Summary: In this post we discuss how we incorporate three concepts: time to money, freedom and risk into our decision making in order to make choices about our real estate portfolio and our lives. These three concepts have played an important role in helping us achieve semi-retirement, so we introduce them to our readers in the hope that by incorporating some or all of these concepts into your own lives, you can better align your decisions with your future goals.
Kenji and I were driving in the car one day when he asked what I wanted my life to look like if anything was possible?
He wanted to me think big, to share what my “dream” life would look like if there were no limitations.
He asked this question in order understand what was important to me, so we could build a shared vision as a couple and then go after it. He wanted us to think actively about what we wanted and to proactively go out and get it. He truly believed we could achieve anything.
To me, this was a totally novel way of approaching life.
Sure, I had the goal of being a doctor and jumped through numerous hoops to achieve it. But beyond that, my goals and vision for my life were less clear. I had some vision of working as a hospitalist for a long time. I had thought about where I wanted to live…
However, I had never asked myself what I truly wanted for my life if anything was possible. I had always worked within my own created limitations when thinking of the future. As a consequence, I had never really thought big.
Let me give you an example.
There’s a difference between considering where you want to live and limiting yourself to the houses you can afford in Seattle versus asking yourself “where do I truly want to spend my time?” and then answering that question without limitations on the possibilities. The answer the second question is probably a radical departure from the first.
So, what does all this have to do with our real estate portfolio, you might ask?
When analyzing our goals and what we needed to achieve financially to get there, we quickly realized that medicine alone was never going to allow us to build the life we wanted. We needed to change course and create a step-by-step plan for how to achieve our dream life beyond the clinical path we had been blindly pursuing.
We also realized we had to answer some very important questions to create our plan. These were questions like:
- How are we going to significantly increase our income from sources other than medicine?
- Which of the possible sources of income should we pursue?
- How do we balance our time between family and work?
This line of thinking led us to pursue entrepreneurial ventures and to use the money from these start-ups to invest in cashflowing real estate.
So how did we make these decisions?
And what was the key for making sound decisions along the way?
This is the subject of this article: our framework for making decisions.
It’s this decision-making framework that helped us achieve financial freedom and semi-retirement in less than four years. But, before we dive in, we want to note that there are many decision-making frameworks out there and each situation is different. Our hope is that by understanding our way of approaching decisions, you can create a decision making process that works for you and your family.
Time to Money
What this means to us is: when faced with a new opportunity, how does the amount of time you (and, by extension, your family) need to commit to this undertaking relate to the amount of financial compensation that you will receive for your time?
Another way of defining this is as the return on time invested (RTI).
Let’s use Kenji as an example. This year Kenji was asked to consider leadership positions at two different hospitals. One of the positions would have had him working with the hospital administration to make positive changes at a system in need of a turnaround. Now, it could have been very tempting to take such a position. I’m sure he would have been able to make the necessary changes to help the hospital system stabilize. And he probably would have enjoyed working in a position of influence.
But let’s step back and apply the time to money lens to determine whether taking a position like this would have been the right decision for Kenji in relation to our goals.
In our case, our primary goal was to achieve financial freedom and do it in an extremely short time frame.
So, how does the administrative position fit in? The short answer is, it doesn’t.
Hospital leadership positions take a lot of time and energy for which you are not usually duly compensated. Pursuing such a position would have gotten us off track. It would have taken away time that we could have spent on our entrepreneurial ventures or building our real estate portfolio.
So, you see, Kenji’s decision was easy. The time to money ratio just didn’t make sense.
When faced with an opportunity, ask yourself: Does taking this position put you closer to your future goal or slow your path to reaching it? What is the return on time invested?
Now, the argument here against approaching decisions with the lens of a time to money ratio may be that it is a self-centered way of looking at things… and I would agree.
Our first priority right now is making sure that we spend our time the way we want as a family. We therefore direct our effort at maximizing the benefit of anything we do to ensure we protect our time. This is a very personal choice that we have made at this point in our life. Over time, it will likely shift to take on more of an outward focus . But this is where we have chosen to focus for the last four years.
Freedom Factor
Freedom is about having the flexibility to do what you want and spend your time the way you desire. Let’s use a real life example faced by one of our friends to examine this concept.
Let’s say you are considering working as a hospitalist in an academic position versus at a community hospital. The academic position requires you be available during your off weeks to give lectures to medical students and attend meetings. It also requires you to commit to doing research. Now the joys of academic medicine and teaching aside, the academic position certainly allows less flexibility in the way you spend your time than the private hospitalist position. It has a lower “freedom factor.”
Does this mean you automatically choose to be a hospitalist at a the private institution? Not necessarily.
People have different visions for what is important and how they want to spend their time. In this case your goal may not be to spend a majority of your time with family and friends and to have financial freedom. Maybe your goal is to be a world-renowned physician academic researcher, and being an academic hospitalist will move you towards achieving it. In this case, it may make sense to cede some of your freedom to get you closer to your desired vision for your life.
The key here is that you need to think hard about whether a loss of freedom is worth it given your personal goals. Is this loss of freedom justified because it moves you closer to your future vision? Faced with the same decision, the answers will vary for different people.
When faced with an opportunity, ask yourself: How will this decision affect my freedom to spend my time in the way I desire? If you will have less freedom, is it worth it?
