Hey everyone, it’s Finance Fridays again. Today is kind of another “thought” exercise kind of post about “Passive Basic Needs“.
Passive Basic Needs?
It kind of sounds weird, but it’s basically another take on “Passive Income”, but made more simplistic. I’m going to start this post this a story about my friend Nathan.
Back in college I had a happy-go-lucky friend named Nathan. He was an extraordinarily smart kid although he found college classes to be boring. He was much more interested in doing things that were fun to him (at the time). Like most of us at the time, he was into cars. However, something I noticed about him compared to anyone else was that before he did anything, he researched it up and down. This was in a depth that most people could not even fathom to do.
For example, he got it in his head that he wanted a motorcycle. This is pretty common in college, especially at Berkeley, where parking is horrid and there are lots of fun places to go for a ride close by. In general, most guys would do a little research, get their motorcycle licenses and then buy a reasonable motorcycle. Back in those days the motorcycle of choice was usually an Yamaha R6 or Suzuki GSXR. Not for my friend Nathan. Instead, he found out out about another very uncommon motorcycle known as the Honda NSR250. Essentially, this was a road version of a true racing motorcycle and was a 2 stroke engine rather than the normal 4 stroke engine.
The long and short of it is:
A two stroke engine can produce twice the amount of power (and makes twice as much noise) than a four stroke engine of the same size. This is because it fires once every revolution, giving it twice the power of a four stroke, which only fires once every other revolution. – Autoevolution.com
So the Honda NSR250 was a 2 stroke motorcycle which also made it considerably lighter than a normal sport bike. Obviously, this changes how it rides and some say 2 stroke engines are more difficult to use. All my friend Nathan saw was lighter, faster —- better. So he set to work to find one.
This was no easy task since they aren’t very common and even less common in California because of the smog laws. Basically, you had to find an NSR250 which had been smogged in California early enough that it was grandfathered in on old regulations in order for it to be street legal. It took him about a year but he finally got his hands on one. He also taught himself how to maintain it. Man he loved that bike so much, all he wanted to do was ride it all day long. He let me ride it a few times, but I was worried I might hurt his baby so I never really tested it. However, it definitely felt significantly different than a run of the mill sport bike. Also, 2 stroke engines are significantly louder than 4 strokes, so you could hear him coming.
Interesting… but why the story?
Well, I wanted to set the tone for the rest of the article to show you how my friend Nathan thinks about things. I remember Nathan telling me that he only wanted a few things in life. He wanted to own a restaurant, an apartment complex, and a bar. I asked him why those three things and he answered like this:
“No matter how bad things get, as long as I own a restaurant, I have somewhere to eat. If I have that apartment complex, somewhere to sleep. If I have the bar, somewhere to have fun.”
At the time I didn’t really get it, but now, so many years later I see that he essentially boiled his basic needs down into those 3 assets. However, not only did he make them into assets, but he made them into passive forms of his basic needs. So I’m going to call this “Passive Basic Needs”.
I think this line of thinking is different than just the notion of “passive income”. Passive income is an idea whereas Passive Basic Needs is an end goal. It’s actually a pretty good thought experiment, but he actually did this thought experiment back in college. He really was wise beyond his years.
More so than that. I think the idea was that as long as he had those things, he could pass them on to his children and his children’s children and they would always be ok.
Sure. Remember why Windfall Management Exercise? This is another thought experiment or exercise if you want.
First you need to decide what your basic needs would cost to cover. This will be different for everyone. If you’re a bachelor or bachelorette with no plans to ever get married or have kids, then your basic needs are pretty simple like my friend Nathan’s. You just need enough money to cover rent/mortgage and food/water.
As long as you passively acquire more money every month than rent/mortgage and food/water costs, then your basic needs are met. Of course, there is some wiggle room in there because you will eventually need new clothes and there is probably a cost for water/electricity. However, now you kind of see where my friend Nathan was going. He simplified it (in his mind) to just owning a restaurant and owning an apartment complex outright.
So then, why not simplify your basic needs to?
Let’s say you save up money and own your house/condo/whatever outright. Your costs are now simply your property taxes and upkeep costs yearly. Let’s also say you like cooking so you cook for yourself everyday. Now you’ve boiled your costs down to property taxes/upkeep and grocery costs/electricity/water.
This is kind of the whole FIRE (Financial Independence Retire Early) movement in a nutshell pretty much. It’s forgetting about paying for things on a monthly basis and instead bringing down your monthly costs by owning assets and/or adding in some degree of passive income.
Once you’ve taken care of your basic needs on a passive basis, you can do a lot more and have a lot more time to do other things. More so than than, you can take more risks. Unfortunately for me, I have far too many liabilities currently. My guess is that in 10 more years I’ll have a much better footing in regards to having all the loans paid off, more equity in my house, more money in the 401ks, 529s, pensions, etc — and then I can think about my own Passive Basic Needs.
Failure to plan is planning to fail.
Back to Nathan
Did Nathan ever buy his restaurant, apartment complex, and bar?
I haven’t seen him in awhile. We kind of lost touch for some years when I was in medical school and he went back home to help with run the family business. However, I think his plan to own those three things is probably still in his mind somewhere. Maybe I’ll reach out him and ask… he really was wise beyond his years, even though he was younger than me.
Back when I was having a hard time in college, and then in medical school, and again in residency — I would come home to see my family. Now my dad doesn’t say all that much when I tell him about when I’m having a hard time. Usually he would just let me talk at length while we ate Carl’s Jr. or something. However, he always did say one thing.
“Walter, your mom and I have worked very hard for a long time. No matter what, you can always come home and there will be a roof over your head and food to eat.”
I didn’t really get it back then, but it was kind of his way of saying that no matter what my basic needs are taken care of. He knew he couldn’t understand the troubles I had academically to get into medical school, or the difficulty of getting the residency I wanted, or the work I was doing in residency. He wasn’t a doctor and didn’t understand what it entailed to be one.
However, he did want me to know that no matter what happened, there was always somewhere for me to go. It was his way of telling me that my basic needs were taken care of no matter what, so that was one thing I didn’t need to worry about.
Thanks dad. Thanks mom.
All you need is a restaurant, apartment complex, and a bar and you’re set….
What are your basic needs? How can you make them passive? Have you thought about it?
This kind of thought exercise is important to plan for your future.
I’ll have a better idea of where I’m at in like 10 years maybe, but I do have a rough plan in place.
Failure to plan is planning to fail.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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