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Author takes an analytical look at managing your household money over a lifetime

October 6, 2018

A diet book that doesnt advise much more than trying to eat less may find an audience, but Joe Galatowitsch has a hard time imagining how anyone could use it as a guide to living a richer and healthier life.

He saw the same problem in just about anything he read about personal finance, too, like detailed budgeting or investing how-to books. Personal finance isnt Galatowitschs field, but he had come to realize that building a healthy financial life takes an understanding of how all the closely connected inputs and outputs work together.

No one else seemed to have put all of it together, so Galatowitsch decided to write his own finance book. It didnt turn out to be an easy project. And the book that resulted, called Manufacturing Wealth, is not an easy read.

But for people who want to put some work into it, they will learn a great way to think about and manage their finances.

Galatowitsch, a 60-year-old medical device industry consultant from North Oaks, calls the book Manufacturing Wealth because he sees household finance as a big, integrated machine. It cranks away to produce if run right more than enough money to reach financial freedom and without needing to make corner-office pay.

More than anything else, Manufacturing Wealth is a big work of analysis, like showing what really happens to household net worth over the course of a working lifetime from decisions like buying new cars. (Nothing good, of course.)

Galatowitsch had worked out some thoughts on this kind of problem and then in 2012 started writing the book while still working his day job. He later welcomed the help of a former Medtronic colleague, Chris Engstrom, to move the project along.

Their book appeared this summer, and of course theres always a little risk in picking up any book the authors published themselves. It took weeks for me to finally get to this one, and it was a relief to find so much good thinking in it.

The machine they describe, the household wealth creator, has a lot of moving parts, so its not easy to summarize quickly here. But at its most basic, the machine has two big engines.

One is powered by the cash flowing through the household, the take-home pay flowing in and where it goes, including paying the bills of daily living.

The other big engine is made up of everything we own. The key idea is how the two are connected, so imagine both the car, an asset that only slips in value, and the monthly car payment.

One fair criticism of Galatowitsch and Engstrom is that Manufacturing Wealth introduces a lot of new terms and has lots of charts and numbers. But Galatowitsch didnt really aim this book at everybody.

One primary reader he had in mind, Galatowitsch explained in a recent call, is people a little like himself, working away successfully at building financial stability. Then he hopes the book reaches a second big group of people he and Engstrom call laborers.

Laborers are the kind of people who try to save and get ahead, but every day is a grind. These are people, Galatowitsch said, a little like unhappy dieters. And they can be found at any income level.

One thing that feels like work is paying for a new car, with the average car now at more than $35,000. And purchasing a car is a big deal in this book, showing how even routine decisions can have big consequences over the long term.

A car also seems to be the single best example of a great term Galatowitsch and Engstrom introduce here, the dead asset.

Living assets, they write, can be expected to increase in value, like 401(k) investments. The authors have a sort of zombie category in the middle that includes things like a house. Then there are all the dead assets we buy.

A dead asset will never increase in value furniture, appliances or, as the authors put it, anything we own with an engine. When writing the check for a new refrigerator or an ATV, the buyer needs to know that it will someday be worthless scrap and that today is when it starts declining in value.

They dont have puritanical ideas about these kinds of purchases, as a car to get kids to soccer practice for most families cant really be seen as a luxury. But as they describe in the book, if the new car is replaced every five years over the course of a working lifetime, these new cars come at a cost of nearly $1.7 million in lost value of retirement savings.

Then theres everything else: the licenses, fuel, insurance, maintenance, accessories and so on, with the worst of all being the interest paid to finance the buy.

They have a great term for all this additional spending that comes with the asset purchase, calling it the asset burden. Thats another tie back to the cash flow part of the machine, as an increasing asset burden for the things a family owns from boat storage fees to the cost of tuning up a lawn mower takes more and more of the monthly cash flow.

And asset burden money cant go to piano lessons, movies or a family vacation.

The authors routinely show specific numbers after different families make their choices. One family could afford new cars they had plenty of income to qualify for loans and ended up with no retirement income other than Social Security.

Another family, with exactly the same middle-class income, bought 5-year-old cars and enjoyed $50,000 a year in retirement income from savings in addition to getting the same Social Security payment.

Like a lot of financial books, the end goal of Manufacturing Wealth seems to be financial freedom, but once again the authors take pains to carefully define terms including one they call operational financial freedom.

OK, so maybe its not poetry, but operational financial freedom seems like a realistic goal.

It doesnt mean getting rich, or even accumulating enough retirement assets. Its having enough cash reserves and enough free cash flow, meaning monthly cash coming in that wont be going out for daily expenses or worse, funding the dreaded asset burden.

Now you can be free of worry and can put away the financial diet books.

lee.schafer@startribune.com 612-673-4302

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