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Glossary of Terms (alphabetized)
Abundance Mindset - The belief that there are more than enough resources to fulfill the desires of all the people within a society. At the heart of abundance is a belief in human ingenuity and human value, and a dedication to applying as much of your own value and ingenuity as you can to improve your society and reap the rewards. The abundance paradigm helps you see the possibility of and the value in win-win exchanges and transactions. People who are operating in abundance know that by serving the wants and needs of others, and thus creating happiness in the lives of others, they actually bring more happiness to themselves. The goal is to serve others, not to exploit or dominate them. They are able to serve wholeheartedly and completely because they know that by so doing, they aren’t in any way diminishing their own happiness; in fact, they are generating more happiness and success in their own lives. In an abundance paradigm, we fulfill our needs and wants by helping others fulfill their own; transactions are always win-win. In abundance, all of our thoughts, words, emotions, and actions are motivated by contributing to our personal success and the success of others. In abundance, no one is jealous or envious of another’s money; there is infinite wealth to be created and put to use.
Accumulation Theory - The financial theory that states that the way to become wealthy is to accumulate a large enough sum of money that will allow you to live off the interest and never touching the principal. Common accumulation products include 401(k)s, IRAs and other qualified plans, and mutual funds. In the accumulation theory, net worth is the greatest indicator of wealth. Common phrases used within the theory are “you’re in it for the long haul,” “compound interest,” “dollar-cost-averaging,” “diversification,” “do-it-yourself,” “high risk equals high returns,” “risk tolerance,” and “asset allocation model.” The theory tends toward scarcity in that those who practice it develop the scarcity mindset through years of frugal saving, always in fear of losing their accumulated money.
Asset - An asset on a balance sheet is anything that results in or can easily be converted to cash flow. Many of our material resources are considered assets, and they are usually listed at their fair market value. So the market values of your home and your car, the current cash value of your life insurance policy (if it isn’t term), and the current value of your investment accounts are all financial assets.
Asset Allocation - The practice of dividing resources among different categories such as stocks, bonds, mutual funds, investment partnerships, real estate, cash equivalents and private equity. The theory is that the investor can lessen risk because each asset class has a different correlation to the others; when stocks rise, for example, bonds often fall. At a time when the stock market begins to fall, real estate may begin generating above-average returns. The amount of an investor’s total portfolio placed into each class is determined by an asset allocation model.
Cash Flow - The combination of the amount of net income a person receives, how that income is produced, and how sustainable it is. Healthy cash flows are created by investing in tangible assets such as real estate, or even more abstract assets such as intellectual property, which produce high and sustainable income. This can be measured on an income statement.
Consumer - One who consumes more value than he or she produces. Because consumers focus on what they get instead of what they can give, they avoid responsibility, they depend on others for their happiness, and they rarely create real value. Consumers operate in scarcity, so they view the world through eyes that see poverty and limitations. They think there isn’t enough to go around, so they should get what they can before it all runs out. They take and leave nothing in place of what they take. They often feel victimized by other people and external circumstances when they don’t get what they think they should. They believe that material things, not people, have intrinsic value. Because they feel entitled to everything that is given to them, they are poor stewards and allow their human life value to degenerate. Security to consumers is based on things outside of themselves and their choices. It is anything and everything they can think of: the government, their bosses, their company, their parents or grandparents, their 401(k)s, etc. When things go wrong, nothing is ever their fault—they place blame and avoid responsibility. Security to them is the expectation that someone somewhere will always take care of them and make things right somehow. They believe in luck and misfortune, not choice and accountability.
Consumer Condition - A worldview that emphasizes scarcity, win-lose transactions, fear, selfishness, dependence, ownership, accumulation, destruction, luck, and entitlement.
Debt - The state of having more liabilities than assets. Debt is not the same thing as having liabilities. The only time we are in debt, in the true accounting sense, is when our liabilities are greater than our assets (those things that provide income or potential cash flow in our lives).
Equity - The state of having greater assets than liabilities.
