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Asset and liability management, practical financial statements, risk control, asset allocation, tax planning, etc., are tools used by companies worldwide in corporate finance to achieve their goals. Who says these techniques can't be applied to individuals? Companies hire financial directors to manage finances, and families also need such roles to handle their finances.

Although not many people think this way, in reality, everyone has two unique "businesses": labor and assets. Viewing these two together is like owning a complete "family limited company."

1. Your Limited Labor

From birth to death, the labor one can provide is limited. Whether you are an office worker, a soldier, or a small business owner, ultimately, you are engaged in a business that converts labor into cash. Just like natural resources such as coal, natural gas, and gold, your potential labor is finite and will deplete over time. When starting a family, one must consider not only their own labor but also that of family members (such as spouses and children). The financial goal of this labor business is to convert it into financial assets as efficiently as possible. Regardless of the job, it is essentially about selling one's skills and energy.

2. Your Assets

The second business is managing the assets you have earned or inherited through labor, such as houses, savings, retirement accounts, etc. You have two main goals in asset management: first, to manage properly and achieve asset appreciation; second, to generate cash flow from assets to support daily consumption and investment. Consumption includes food, clothing, housing, transportation, education, and entertainment, while investment includes future human capital investments, such as further education and improving earning capacity.

These two businesses can complement each other or be viewed independently. Conversely, their management methods must complement each other. The financial director overseeing these two businesses can simplify their goals into the following three points:

1. The generated cash flow is sufficient to support current and future consumption, while also leaving surplus funds for self-investment, achieving an "industrial upgrade" of labor and assets.
2. Maximize the net worth of the family limited company, where net worth refers to the total after-tax value of labor and financial assets.
3. Properly manage the inheritance to be left to family members (including family members' asset management capabilities), while also considering the possibility of bequeathing the inheritance to other groups. Although this goal is valuable, its priority should clearly be last. If the first two points are not well managed, the third point cannot be discussed.

Next, let's use a simple example to explain how these "businesses" influence each other. For simplicity, this article will estimate the future salary, investment returns, and retirement benefits of a young person. Important financial concepts will be introduced in a similar manner throughout the book. Meanwhile, tools are provided on the website familyinc.com, allowing readers to personalize the examples based on their own situations.

The net worth of the family limited company summarizes three major components: the after-tax labor income at today's expected value; the present value of after-tax social security benefits; and net financial assets (financial assets minus financial liabilities). In short, this family accumulates assets during their working years by converting labor into money and future social security benefits to support expenses after retirement.

This diagram is overly simplified; from a realistic perspective, the estimated assumptions may not be entirely accurate, as the environment is constantly changing. However, in terms of concepts, insights, and the presentation of planning tools, this diagram is quite effective. On one hand, if this 25-year-old does not continue further education, they may have some concept of their future financial outlook. However, if they plan to apply to law school, they may need to reset assumptions to reflect the impact of becoming a lawyer and compare it with the original diagram. Several concepts highlighted in Figure 1.1 will be gradually explained in this book.

The net worth of the family limited company is an extension of the definition of net worth (all financial assets minus liabilities), treating expected lifetime after-tax income and retirement benefits as an asset, highlighting several important principles:

Most people's largest asset is future work income, so when net worth reaches its peak, financial assets are often at their lowest. This illustrates the opportunity cost of working, unemployment, or "over-time" studying (i.e., the value sacrificed for alternative income). In other words, if this young person decides to attend law school, they need to calculate carefully, ideally ensuring that the salary from the new job compensates for the educational expenses and the income lost during their studies.

As the family limited company enters its later stages, career success relies on gradually increasing income and the compound growth of financial assets. Figure 1.1 shows that this young person takes about 25 years to accumulate $180,000 in financial assets, which then triples in the next 17 years to reach $570,000. To realize this potential growth in financial assets, one must save early and begin enjoying the process of compounding. Starting to save in mid-life will inevitably put one's financial security at a disadvantage.

When it comes to financial security, financial management ability is key, but this is often overlooked.

Figure 1.1 shows that savings and capital appreciation account for about 20% of total lifetime consumption assets (including labor and retirement benefits), but most people are often unwilling to spend time managing this "business." How many people do you know are willing to spend 20% of their time managing personal assets?

According to the net worth structure of the family limited company, retirement assets are at best mandatory purchases of government-guaranteed inflation-indexed annuities, which are part of financial assets. This asset itself does not directly provide financial security and may actually lead to reduced payouts due to future policy changes. Regardless, retirement benefits are an important asset for most people and a key component of financial planning.

