Monthly Archives: February 2008

The Scared Millionaire

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Greed Is Good

They say there are two primal forces driving mankind forward …

…. FEAR and GREED.

The typical image that we carry of the ‘rich guy’ is the uber-slick Michael Douglas / Gordon Gekko character from the movie Wall Street who’s catch phrase was “Greed is good”.

But, the Millionaire Next Door was perhaps the first book to dispel that particular myth.  Still, we are either driven, it seems to a greater or lesser extent, by fear or greed.

Is it possible to become rich if you aren’t driven by GREED? Isn’t it also true that most millionaires are OPTIMISTS?

Well, I can only speak for myself, but what moved me forward every day was actually FEAR. You see, I am a pessimist!

EVERY time I buy something, I am thinking of how much I could lose … not how much I could gain. Yet, I go ahead and buy, anyway!

Why do I buy, if I carry so much FEAR? 

I do it because I have an EVEN BIGGER FEAR … a fear that if I don’t make these ‘big moves’, I won’t make MY NUMBER ….

… and, I have realized that making my number is the most critical thing that I can do. Unfortunately for me and my personality type, my Number was a BIG NUMBER … I simply had to move well out of my comfort zone to get there …

… and, get there I did.

So, it doesn’t matter what drives you … just make sure that SOMETHING bigger than amassing a seven-figure bank account for the sake of seeing a pretty bank statement one day IS driving you!

I think I'm revealing the whole 'secret' of money …

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In my first post I briefly alluded to the 3 stages of money: I call them Making Money 101, 201, and 301.

Starting next week, I’m going to write one post a week on each of these stages …

 First, though, let me tee up how I think about making money … serious money … say, $7 million in 7 years.

Making that sort of money – for most of us who don’t inherit, win, steal, speculate, gamble our way to that much moolah – is a long journey …

It’s not so bad when you consider that 99% of people can’t SAVE their way to $1,000,000 in 20 years … but, my point is that it’s still a journey that takes quite some time.

So, if you were to go on a long journey (besides taking a change of shorts) what would you need?

Three things …

1. A destination

You would need to know where you’re going … for a short, local journey, you probably need an address … for a long, global-scale journey, a country and city would be a nice start.

2. A map and compass

If it’s a local journey, you will probably need a street map … although, very simple instructions from somebody who knows the way will probably do.

But, if it’s a global-scale journey, the trip will most likely be broken down into stages for you by your travel agent, and you will need a series of  ‘planes, trains, automobiles’ maps, telling you how to get from HERE to THERE.

 Also, it would be a good idea to have a compass to tell which way is UP when you read the maps!

3. The Rules of the Road

Now, it would be nice to get to where you’re going without being arrested. If it’s a local journey, you can probably use common sense (although, it’s still best not to jaywalk).

But, if it’s a global scale journey, the rules may be totally different at different stages of the journey (you DO know that the Brits drive on the other side of the road, don’t you?).

Well, making money is a journey as well … therefore, you need …

… three things:

1. A destination

When it comes to money, your destination is in two parts (a) HOW MUCH you need, and (b) WHEN you need it. The when is usually in terms of WHEN you stop working, but it need not be; and the HOW MUCH is determined by how well you want to live when you get there (1 star? 5 star? In between?).

2. A map and compass

Your map will be the three stages of your financial journey (getting debt free and starting a savings plan; ramping up both your income and your investments; keeping your money once you get wherever ‘there’ is for you) and we will cover all of that over the coming weeks.

Your compass will be your Investment Net Worth (we’ll discuss the difference between this and your ordinary, old ‘net worth’ later this week).

 3. The Rules of the Road

Like every good ‘rule book’ the Rules of the Finance ‘road’ is a thick one! I’ll be giving you many of these rules over the coming weeks and months in the cyber-pages of this blog; an example of a Financial Rule is the 20% rule of investing in your own home …

… there are many, many more. By learning these Financial Rules, you can shave YEARS off the time it takes you to get rich.

This blog is here to show you how!

Are you really on track?

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I read an interesting question on one of my favorite blogs the other day.It was from a couple thinking about retirement asking the usual saving-for-retirement questions, peppered with the usual ho-hum terms: ROTH IRA’s, 401K, HSA, CD’s …

What caught my attention was the opening sentence to their post:

“I feel very knowledgeble about long term investments.  I feel I manage my retriement savings very well and this has been a top priority.”

