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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 skills 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 possesses 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, you must consider not only your own labor but also that of your 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, essentially, you are selling your skills and energy.

2. Your Assets

The second business is managing the assets you acquire through labor or inheritance, such as houses, savings, retirement accounts, etc. You have two main goals in asset management: one is to manage properly and achieve asset appreciation; the other is 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 be mutually reinforcing. The financial director overseeing these two businesses can simplify their goals into the following three points:

1. Generate cash flow sufficient to support current and future consumption, while also having surplus funds for self-investment, achieving "industrial upgrades" in 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 their asset management capabilities), while also considering the possibility of bequeathing assets to other entities. 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" interact. 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 situations.

The net worth of a 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 summary, during their working years, this family accumulates assets through labor 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 presented planning tools, the diagram is quite effective. On one hand, if this 25-year-old does not continue further education, he may have some concept of his future financial outlook. However, if he plans to apply to law school, he may need to reset assumptions to reflect the impact of becoming a lawyer and compare it with the original diagram. The concepts highlighted in Figure 1.1 will be gradually explained throughout this book.

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

Most people’s largest asset is future work earnings, so when net worth reaches its peak, financial assets are often at their lowest. This illustrates the opportunity cost of working for free, being unemployed, or "over-educating" oneself (i.e., the value sacrificed for alternative income). In other words, if this young person decides to attend law school, the calculations must be precise, ideally ensuring that the salary from the new job compensates for educational expenses and lost earnings during school.

As the family limited company enters its later stages, career success relies on gradually increasing earnings and the compounding 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 to $570,000 over the next 17 years. To realize this potential growth in financial assets, one must start saving early and enjoy the process of compounding. Starting to save in mid-life will inevitably disadvantage one’s financial security.

When discussing financial security, financial management skills are 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), yet 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 a family limited company, retirement assets are at best mandatory purchases of government-backed inflation-indexed annuities, which are part of financial assets. This asset itself does not directly bring financial security; rather, it may 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 Family Limited Companies: The Ten Inevitable Variables and the Responsibilities of Family Financial Officers

The Net Worth Structure of Family Limited Companies: The Ten Variables Affecting Financial Security#

The net worth structure of family limited companies 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. Job Duration: How long can you maintain this job?
   The length of time you can sustain this job is an important variable in financial planning; long-term stable employment 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 the family’s financial situation.

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

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

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

7. Family Inheritance
   How much family wealth can you inherit, including real estate, savings, etc., will affect your family’s financial situation and future financial planning.

8. Income, Capital Gains, and Property Tax Rates
   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 it is essential to 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 acquire more favorable information, you can adjust your strategies at any time to achieve your financial goals. The last three variables (tax rates, retirement policies, and inflation rates) are beyond your control but will still significantly impact your family’s finances, so they must be considered in financial planning.

Responsibilities of Family Financial Officers#

As the financial officer of a family limited company (i.e., the family financial manager), you need to take on 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 Statement Management
   Oversee the family’s cash income (such as salary) and expenses (such as monthly expenditures), and create budgets to regularly check actual spending against 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. Manage 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 officers and impart relevant financial management experience.

11. Successor Planning
    Create an environment suitable for successors to grow, ensuring the family business can be passed down and maintain long-term financial stability.

The Macro Environment and Trends: Skills and Knowledge Required for Financial Officers#

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

1. Increasing Lifespan
   With life expectancy increasing, the time relying on savings and investments after retirement has become longer. The average retirement lifespan for 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 long-term relationships with a single employer increasingly unstable, requiring families to adjust their finances accordingly.

3. Declining Union Membership and Collective Bargaining 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 more financial responsibility and risk must 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 the foundation for future financial security. The responsibilities of family financial officers are to ensure effective management of all financial decisions and resources, allowing families to maintain financial stability in the face of risks and challenges.

Be Your Own Life Financial Officer

For those inclined to attend university, investing in education is the most stable path to financial security and wealth creation.
Most people know that completing higher education leads to higher earnings, but there are many other benefits: reduced unemployment; easier job transitions, location, and industry choices; and extended career options.
The ability to extend one’s career acts like insurance, allowing you to continue earning even if you reach retirement age without achieving your financial goals. This can enhance earning capacity while significantly shortening the time you rely on financial assets for sustenance 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 better 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 its value.
2. Volatility: How much does the price of the underlying security fluctuate? Since exercising is a right rather than an obligation for the option holder, higher volatility increases the option's value.
3. Price Spread: How much higher or lower is the exercise price compared to the current price? The more "in-the-money" the option (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 in the job market and industry, and the price spread 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, clarifying 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 vary greatly in risk and return. Understanding the importance of different types is crucial: first, the type of job risk and return will affect how personal financial matters are managed (to be discussed in the third part); second, clarifying your views helps set the conditions for your 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 require reconsideration of the initial decision. Just as professional investors have a set of stock selection logic (criteria for choosing stocks), you should have a logic for labor selection, allowing you to reflect and adjust your decisions in a timely manner when circumstances change.