Financial Management of the Family Limited Company: The Ten Inevitable Variables and the Responsibilities of Family Financial Managers

Net Worth Structure of the Family Limited Company: Ten Variables Affecting Financial Security#

The net worth structure of the family limited company is designed for individuals who are single or have families, outlining ten unavoidable variables that affect personal and family financial security. Here are these ten key factors:

1. Salary Rate: Salary and Bonuses
   This refers to the income you can earn each month, including base salary and additional bonuses or allowances.

2. Duration of Employment: How long can you work?
   The length of time you can maintain this job is an important variable in financial planning; a long-term stable job can provide you with continuous cash flow.

3. Savings Rate: How much do you save from after-tax income?
   This is a percentage of your income that determines how much wealth you can accumulate each year, thereby affecting your family's financial situation.

4. Consumption Situation: What are your expenses?
   Your daily expenses, such as rent, food, education, and medical costs, directly affect your ability to save and invest.

5. Reinvestment Rate: What is the expected after-tax return on investments?
   The return on investments, especially considering after-tax returns, directly affects the speed of future wealth appreciation.

6. Life Expectancy
   The life expectancy of you and your family members will determine the amount of funds needed after retirement and the standard of living after retirement.

7. Family Inheritance
   The amount of family wealth you can inherit, including real estate, savings, etc., will affect your family's financial situation and future financial planning.

8. Tax Rates on Income, Capital Gains, and Property
   The tax burden you face on income, capital gains, and asset transfers will affect the efficiency of wealth accumulation and transfer.

9. Retirement Eligibility and Policies
   Retirement benefits, government pension policies, and their changes will also have a significant impact on your and your family's future financial situation.

10. Inflation Rate
    Changes in inflation will affect your purchasing power, so you must consider how to cope with potential price increases in financial planning.

Controllable and Uncontrollable Factors in Financial Planning#

Among these variables, the first seven are primarily controllable. In other words, as you gain more favorable information, you can adjust your strategy at any time to achieve your financial goals. The last three variables (tax rates, retirement policies, and inflation rates) cannot be controlled by you, but they will still have a significant impact on your family's finances, so they must be considered in financial planning.

Responsibilities of Family Financial Managers#

As the financial manager of the family limited company (i.e., the family financial manager), you need to undertake the following responsibilities to ensure the health and sustainability of family finances:

1. Cash Management
   Ensure that family funds are sufficient to meet short-term needs, such as daily expenses, bills, loans, and emergencies.

2. Balance Sheet Management
   Manage the family's assets and liabilities, including balancing liquidity, risk tolerance, and appreciation needs.

3. Profit and Loss Management
   Monitor the family's cash income (such as salary) and expenses (such as monthly expenditures), and create a budget to regularly check the comparison between actual spending and the budget.

4. Family Labor Decisions and Development
   Manage and invest in the skills of family members to ensure they can seize the best employment opportunities.

5. Risk Management
   Control family risks through self-insurance and third-party insurance management.

6. Asset Allocation and Investment Decisions
   Develop suitable asset allocation and investment strategies based on the family's needs and risk tolerance.

7. Managing Entrepreneurial Investments
   Provide the necessary funding support for family businesses to enhance family human and financial resources.

8. Advisor Management
   Manage the advisory team related to financial planning, including financial advisors, lawyers, estate planners, and other professionals.

9. Tax and Estate Planning
   Develop and manage tax and estate planning to minimize burdens.

10. Education and Training
    Teach family members how to become qualified financial managers and impart relevant financial management experience.

11. Successor Planning
    Create an environment suitable for the growth of successors, so that the family business can be passed down and maintain long-term financial stability.

The Macro Environment and Trends: Skills and Knowledge Required by Financial Managers#

To adapt to the increasingly complex financial environment, every family needs a capable financial manager to meet these challenges. Here are several important factors contributing to this trend:

1. Increasing Lifespan
   With the increase in average life expectancy, the time relying on savings and investments after retirement has become longer. The average retirement lifespan of American men has increased from 4 years in 1960 to 16 years, a 300% increase.

2. Frequent Job Changes
   With globalization and intensified market competition, many people will change jobs more frequently throughout their careers. Nowadays, a young person may change jobs more than ten times, making the long-term relationship between individuals and a single employer increasingly unstable, requiring families to make corresponding financial adjustments.

