felt like a failure.
Problems with money are about more than just inconvenience. They can be deadly.
A recent study found that people facing financial stressors, such as unemployment, past homelessness or lower-income, are 20-times more likely to attempt suicide than those who have experienced no financial strain. I saw that in myself.
I had a million-dollar life insurance policy. I was so stressed out and desperate about money that if I could have found a way to die and ensure that my family would get that million dollars, I likely would have taken my life. It’s only because I knew the insurance company wouldn't payout in the case of suicide and I couldn't think of a way to make it seem accidental, that I believe I’m alive today.
Financial crises, like the ones we experienced, are sadly far too common. An unexpected job loss, a divorce, an illness or death, or a global pandemic can suddenly set a person or a family who seemed to be on firm enough financial footing right into the quicksand.
I have been researching and working with women around money and investing for over 10 years. Data from my research shows that most people are nowhere near having a firm financial footing.
4 out of 10 Americans can't cover a $400 emergency, and 6 out of 10 Americans can’t cover a $1000 emergency! That means more than half of all people are one crisis -- one major accident, one severe illness, one pink slip, away from financial ruin, homelessness or bankruptcy.
Women are even more financially vulnerable than men. They tend to get paid less for the same work. They’re more likely to lose years of peak career growth taking care of kids or aging family members. This loss of earning power and seniority means that they are more likely to get fired first and they have fewer savings and investments.
The sad fact is that even men and women who have “good jobs” can be very financially fragile.
The lessons we culturally are taught about money, keep most people financially unsafe.
Most of us are taught to go to school, get the best job you can, put some money into savings, buy a house and nice cars and you will be fine. This is supposed success and this is security. Did you receive this message too? I did and I was following the plan. I went to an Ivy League Law School and had been making 6-figures working in the partnership track of a law firm. And yet, I still found myself and my family on food stamps.
At the time, I knew that I was in a life or death situation and I had to figure this money thing out.
I’m a learner and a seeker, so I started learning everything I could about money and prosperity. I read dozens of books, took money classes, worked with financial professionals, and I became certified as a Money Mastery Coach. I learned then, and have been implementing since, the key to true financial stability -- how to create crisis-proof finances.
So how do you create crisis-proof finances?
It’s very different from what we are taught -- that all we need is a magical job with benefits to protect us. It can be a start, but it’s a small part of the story.
Think of financial stability as a table. The legs of that table are your streams of income. Most of us are taught to put one leg under our table, your job. So what happens if you experience a crisis -- lose that job or you’re not able to work because you get sick? Your table comes crashing down.
The way to have crisis-proof finances is to have multiple legs under your table. You need enough legs that even if you lose a leg, your table stays steady, and your table stays firm.
So how do you create legs under your table?
One way -- the way most of us are taught is to get a job.
That’s active income. Your income comes from your activity. If you’re self-employed and you get paid for your time, that’s active income too. You trade your time for money.
Some people have told me, "You know, I have several legs of my table. I have three jobs." That's a more stable table. If you lose one job you have other ones. But what happens if you can’t work for some reason -- you’re sick or need to take care of a loved one? There go all your legs.
To have true crisis-proof finances, your legs cannot all be based on active income.
Most of your legs should be formed from passive streams of income - income that does not require you to trade your time and effort for money
Passive income streams take a bit of effort on the front end to set up, but once they’re in place they can continue to sustain you. Passive income is not tied to your time and comes to you whether you are sleeping, on vacation, or working another job.
When you have enough passive income legs that your passive income equals or exceeds your expenses, that’s financial freedom. At that point you work because you want to, not because you have to.
So how do you create those passive income legs?
One of our favorite ways to create legs is real estate.
Luckily, even back in 2008, we owned a couple of investment properties. In Los Angeles, real estate is expensive and can be hard to cash flow (no cash flow = no legs). In fact, we had negative cash flow. It cost us money each month to own! We weren’t educated, so we didn’t know better.
The real estate still helped us though. We were able to sell one of our properties that had equity and we reinvested that money into buying more real estate.
We started flipping houses when properties were on sale after the last crash (one leg from active income streams) and we started to buy and hold properties that were giving us passive income streams. Once a tenant is installed and is paying rent, after expenses, what you have left is passive income.
Since then, we have invested heavily in real estate. We learned strategies that allowed us to partner with others to purchase larger properties, and have expanded our investments to include residential and commercial real estate across 10 states. We have income coming from over a thousand rental doors. As you can imagine, that keeps our table exceedingly steady.
I now teach women how to invest in real estate. My mission is to help 1 million women achieve financial freedom through real estate investing. Seeing my students purchase properties and create these legs is one of my greatest joys.
Another way to create passive income legs is with intellectual property. Intellectual property are creations from the mind, such as inventions, musical or artistic creations. I have written books and courses that pay me every month. I was also blessed to be on an episode, long ago, of a major sitcom, and I still, even though this was 12 years ago now, I still receive checks from that one day of work. My son, who's in music and starred in movies, gets money every time people stream his songs or watch his films. You can use intellectual property -- create something like a book, song, or patent that you create once, but can continue to profit from it again and again. This is a great way to contribute to your legs.
Yet another way to create those legs is to have a business. A true business is different from being self-employed. A true business will work without you. You can own a car wash and you don’t have to personally wash and vacuum every car that comes through -- you hire and train employees that will work the business for you. You’ll be a business owner enjoying the income, but you needn’t trade your time for it.
And, you can create passive income through stocks and bonds. Remember, it’s income streams that create your legs though, so to fortify your table invest in dividend-paying stocks (i.e., stock ownership that pays you regularly).
So how do you get started?
My suggestion is that you take 10% or more of any income you receive and pay yourself first. Take that 10% to start investing. Invest in things like real estate that will help you create passive income and extra legs on your table.
Also, get educated, because there are ways to start creating legs that don’t require any money at all. I know a lot of people won’t even consider real estate as an option because they have a mistaken belief that they need tens of thousands of dollars in the bank to even get into the game. I want everyone to know that with the right education and strategies and some elbow grease, you can start creating legs from real estate with little to no money down.
It’s important that you start NOW to create those legs under your table because life is full of the unexpected. There's enough stress that you'll have to deal with when these crises show up. You don’t also want to have to deal with your table crashing down.
I’m so grateful to have been able to create a steady table and financial freedom in my life. I want the same for you.
Create crisis-proof finances and relax knowing that whatever life throws at you, at least your money and finances are handled.