2. Evaluate 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 greater opportunities 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 promotions and avoiding unemployment.

Over time, an employee’s wealth can change dramatically as a result. Suppose 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 fast-growing technology industry with a 10% annual growth rate, while the other is a mature traditional industry with only a 3% annual growth rate. If the price-to-earnings ratio remains unchanged over 30 years, the employee working for the technology 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 multiple 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, geographical layout, outsourcing, new product launches, and mergers and acquisitions will still have opportunities to achieve long-term goals even if a particular strategy becomes ineffective.

3. Examine Company 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 (ROTIC). Although these ratios differ, their purpose is to measure the relationship between a company’s profitability and its use of capital. Personal preference may lean towards ROTIC, as this metric uses the purest data from operating cash flow and invested capital. Although this is not a strict scientific standard, companies that typically perform well can maintain ROTIC above 20%, which is sufficient for investors and creditors who take on risks and expect returns.

This figure 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 needed for the company to expand its business. Companies with high ROTIC usually do not need to raise capital to achieve growth.

In addition to focusing on ROTIC, excellent companies should also have stable cash flow and effectively manage the risk of asset loss. If the risk is low, the ROTIC that investors are willing to accept is also relatively low. 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 returns indicate a high degree of differentiation in business, creating significant barriers to entry for new competitors; conversely, low capital returns indicate a lack of competitive differentiation.

Generally, companies with high capital returns 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, often providing high bonuses and rewards for outstanding performance. In contrast, capital-intensive industries such as steel, utilities, and manufacturing tend to attribute competitive advantages to assets, production processes, or equipment investments, offering generous compensation only to senior management while ordinary employees face lower remuneration. If a company encounters operational 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 distress 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 ever-changing, and unexpected situations arise frequently; some companies inherently possess greater adaptability. The following conditions are worth noting:

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

• Fixed vs. Variable Costs: Companies with a higher proportion of variable costs can better withstand income 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 income changes. Conversely, industries with very high fixed costs, such as airlines, find it difficult to adjust capacity during demand declines, making layoffs challenging and costly, thus making them more susceptible 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 assets that may depreciate. For example, consulting firms primarily rely on accounts receivable as their main asset, which is easy to liquidate, with payment cycles typically ranging from 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, both 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 service characteristics and minimal technological disruption, such as healthcare, security, maintenance, and education, will have advantages. Their local characteristics and close interaction with customers provide resilience against the shocks of globalization and technological innovation.

Using investment principles to evaluate career opportunities is a valuable way of thinking that helps us analyze and choose career development paths more rationally. Investment principles emphasize the balance of risk and return, optimal resource allocation, and maximizing long-term value; these concepts also apply 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, measurable through salary, bonuses, stock options, etc.
• Career Development Potential: Does the position have upward mobility? Will it allow you to take on 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: Some 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; career opportunities also require similar risk assessments.

• Industry Risk: Is the chosen industry in a growth or decline phase? Certain industries (such as technology and healthcare) may have greater long-term growth potential, while traditional industries may face greater external competition and challenges.
• Company Stability: Is the company financially sound? Are there potential mergers, layoffs, or other factors that may affect stability?
• Job Uncertainty: Some positions may be temporary or contractual, lacking long-term stability. Assess whether the position has sustainable job security.
• Skill Substitutability: Is your position easily replaceable by automation or technological advancements? Some skills may have short-term market demand, and the sustainability and adaptability of the career need to be evaluated.

3. Time Value#

In investing, the time value refers to the need to discount future returns to compare them with current 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 substantial short-term returns, but may have limited long-term growth. For instance, high-paying positions may be busy and stressful but lack career advancement opportunities. Conversely, some positions may have lower starting salaries but offer significant long-term returns through experience and industry knowledge accumulation.
• Learning and Accumulation: In the early stages of a career, it may be necessary to invest time in skill and experience accumulation. Does this process help 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, you need to consider how to allocate your limited resources to maximize benefits.

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

5. Marginal Diminishing Returns#

The principle of marginal diminishing returns in investing refers to the idea that as you continue to invest resources in 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, are you experiencing a “career bottleneck”? Even if your salary continues to grow, the work may become monotonous, boring, or not significantly contribute to personal growth. Are you prepared to break out of this bottleneck and seek new opportunities?
• Promotion Opportunities: Some positions may have clear promotion opportunities, while others may lack further development space, or the time required for promotion may be too long, 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, thereby ensuring long-term career sustainability.

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 fluid, while others may require significant 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 prospects of different career paths. This approach helps individuals make informed decisions about their careers, ultimately leading to greater satisfaction and success in their professional lives.