Core Capital - Part Two

Getting Paid in Time and Building Human Capital

In Part One, we introduced Core Capital as “money we can’t afford to lose.”

We walked through three components:

1. Cash Reserve

2. Debt Free House

3. Investment Portfolio

I mentioned that, across a lifetime, we could expect to experience major setbacks and sudden liabilities.

Around the time of my 40th birthday, I experienced:

• Sudden Unemployment

• Unexpected Liability

• Large Balance Sheet Write Off

As I mentioned in Part One, my attorney told me there wasn’t much I could do about the past but there was a lot I could do about my future.

Back then, my Core Capital sat in my family’s personal balance sheet. Today it sits somewhere else.

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Use of Trusts

My attorney recommend I go speak to a Trusts & Estates Lawyer.¹

I headed off, and explained my situation. After consideration, we placed the equivalent of my Core Capital into a trust.²

At the same time, we reviewed my Will & Estate documentation.

• Do you know what happens to your assets if you die without a Will?

• Take the time to document your wishes, officially.

• Do this if you have ANY assets.

The unexpected happens every day and you don’t want to leave a mess for the survivors.

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My Core Capital, Today

As a single adult, my Core Capital was:

1. Cash Reserve

2. Place To Live (for free)

Worked well, for that phase of my life.

As a husband, and father of three - the structure of our Core Capital has changed, because our goals have changed.

As a young adult, I wanted the freedom to live my best life.

I still want that.

I also want:

• to provide financial security for my wife

• to provide debt-free education to my kids

The components:

1. Cash Reserve

2. Two-Unit Rental Property

3. 529 College Accounts³

4. Balanced Portfolio

Let’s consider the two-unit rental property.

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Real Estate As Insurance

13 years ago, I purchased a two-unit property in Downtown Boulder.

• There is a larger unit, and a smaller unit.

• The larger unit is a small house.

• The smaller unit is a detached, one-bedroom rental.

• The previous owner had planned to redevelop but got caught in the financial crisis of 2008/2009.

I liked:

• Location - Downtown

• Cash Flow - cash positive from Day One

• Development Option - can redevelop, later

• Insurance Option - see below

The insurance option pays out if everything goes to hell.

• My wife and I are incapacitated

• The family balance sheet is wiped out⁴

My kids would have the ability to:

• Move into the house

• Rent the back unit

• Live for free

Combined with the rest of my Core Capital, the property is sufficient to deliver my goal of debt-free education.

…and if I’m the only one incapacitated then the house will provide financial security for my wife in her old age.

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Building Human Capital

Why not buy a vacation home and traditional life insurance?

We could have done that, but:

1. That choice creates more expenses, the investment property provides income

2. Downtown Boulder had better capital growth potential than my alternatives

3. We’ve owned a house without any HOA payments, rather than a ski condo with HOA payments⁵

Combine 1-2-3 our rate of return on the house has been more than double our alternative investments.⁶

Here’s the kicker.

Instead of allocating capital to elevate lifestyle, I made an investment that generates cash flow.

The cash flow allowed us to spend more TIME with our kids when they were young.⁷

This investment has been paying our family, in time, since 2010.

The additional time was used to build the family’s Human Capital.⁸

Part Three covers the next iteration of our Core Capital, the transition to Empty Nesters.

Back To Index

1. I’m going to share my experiences. This is not meant to be legal, or tax, advice for you. Take expert tax, legal and accounting advice for your individual situation. The rules differ, significantly, based on where you live.

2. The type of trust I used is called an Intentionally Defective Grantor Trust. It has certain advantages to an US resident. One feature is the Grantor pays the tax liability for the trust in their lifetime.

3. Take specific advice on how these accounts are treated/protected in your State of residence. No one expects sudden death, bankruptcy or creditor liability. Unfortunately, it happens.

4. This property sits in an irrevocable trust. Nobody can get at the asset, other than the beneficiaries of the trust. “Nobody” includes me. Think carefully, before making irrevocable settlements into a trust.

5. Cost of Ownership matters, significantly, over long time horizons.

6. And a property manager runs the place. Low cost of ownership, low admin burden, focused on long term capital gain, and cash flow positive.

7. See Allocating Time at the bottom of Kids & Money - Part Three.

8. Your family’s Human Capital will get the highest return on investment (time and money) by what Mom & Dad do when the kids are under six years old.