Human Life Value - Human life value is your own particular combination of knowledge, skills, and abilities—everything that you are when you take away all of your material resources. It is your character and integrity, your ability to think creatively and uniquely, your relationships, your faith—or the lack of each of these things. It is your knowledge and ability to shape materials and information in new ways that are valued and utilized by others and yourself. Every material thing you enjoy today came from the utilization of individual human life value. The materials in your home already existed in the earth, but until human life value was applied to natural resources, that matter was nothing but potential value. When human life value is applied to physical matter, it becomes shaped and manipulated into something valuable to people.
Indemnification - Compensation for damage or loss sustained, expense incurred, etc. Guarding or securing against anticipated loss, or to give security against future damage or liability. Self-insurance provides no means of indemnification; proper insurance covers losses without the individual policyholder needing to come out of pocket to replace items lost through unforeseen events.
Investor - One who possesses the ability to contribute to and create favorable conditions to get healthy returns on their investments, mitigate their risk, have an exit strategy that allows them to profit under almost any circumstance, and practice the theories of utilization and velocity as opposed to accumulation. True investors don’t invest in anything that they don’t know how to make productive. Because they know how they’re creating value with every one of their investments, they also know how they’re going to make a profit, and so there’s little risk involved.
Liability - Anything that is an expense in your life, including many of the things you may think of as debts, such as mortgages, car loans, small-business loans, and so on. The name of the game of wealth is not to focus on ridding our lives of as many liabilities as possible. Rather, it’s to identify which liabilities are consumptive (take more value from our lives than they put into it) and which are productive (provide more value to our lives than they take from it), and then focus on increasing our productive liabilities. By definition, a productive liability always creates a corresponding asset—an asset that we never would have had access to had we not incurred the liability. The converse is also true— every asset comes with a corresponding liability, at least in some form.
Liability, Consumptive - Consumptive liabilities are any liabilities that do not produce a subsequent positive cash flow. They are liabilities that incur an expense only, without a corresponding income from the acquired asset. They take more money out of our pockets than they put in. For example, if I buy a sofa using a credit card, the credit card balance is the liability and the sofa is the asset. If the sofa does not put more money than the credit card payment into my pocket, it is a consumptive liability. However, it must also be understood that some consumptive liabilities indirectly contribute to my ability to produce. For example, although having a car directly takes more money out of my pocket than it puts in, it also increases my ability to create income; it enhances my productivity indirectly. Cell phones and computers used for business purposes can also be good examples, depending on how they’re used. Even still, a good rule of thumb is never to borrow money to purchase things that don’t directly increase cash flow.
Liability, Destructive - Destructive liabilities are things that do nothing but detract from our ability to produce and damage our human life value. For example, if I use heroin, that is a liability that has nothing but a destructive effect, both on my human life value and on the value I could potentially create for the people around me. Destructive liabilities also include activities like gambling, pornography, addictions, and engaging in criminal and destructive behavior.
Liability, Productive - Productive liabilities are any liabilities that are attached to a corresponding asset that provides an increase in our immediate or possible positive cash flow, even in the long term. Real estate is an excellent and simple example of this. If by incurring a liability in the form of a mortgage payment a person is able to control an asset that pays them more than the liability, this is productive and desirable. If a person decides to go back to school to earn a degree and can turn that degree into a new career that allows her to live her Soul Purpose, increase her human life value, and increase her income, then the student loans she takes out are likely productive liabilities. This does not mean that incurring liabilities is necessarily a step to financial freedom. Use liabilities wisely and productively and remember that what makes an asset productive or not is you—how you decide to utilize the asset and how you apply your human life value to it.
Macroeconomics - The study of how every part relates to and impacts the whole, and learning how to maximize and utilize specific parts in order to maximize the whole. It helps you make holistic decisions based on how those variables affect the whole of your situation, not just a part. There are many aspects to consider in your financial life: income, expenses, assets, liability, insurance, legal and liability issues, investments, etc. A macroeconomic view places all of these separate aspects into one model in order to coordinate their effectiveness and maximize their productivity.
Microeconomics - The study of parts unrelated to the whole, or without consideration of the whole. A microeconomic view leads people to take action on one aspect of their financial picture that is detrimental to others; their plan is not coordinated and symbiotic.