Risk
Factoring in risk can be split two parts 1) Considering the personal exposure and liability a certain path may hold for you and your family and 2) Considering whether a certain path offers enough of a guaranteed outcome for the amount of time and effort invested (i.e. balancing the risk of no return). This can be thought of as the opportunity cost.
Personally, I spent the most amount of my time thinking about risk when Kenji and I were involved in startups. Starting a business had both types of risk described above – the increased risk of personal exposure and liability AND the risk of a loss of time and effort for no guaranteed outcome.
When we work as hospitalists, we take on an amount of risk (i.e., the risk of getting sued for a medical mistake) in exchange for a salary. The salary is known ahead of time before assuming the risk. When you start a business, on the other hand, there is no guaranteed payout. And the liability risk is relatively unknown (but, based on my “n” of two, it’s very high if you have business partners).
So, the last time we started a business, we sat and talked about the risk ahead of time. The risk of being sued, the risk of gaining nothing compared to the known risks of being a hospitalist. And we combined all three parts of our decision making to come up with a comprehensive plan.
Since this decision required a combination of the three tenets of decision making, I’ll cover this in more detail in the last section of this post.
Ask yourself: How much risk does this path put me in, and is it worth pursuing? If the path carries more risk, is there a way to mitigate it?
Nowadays, we apply this risk concept frequently in evaluating real estate deals. At this point in our journey, as Kenji often says, we no longer need to be taking big gambles (i.e. doing high risk deals or banking on appreciation) in order to make rapid step-wise gains. Thus far, we have made the decision to focus on cashflow and to do “safer,” less sexy deals to minimize our risk, knowing it may take longer to build our financial position in the long run. After what we have built over the last few years, what we are more concerned about now is taking a huge step backwards.
That being said, we recently met with a fellow physician who told us he places some “appreciation bets” instead of only focusing on cashflowing properties. His explanation was that he needed some of these “bets” in order to take huge leaps forward and shift the growth trajectory of his real estate portfolio. We understand this. For us, sales of our businesses gave us the cash infusion to make a leap forward. Thus, for some, it might make sense to place appreciation “bets” in real estate to help supercharge their investing trajectory. As long as you realize you’re gambling (high risk with no guaranteed outcome for the time and effort and money invested) and not investing, then you’re using the concept of risk (and blending in the time to money ratio) to help you make informed, well-thought out decisions.
That’s why we think factoring in risk (and specifically the risk posed to yourself reaching your future vision) is important to making goal-aligned decisions. It gives you perspective.
Applying our decision-making framework
This example is a personal one that Kenji and I debated after we had settled a lawsuit with a previous business partner and left the first business. The decision we were wrestling with was: should we capitalize on our accumulated knowledge and launch another startup in direct competition with the business we had just exited?
The return on time invested in a business can be substantial. In entrepreneurial business activities, you can get a relatively large payout compared to the time committed. Taking into account the possibility of a payout and the tax benefits (long term capital gains if you’ve been in that business for more than one year), the lure of the time to money ratio can be enticing.
In this case we also had a proven concept. The previous business had been successful. By extension we were familiar with the steps needed to create another successful business in that space. We had the knowledge and connections. We had three of the original team members who had worked on the previous business. We knew this time we’d be much more efficient. So, given these things, building another startup from the time to money ratio made sense to us.
From the freedom factor standpoint, however, it didn’t make a whole lot of sense to pursue another startup business. When you’re in a startup, you eat, drink and sleep the business. In the type of business we were in, in particular, there is a considerable amount of travel to clients sites. We also knew we would need to move to a different city to be near our other partner for the company to be successful. This meant we would lose the flexibility to determine where we lived and how we spent our time while we built the business. After just getting a payout from our last business, the loss of freedom was going to be a sacrifice.
To mitigate the loss of freedom, we decided to define limits for our participation before signing on to the startup. These limits included a personal time limit of participation. In our case, we went into the business with the goal of being out in one year.
From the risk standpoint, building another business was also a dicey choice. Startups fail all the time. In fact, the failure rate is commonly quoted to be near 90%. We did, however, have a lot of insight from previously building a successful company in this space. Therefore, we felt that our risk was lower than starting in a new market from scratch. It wasn’t as low a risk of just remaining in our hospitalist jobs though.
After considering all these factors, in the end, we decided to take the plunge.
We felt that the possibility of getting another payout was worth the time, loss of freedom and risk to ourselves. We knew that another sale of shares could mean that we would achieve financial freedom – and reach our ultimate goal of having unlimited time with our family and friends – much much sooner.
It’s only with the final goal in mind that we made the choice for our short term sacrifice.
It was the combination of the time to money ratio, freedom factor and risk that allowed us to make a thoughtful, well-planned decision. Because of these factors, we also went into the decision having set limits on the length of our involvement, having determined what we were willing to accept as a success and having made a plan for when we were ok walking away. These limits resulted us leaving the business in a little over a year (at which point the time to money, freedom and risk of waiting for a larger payout were no longer worth it for us).
Does this approach to decision making resonate with you?
What framework do you use to make important decisions in your lives?
If you have a partner, do you have a share decision-making blueprint?
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Action Plan:
- Determine your life goals and values
- Apply these concepts to create your structure for decision-making
- Use your decision-making lenses whenever you are considering important choices that will alter the direction of your life