3. Declining Union Membership and Collective Labor Agreements
   The proportion of union members in the U.S. has decreased, and traditional corporate pension plans (fixed pensions provided by companies) are also declining, replaced by individually managed 401(k) retirement plans. This means that more financial responsibility and risk need to be borne by individuals.

4. Rising Healthcare and Education Costs
   The costs of healthcare and education are rising year by year, usually at a rate higher than general inflation, putting tremendous pressure on family finances.

Although financial planning cannot accurately predict the future, it remains an indispensable part of every family's financial management. A proper financial plan can help families cope with various uncertainties and lay a foundation for future financial security. The responsibility of family financial managers is to ensure the effective management of all financial decisions and resources, so that families can maintain financial stability when facing risks and challenges.

Be Your Own Financial Manager

For those suited for college in terms of inclination, skills, and personality, investing in education is the most stable way to secure financial protection and create wealth.
Most people know that completing higher education means higher rewards, and in addition, there are many benefits: reduced unemployment; easier job changes, choosing work locations and industries; extended career options, etc.
The ability to extend one's career acts like insurance, allowing you to continue earning even if you haven't achieved your financial goals by retirement age. Doing so can enhance earning capacity while significantly shortening the time you depend on financial assets for living expenses in later years.
The economic benefits of education vary. When considering career investments, consider majoring in mathematics, science, and engineering, as these skills typically yield good economic returns.

This way of thinking allows you to view job choices with the mindset of investing in stock options—unlimited profits but limited losses.

The value of stock options depends on several variables:

1. Time: The longer the time to exercise the option, the higher the value of the option.
2. Volatility: How much does the price of the underlying security fluctuate? Since exercising is the right of the option holder rather than an obligation, the higher the volatility, the higher the value of the option.
3. Price Difference: How much higher or lower is the exercise price compared to the current price? The more "in the money" the option is (exercise price lower than the current price of the underlying security), the higher its value.

In the context of labor allocation decisions, the time variable refers to the duration of an individual's career, volatility refers to the potential ups and downs of the job market and industry, and the price difference refers to the total compensation (including salary, bonuses, stock options, professional development opportunities, etc.) at a given time compared to the market conditions for skills and responsibilities. Using this framework to think about job decisions will yield some unique conclusions.

Using Investment Principles to Evaluate Career Opportunities#

The following explanation can apply investment principles to determine career paths. While all factors need to be considered, I will introduce them in order of importance.

1. Determine the Perspective on Risk and Return#

When evaluating an opportunity, the first step is to determine the potential risks and returns, and clarify the key assumptions behind these perspectives. Investors can allocate funds between stocks and bonds; similarly, job seekers can choose to invest their labor in career opportunities that differ significantly in risk and return. Understanding the importance of different types is crucial: first, the type of risk and return associated with a job will affect how personal financial affairs are managed (as mentioned in the third part); second, clarifying one's views helps set conditions for career development from the outset. For example, after purchasing bonds, investors will pay attention to changes in the business risks of the issuing company. If a stable job is chosen but the company performs poorly, threatening the original stability, it will be necessary to reconsider the initial decision. Just as professional investors have a set of stock selection logic (criteria for choosing stocks), you should also have a logic for labor selection, allowing for timely reflection and adjustment of decisions as circumstances change.

2. Assess Long-Term Growth Potential#

For long-term investors, growth is the primary driver of value. This is especially important for professionals. An employee's career can last up to 50 years, much longer than most financial investors' investment cycles, meaning employees have a greater opportunity to benefit from the compounding effect of long-term growth. In addition to salary, "luck" in the workplace often brings many non-monetary returns, such as smooth promotions and avoiding unemployment.

Over time, an employee's wealth can change dramatically as a result. Assume two classmates start working simultaneously and both receive stock options worth $10,000, with both companies having a price-to-earnings ratio of 20. The only difference is that one company belongs to a rapidly growing technology sector with a 10% annual growth rate, while the other is in a mature traditional industry with only a 3% annual growth rate. If the price-to-earnings ratio remains unchanged over 30 years, the employee at the tech company will ultimately receive stock options worth $1,640,000, which is 12 times the $140,000 received by the employee in the traditional industry.