Net Worth - A person’s financial assets minus his or her liabilities. Net worth is removed from income in that a person could theoretically have a net worth of $1 million and have no income. Net worth is a function of a person’s balance sheet.
Opportunity Cost - The cost of what you could have done with your money in any particular situation, instead of what you actually did. For example, if you lose $10,000 in an investment, the cost was $10,000. The opportunity cost is what that money could have grown to had it been invested elsewhere.
Permanent Life Insurance - Permanent life insurance policies are designed to provide coverage for the duration of a person’s lifetime, not a specified term only. They carry a cash value that accrues with premiums paid, and provide many benefits that a policyholder has access to while he is living, such as tax protection and waiver of premium riders/disability protection, among others.
Personal Rate of Inflation - The government rate of inflation is measured by the Consumer Price Index, and indicates the rising prices of consumer goods. Personal rate of inflation is defined by how prices for goods and services rise for each individual, based on their unique propensity to consume, the types of goods they consume and when they consume them. Personal rate of inflation is impacted by such factors as the propensity to consume, planned obsolescence, and technological advances. For example, according to the Consumer Price Index, the price of computers progressively lowers because the rate of technological advances outpaces the rate of inflation. On the other hand, more and better computers are being produced constantly, which then increases our propensity to consume. A comparable computer may cost half as much today as it did three years ago, but because we want the advanced models, we buy better machines more often. Individual computer prices are lower, but we may actually be spending more on them.
Producer - One who produces more value than he or she consumes. Producers are the responsible, innovative, and creative people who create all of the products and services that we buy and use. They are more concerned with giving than with receiving. They practice enlightened self-interest, the belief that the way to bring ourselves the most happiness is to serve others. They are happy, wealthy, and successful, or they are on their way to becoming so. Producers lift, bless, serve, and contribute to everything good in the world. Producers always leave things better than they found them, even if they weren’t responsible for the destruction that they fix. Producers know that people, not material things, have intrinsic value. They love people and use material things to serve others. They operate in abundance, and they view the world through eyes that see limitless possibilities for value creation. They are wise stewards over everything that they have been blessed with.
Producer Paradigm - A worldview that emphasizes abundance, win-win interactions, faith, service, interdependence, stewardship, utilization, creation, accountability, and value creation.
Qualified Retirement Plan - Any investment vehicle designated by the government to be qualified and enjoys tax advantages. Qualified plans include 401(k)s, IRAs and Roth IRAs, 403(b)s, SEP IRAs, Keogh Plans, and others.
Risk Mitigation - Any and all measures designed to reduce the risk of any investment opportunity. Risk mitigation factors include education, analyzing the value proposition, insurance and legal products and strategies, collateralization, aligning with principle, and more.
Risk Tolerance - The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio. An investor’s risk tolerance varies according to age, income requirements, financial goals, etc. For example, a seventy-year-old retired widow will generally have a lower risk tolerance than a single thirty-year-old executive, who generally has a longer time frame to make up for any losses she may incur on her portfolio.
Risk Transference - Reducing or eliminating the risk an individual is exposed to by transferring the risk to other parties who have a financial incentive for shouldering risk. The most common way to transfer risk is through insurance. Producers ensure that their human life value is viable and productive in any situation that they can control, whether they are sick, disabled, or dead. They are able to see the intangible benefits of insurance beyond the tangible premiums and paid claims. By ridding themselves of fear of loss, they ensure that they maintain a productive mindset. And producers act as good stewards of their responsibilities. They understand that the first step of being a wise steward is ensuring that their current stewardships are protected before they concern themselves
with acquiring more. When we understand what insurance can provide, we want the best, most durable, most certain policy that money can buy. We know that there is never a time when we will want to do without insurance. We realize that self-insurance is a waste of human life value because insurance companies are so much more efficient at managing risk than we are as individuals.
