Get in the STREAM: A new framework for building wealth

By Christopher Peck

I used to work at a native plant nursery in Santa Fe, New Mexico, and folks would come in and ask about grass for their lawn: “it needs to be very drought tolerant, soft for my grandchildren to play on, green year round, not invasive into my garden beds, and did I mentioned really low water use?” My flip but accurate response, depending on how amiable the person appeared, was often, “Have you considered Astroturf?”

Similarly, one of the most frequent calls I get as a financial planner is from a worried soul in their late fifties who tells me “I have almost nothing saved for retirement. I need help saving as much money as possible, as quick as I can, but I have a very low risk tolerance and I’m worried about job security. Can you help me?” My reply: “full STREAM ahead!”

Both situations require humor and unconventional thinking. Speed and simplicity are at the heart of solving this problem. In that spirit, I have a new idea. At least, I think it’s a new idea because I haven’t seen it anywhere else. It won’t change the world, but I think it simplifies retirement planning and wealth building. I call it STREAM.

I love acronyms! Hold on to your hat for the decoding: a Sustainable and Sufficient Single Source of Take-home Revenues Exceeding Expenses And Maintenance (so, SSSSTREEAM if you want to go all the way). In a sentence, a STREAM is an independent source of income sufficient to cover your complete living expenses.

If your complete living expenses are $50,000 a year, then for you to have one STREAM, you need one independent source of income of at least $50,000. I stress the phrase “complete living expenses” because folks frequently forget about expenses that are not monthly: tires for the car, the roof needs new shingles, or taxes are due (yes, people forget about their taxes). All of those expenses are to be included in “complete living expenses.” This is Exceeding Expenses and Maintenance in my epic acronym.

Let’s unpack what these terms mean. The abundant alliteration of Sustainable and Sufficient Single Source contains several important concepts. Sustainable has two meanings here: able to be sustained over time, and done in a way that enhances life. Enhancing life is easy for us natural investors to understand, so I won’t ramble on about that. Sustainable over time is an important reminder, since some sources of income occur once, or for a couple years, but don’t have much likelihood of continuing in the years ahead. Think flipping condos in an up market, versus a mixed portfolio of bonds.

Sufficient means that the revenues need to simply cover expenses and maintenance. Sufficiency reminds us that the most immediate path to creating a STREAM is through cutting expenses: the rigorous application of the principle of thrift. A Source is wherever income flows from: your job, dividends from an investment account, profits from a business, or profits from owning rental property. Most people have many sources but not a single STREAM. I stress that if you’re in a hurry and you’re worried about security, build a STREAM from a Single Source. We’ve been through some harrowing times financially in the last several years: job loss, devaluations in the real estate market, and a roller coaster stock market. Living on one STREAM when you have several, builds in a safety net and accelerates progress.

Take-home Revenues is the kind of distinction a financial planner enjoys, but here it means cash you can count on in the bank, year in and year out. Unrealized gains don’t count, and even realized gains from a portfolio don’t count: you need reliable flow of cash in hand.

There’s another factor to address here, regarding the time required to keep your STREAM flowing. The STREAM that one can generate from employment requires full time work and effort, but the STREAM that flows from an investment portfolio requires considerably less time and effort (though it’s not zero). The time required to keep a STREAM flowing falls on a continuum. Real estate portfolios are somewhere in the middle, between market investments and a job. Of course the point is to transition to STREAMs that have a low time requirement.

Here’s the simple plan I convey to worried pre-retirees: first, get one STREAM established. Focus next on having your partner build their income to another STREAM. Maintain diligence on reining in expenses. With two STREAMs, live on the smaller one and invest the rest (I know, this is radical and hard. It’s the Astroturf solution). At a safe 5% return, and investing one STREAM, it’ll take 12-13 years to have a third STREAM—and your first STREAM not based on employment income. You’ve established more security, and the ability to retire when you’re ready to. Vicki Robin and Joel Dominguez call this the “cross-over point,” when your returns from an investment portfolio match your expenses. Real estate investing might help you create another STREAM more quickly, as might self-employment on the side.

You can clarify your expenses using Quicken, mint.com, paper spreadsheets, or whatever form works for you. You’ll probably need to dramatically trim expenses. Getting to one STREAM is no small feat; almost everyone, regardless if they make $50,000 a year or $250,000, spends more than they make. “Hand-to-mouth” disease transcends income level.

To speed your progress, I recommend two STREAMs. That’s when significant progress can be made, and you can really start to save and invest aggressively. By aggressively I don’t mean high risk; I mean that saving half your income takes a huge effort. There are personal and relationship factors that make living on one STREAM when you’re making two quite challenging. “We’re making so much money, and we’re working hard, why can’t we buy this widget or take this cruise?” Finding a balance between fiscal discipline and enjoying the day-to-day is one of life’s great challenges.

I like STREAM because it’s an easy-to-use framework that highlights the next steps needed. It’s honest: it’s not trying to deceive anyone that building wealth is easy. In fact, it clarifies why building wealth and retiring early is so challenging. It’s motivating: if you need to retire soon, you’re going to have to plan and work and save, for many years – not forty, but more than ten.

Hopefully this simple notion – and the unique ways it comes together for you – can help!

This article first appeared in the Spring 2010 Natural Investing newsletter

See also Christopher’s related post: How (and why) to  manage your career as an asset

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Christopher Peck

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