Because predicting long-term growth is very difficult, investors (and employees) should consider various factors when assessing growth, rather than focusing on a single factor. For example, many technology companies grow rapidly because their products and services are in high demand, but generally, the ideal situation is for companies to demonstrate the ability to create trends rather than merely relying on market expansion for growth. Companies that excel in market share, geographic layout, outsourcing, new product launches, and mergers and acquisitions will still have opportunities to achieve long-term goals even if one strategy becomes ineffective.

3. Review the Company's Capital Efficiency#

Financial metrics that investors focus on include return on equity (ROE), return on assets (ROA), return on invested capital (ROIC), and return on tangible assets invested capital (ROTIC). Although these ratios differ, their purpose is to measure the relationship between a company's profitability and its use of capital. Personal preference leans towards ROTIC because this metric uses the purest operating cash flow and capital data. While this is not a strict scientific standard, companies that perform well typically maintain a ROTIC of over 20%, which is sufficient for investors and creditors who bear risks and expect returns.

This number is significant for both investors and employees. First, companies with high ROTIC can withstand competition and maintain profits; second, it reflects the amount of investment required for the company to expand its business. Companies with high ROTIC can often achieve growth without needing to raise capital.

In addition to focusing on ROTIC, excellent companies should also have stable cash flow and effectively manage asset loss risks. If the risk is low, investors are willing to accept a relatively lower ROTIC. The importance of this metric for employees lies in its reflection of the value created by the company through its services or products. High capital return rates indicate a high level of differentiation in business, creating significant barriers to entry for new competitors; conversely, low capital return rates indicate a lack of competitive differentiation.

In general, companies with high capital return rates tend to be "light asset" companies, meaning their competitive advantages primarily come from intangible assets such as talent, brand, and intellectual property, rather than heavy assets. For example, real estate agencies, investment banks, and management consulting firms rely almost entirely on employee capabilities and typically offer high bonuses and rewards for outstanding performance. In contrast, capital-intensive industries such as steel, utilities, and manufacturing often attribute their competitive advantages to assets, production processes, or equipment investments rather than employee capabilities. Such companies usually only provide generous compensation to senior management, while ordinary employees face lower wages. If a company's operations encounter challenges (which will inevitably happen), I would prefer to work for companies that invest more in talent rather than those focused on assets.

Finally, companies with higher compensation are generally less likely to fall into financial difficulties because they can consistently generate enough cash flow to repay debts without needing to raise capital to maintain performance.

4. Focus on Robust Business Models#

Investors typically choose business models that can maintain resilience even in the face of unexpected events, and employees should do the same. The market is constantly changing, and unexpected situations arise frequently; some companies inherently possess greater adaptability. The following conditions are worth noting:

• Predictability of Revenue: The long-term growth rate of the market is almost impossible to predict, so investors generally prefer companies with predictable revenue sources. For example, investment funds, aftermarket services, heavy equipment industries, and international courier companies have relatively stable revenue sources and can maintain resilience during economic fluctuations. In contrast, luxury goods industries, such as high-end department stores, have relatively unstable market environments.

• Fixed Costs vs. Variable Costs: Companies with a higher proportion of variable costs are better able to withstand revenue fluctuations. For example, consulting industries such as accounting firms and law firms often have over 80% of their total costs related to employees and daily operations as variable expenses, allowing them to flexibly adjust personnel numbers to adapt to changes in revenue. In contrast, industries with very high fixed costs, such as airlines, find it challenging to adjust capacity when demand decreases, making layoffs difficult and costly, thus making them more vulnerable to market fluctuations.

• Safety of Company Assets: If a company's assets are short-term and can be quickly liquidated with low risk of depreciation, they are generally safer than long-term, illiquid, and potentially depreciating assets. For example, consulting firms primarily rely on accounts receivable as their main asset, which is easy to liquidate, and the collection period is usually 30 to 45 days, while airlines depend on fixed assets like airplanes, which are difficult to liquidate quickly.

• Local Service Models and Minimal Technological Disruption: From a long-term investment perspective, investors and employees should pay attention to the impact of global trade and technology on companies. In the coming decades, low-cost regions such as China, India, and Mexico will continue to expand in labor-intensive industries. In contrast, industries with strong local services and minimal technological disruption will have advantages. For example, healthcare, security, maintenance, and education industries have strong local characteristics and close interactions with customers, making them resilient to the impacts of globalization and technological innovation.