Scarcity Mindset - The belief that resources are limited, and the world is a stage for a zero-sum game of accumulation. In a zero-sum game, anything that another wins is no longer available to all others playing the game. Further, these winnings are not replaced or transformed into anything of equivalent or greater value that remains in the game, available to other players. In scarcity, ownership by another means the loss of opportunity for oneself. When our actions are based on a scarcity mindset, we are acting on fear: fear that we won’t get our fair share, that somebody else will reap rewards that we won’t, or that we’ll have to fight tooth and nail against others to achieve the level of success or prosperity we desire. And this fear causes us to make irrational decisions (especially when it comes to our finances) that limit our potential rather than enhance it. In a world of possible freedom, joy, abundance, and service, a scarcity mindset cripples us and aids us in seeing not much more than limitations, suffering, poverty, and selfishness.
Self-Insurance - The belief that if a person has enough assets accumulated in the bank or other safe, liquid account they can drop all of their insurance to save money on premiums and make up for unforeseen losses with their own assets. The fact is that there’s no such thing as self-insurance; either you have insurance or you don’t. You either have a way to transfer your risk of loss, or you retain that risk. Simply having a lot of money in no way protects you from the loss of that money. In fact, the more money and assets a person has, the more important insurance becomes to protect him from the risk of loss. Self-insurance is really no insurance and the unnecessary assumption of risk.
Self-Reliance - The internal commitment to take responsibility for your life and results, no matter what happens to or around you. Choosing this path means making powerful choices in your life regardless of what has happened in the past without using excuses or placing blame; it’s a recipe for heroism.
Soul Purpose - Your unique set of talents, abilities, and passions applied productively and effectively, making tremendous impact upon the world and bringing the highest levels of joy and fulfillment for you and everyone you touch. It’s the mission that you were born for; it’s what you would do every day even if you didn’t get paid for it. When you’ve truly found your Soul Purpose, you create so much value for others that you’re almost inevitably paid very well indeed. Another way to say Soul Purpose is “life mission.”
Term Life Insurance - Life insurance that provides a death benefit for a certain period of time. Unlike permanent life insurance, term carries no cash value within the policy and has no tangible living benefits.
Utilization Theory - The financial theory that states that the way to become wealthy is to continuously find the most productive uses for all of your resources in the present. Those who practice this theory utilize their assets to immediately provide as much value for as many people as possible, usually through entrepreneurship, real estate and other investments, and intellectual property. Utilization means you stop waiting for financial freedom to come to you and instead become proactive in creating it yourself, right now. Utilization is also about your own immediate enjoyment of life, as well as creating favorable conditions for long-term enjoyment, rather than locking up your assets for fear of losing them. The utilization theory tends toward abundance in that practitioners learn to constantly be seeking ways to maximize their usefulness to the world, rather than waiting for retirement. In the utilization theory, cash flow is the greatest indicator of financial freedom.
Value - Anything of worth or service that, when provided to another, creates joy for both parties. Value can come in many forms such as physical gifts, kind words, acts of service, and others. Wealth is created when value is exchanged.
Value Creation - Identifying what others value and providing it to them.
Value Proposition - The clearly-defined identification of how value is created for others through specific actions, investments, business proposals, etc. A good value proposition comes in the form of a very clear and concise statement that explains how value is being created and how it will be sustained. The value proposition must be simple and easy to understand, and it must make good economic sense—that is, the receiver must truly value what’s offered, and the giver must be able to provide it efficiently.
Variable Universal Life Insurance - A type of life insurance, that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The ‘variable’ component in the name refers to this ability to invest in volatile investments similar to mutual funds. The ‘universal’ component in the name is a bit of a misnomer that is used to refer to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.
Velocity of Money - The measure of how productive financial resources are or how much benefit (profit, revenue, value) is produced with a given amount of investment. On a national macroeconomic scale, the mathematical equation to describe velocity is gross domestic product divided by the money supply. Applied individually to personal finance, the equation is output divided by input. Simply put, velocity is increased by keeping input at a minimum while increasing output. The goal, then, is to put continually less time, effort, risk, and money into something (input) and have it bring continually more productivity and value (output). There are two ways in which the velocity of money can increase: 1)The more exchanges made with the same dollars, the more wealth is created, and 2) The more simultaneous uses we find for each individual dollar, the wealthier we become.
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