Tuesday, April 2, 2019

The Two Profiles In Finance And Life

As a dividend growth investor in the accumulation phase of my journey to achieve financial independence, I have realized over time, that there are two types of profiles in finance and life. For one that is seeking financial independence, they should lean more towards one of these profiles rather than the other. The two profiles in finance and life that I am referring to include the producer/provider/investor and the consumer.

Although it's impossible to purely fit the characteristics and preferences of either one of these profiles, I do believe that there is a balancing act that must go into ensuring that either one of these preferences don't become too powerful in one's life. 

With that said, let's first delve into each of the profiles in finance and life by first defining what each profile is and what the characteristics of each encompasses.



Profile #1: The Producer/Provider/Investor

The producer can take on many different forms, but for the intents and purposes of this post, I will define the producer as follows:

Producer: Anyone that provides value to society through various channels.

The first channel that a producer provides valuable goods and/or services through is their labor at their employer or through self-employment. I refer to this as a direct channel, with the rationale that they are directly producing the valuable goods and/or services for society. This is how most of us are able to pay our bills and survive in our society that uses "money" as a trading mechanism. Rather than produce everything ourselves, we purchase goods and services from others because it would be incredibly difficult to hand produce all of the things that we take for granted these days. 

Without the society we currently have, we would all have to grow our own food, produce our own clothes, produce our own entertainment/leisure, and in the process of fulfilling such arduous tasks, we would lose the free time that many of us also take for granted. We value the goods/services that someone provides to us by the price we pay to attain those goods/services. 

The second channel of providing valuable goods and/or services to society is on a more passive basis, primarily through investments that produce dividends, interest, and rent.

As a dividend investor, you're an owner in some of the most vital businesses to our everyday functioning in our modern economy. As an owner of Exxon Mobil, you're providing the world with the fuel necessary to allow hundreds of millions of consumers around the world to commute to work via their own vehicle or public transit. As an owner of Johnson & Johnson, you're providing the world with valuable consumer staples, such as Band-Aids, Neutrogena, and Listerine. You're also providing patients with medical devices that drastically improve their health, and ultimately, their quality of life. As a lender, you are extending credit to a consumer or a business to purchase their first home or to expand their business, possibly providing more value to others. Finally, as a landlord, you are providing a tenant with a safe, comfortable place to live. 

It's the combination of the direct channel of production and the financial benefit provided to you, in combination with the utilization of the indirect channel of production that can allow you to rapidly amass wealth, and passive income as a result. 

Suffice to say, the more value you provide to society, the more you will economically benefit. This will allow you to eventually become financially independent, indirectly providing value to those around you in a passive manner. This isn't to say you should stop your efforts to provide value in an active manner, but it extends more freedom to you to be able to choose how you want to provide that value to society. In my case, I have found that I enjoy writing and inspiring others to take action toward living their best life, as well as providing viable investment ideas over at Seeking Alpha to allow readers to eventually unlock financial freedom.


Profile #2: The Consumer

As we've discussed already discussed above, the producer is actively providing value to others through the provision of goods and/or services.

As you can imagine, the consumer is the one on the other end of the spectrum that is benefiting from the goods and/or services they are obtaining from the producer. 

The consumer would be the customer that is benefiting from the Exxon-Mobil branded gasoline they purchase from an Exxon-Mobil gas station, the Band-Aids, Neutrogena, or Listerine they are indirectly purchasing from Johnson & Johnson, and the house or apartment they are renting from their landlord, or the mortgage payments they are paying to their lender. 

Although there is nothing wrong with being a consumer and it's a necessary part of life (unless you'd like to be completely self-sufficient, living in the mountains or something), one must be careful to balance being a consumer and a producer.

This is to say that if you are consuming more than you are producing (i.e. spending more than you earn), you will go into debt. It is this debt that will require you to actively produce more (primarily work at your day job). 

The takeaway is that if you are unable to produce more than you consume, you will never have the luxury of attaining financial independence. This would mean that you're never able to live your life the way you would like, which is on your terms. Of course, if you enjoy your life the way it currently is with whatever job you currently hold, the reason for producing more than you consume would be in the event that you are eventually laid off from the job you love or are unable to perform the job anymore, you would still have the financial means to be able to consume the vital goods and/or services that are necessary to one's basic survival. 

On the other hand, this isn't to say that you should blindly produce tremendous value for society while depriving yourself of the necessary goods and/or services in life. 

As with everything in life, I believe one must strike a balance between producing and providing for their future needs while also meeting their current needs. After all, investing is worthless if you are depriving yourself of what you need today for what you need tomorrow.

Discussion:

What are your thoughts on the balance between being a producer and a consumer? Are you balancing your production and consumption adequately, in your opinion? As always, thanks for reading my thoughts and I look forward to reading yours in the comment section below.











7 comments:

  1. I love how you simplified this concept, Kody! It really does come down to a balance between consumption and production. I'm would say I'm doing an alright job balancing the two, but I have room for improvement. I need to produce more. I also like the ownership mentality you alluded to about JNJ and Exxon. Thanks for sharing!

    ReplyDelete
  2. RTC,

    Agreed. There absolutely is a balance between consumption and production, like all things in life. Moderation is the key. Thanks for the comment and I'm glad you found value in the post!

    ReplyDelete
  3. Pretty nice post. I just stumbled upon your weblog and wanted to say that I have really enjoyed browsing your blog posts. After all I’ll be subscribing to your feed and I hope you write again soon! financial news for today

    ReplyDelete
  4. Saqib,

    I'm glad you enjoy my posts. I look forward to continuing to post at least once a week on the blog.

    ReplyDelete
  5. This comment has been removed by a blog administrator.

    ReplyDelete
  6. Hey, this day is too much good for me, since this time I am reading this enormous informative article here at my home. Thanks a lot for massive hard work. KETQUAMOINHAT

    ReplyDelete
  7. Muhammad,

    Thanks for the comment. I'm glad you found value in the post.

    ReplyDelete