Using investment principles to evaluate career opportunities is a valuable way of thinking that can help us analyze and choose career paths more rationally. Investment principles emphasize the balance of risk and return, optimal resource allocation, and maximizing long-term value; these concepts are equally applicable to career choices. Specifically, career opportunities can be evaluated from the following aspects:

1. Expected Returns#

The returns from career opportunities can be measured through salary, career development, personal growth, and social influence.

• Salary Returns: This is the most direct return, which can be measured through salary, bonuses, stock options, etc.
• Career Development Potential: Does the position have upward mobility? Can it provide you with more responsibilities, higher salaries, and more resources in the coming years?
• Personal Growth: Does the career opportunity allow you to learn new skills, enhance personal abilities, and increase future career transition or advancement opportunities?
• Social Influence and Reputation: Certain industries or companies may grant you greater social influence or higher industry reputation, especially in well-known multinational companies or innovative enterprises.

2. Risk Assessment#

A key principle of investing is to measure the relationship between risk and return, and career opportunities also require similar risk assessments.

• Industry Risk: Is the chosen industry in a growth or decline phase? Some industries (like technology and healthcare) may have more long-term growth potential, while traditional industries may face greater external competition and challenges.
• Company Stability: Is the company financially sound? Are there potential factors that could impact stability, such as mergers, layoffs, or other issues?
• Job Uncertainty: Some positions may be temporary or contractual, lacking long-term stability. Assess whether the position has sustainable employment security.
• Skill Replaceability: Is your position easily replaceable by automation or technological advancements? The market demand for certain skills may be short-lived, requiring an assessment of career sustainability and adaptability.

3. Time Value#

In investing, the time value refers to the need to discount future returns to compare them with present returns. In career planning, the time value means you need to have clear expectations about how you use your time and the potential for future career growth.

• Short-term vs. Long-term Goals: Some career opportunities may yield high returns in the short term but may have limited long-term growth. For example, high-paying positions may be relatively busy and stressful but lack career advancement opportunities. Conversely, some positions may have lower starting salaries but can provide significant long-term returns through experience and development.
• Learning and Accumulation: In the early stages of a career, time may need to be spent on skill accumulation and experience building. Is this process beneficial for your future career development? If you can accumulate important experience, skills, or industry knowledge through your current job, it will yield higher long-term returns.

4. Resource Allocation#

The success of career development often requires efficient allocation of your time, energy, and other resources. When choosing career opportunities, consider how to allocate your limited resources to maximize benefits.

• Time and Energy Investment: Different jobs have different demands on time and energy. Some high-paying positions may require long hours and high stress, potentially impacting personal life and health. Other positions may emphasize work-life balance.
• Investment in Learning and Development: Are there opportunities for professional training, further education, or other skill enhancement? Will these resources help you achieve higher career returns in the future?

5. Marginal Diminishing Returns#

In investment, the principle of marginal diminishing returns refers to the fact that as you continue to allocate resources to a particular area, the incremental returns will gradually decrease. In career choices, this means you need to assess whether your career development is hitting a bottleneck.

• Career Stagnation: If you have been in a position for many years, will you encounter a "career bottleneck"? Even if your salary continues to grow, the work may become monotonous, boring, or not significantly beneficial for personal growth. Are you ready to break out of this bottleneck and seek new development opportunities?
• Promotion Opportunities: Some positions may have clear promotion opportunities, while others may lack further development space or take too long to promote, leading to diminishing marginal returns.

6. Career Portfolio#

Similar to diversification in an investment portfolio, career planning can also benefit from diversification.

• Cross-industry Development: Try to enter multiple industries or fields, developing different skills to maintain competitiveness in the job market.
• Combining Side Jobs with Main Jobs: If possible, consider combining side jobs with your main job to gain more career experience, additional income, or expand your network.
• Balancing Career Development with Life: Maintain a healthy lifestyle, family life, and career balance, ensuring that work does not consume all your time and that long-term career sustainability is ensured.

7. Liquidity#

In investing, liquidity refers to the ability to convert assets into cash. In career planning, liquidity means whether you can easily switch jobs or positions during your career.

• Industry Liquidity: Is your industry easy to transition within? Some industries, such as technology and finance, are more liquid, while others may require more experience and professional certification.
• Transferability of Skills: Do the skills you possess have broad applicability? If a particular industry declines, is it easy to transition to another industry?

By applying investment principles to evaluate career opportunities, we can systematically assess the potential returns, risks, resource allocation, and long-term growth of different career paths. This approach encourages a rational analysis of career decisions and helps individuals make informed choices that align with their financial goals and personal aspirations.