If you think your ‘retirement is on track’ just because you are saving your 10% or so into all the ‘right investment vehicles, or retirement for you is still a hell of a long way off, I would just ask that you do the following quick ‘reality check’:

1. What is your current Net Worth (try the CNNMoney calculator)?

2. What is your annual income goal to fund the retirement that you always hoped for?

Multiply that by 20 to 40; depending on how certain you want to be that your money will last as long as you do …

3. The difference between 1. and 2. is what you have to make up (ADD a little more for inflation) between now and retirement.

If it’s only a little, keep doing what you’re doing; your retirment is probably ‘on track’ …

BUT, if it’s a lot, maybe you need to think about INVESTING actively (business, real-estate, trading) rather just SAVING (CD’s, 401K’s, etc.).”

The problem is that most people seem to SAVE (or not save) for their retirement without having a clear understanding of what they want out of retirement, therefore, how much income they need to fund that lifestyle.

It MAY have NOTHING to do with what they currently earn … yet, replacing some or all of the pre-retirement salary is what everybody seems to be aiming for. 

So, the issue changes – in my estimation, for MOST people – if they are set to save for a $35k a year retirement, but their dream of living in Tuscany [insert retirement dream of choice: working with the poor in Africa; sailing around the world; quitting my job well BEFORE usual retirement age to become a painter; etc.] requires $150k a year!

Are you really on track for your retirement? 

 

Against the odds …

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For those of you who follow this blog, you will know that a key part of getting ahead is increasing your income.

And, you will already know that I think one of the best ways to do this is to start your own business … perhaps part-time, at first, to limit your risk … and, definitely in combination with other financial strategies that I will be sharing with you over the coming weeks.

For me, the gold-standard in this area is still The E-Myth Revisited by Michael Gerber … a book that I will unashamedly admit changed by life.

But, for anybody heading down the entrepreneurial path, I equally highly recommend a book by Guy Kawasaki (ex-Apple, founder of garage.com) called Art of the Start.

Guy can also be found on his blog, where I found this interesting post, that deals with the various myths around being an entrepreneur.

The problem is that the guest author is an academic who uses ODDS to establish that some types of businesses are better than others, and to suggest that it is the type of business that you go into rather than your ‘entrepreneurial ability’ that determines your success.

Here’s where I disagree …

YOUR odds of succeeding in any business venture are exactly 50/50 … either you WILL or you WON’T succeed!

Obviously, that makes no MATHEMATICAL sense, but going into business rarely does.

That’s why the rewards for those who DO succeed can be so high. If it were easy – and if success was GUARANTEED – we’d ALL be doing it!

For example, we intuitively know that the ODDS of being a huge success are so small in, say, sandwich shops.

In fact, the article suggests that the odds of mega-success in that type of business are 840 times smaller than starting, say, a computer business.

Yet, who wouldn’t like to be Mr Subway, Mr Quizno, Mr Togo, or Mr Potbelly?

I’ll even put up $1,000 that says that each of them knew EXACTLY what they were getting themselves into when they started out.

But, somewhere along the line each and every one of these entrepreneurs … in fact, EVERY SINGLE SUCCESSFUL ENTREPRENEUR IN HISTORY … simply said: “screw the odds”.

Having done some ‘odds screwing’ of my own (a number of times, with great success) over the years, I humbly suggest that you do, too.

Please let me know how well you do …

Are you Rich, yet?

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I like reading, and sometimes commenting on, other people’s blogs.

There are some really good ones out there (check out the Blogroll in the sidebar) … especially helpful to people still in the saving/debt cycle.

 One that I read is Pinyo’s very open blog; in one post he says:

 “From The Millionaire Next Door by Thomas Stanley and William Danko, you net worth should be:

Net worth (or Assets – Liabilities) = your age X your pre-tax income / 10

If you have twice that, you are indeed on your way to become wealthy! Stanley and Danko call them Prodigious Accumulator of Wealth or PAW

I did a quick calculation yesterday in my beat up 98 Ford Contour, and our net worth should be about $345,000 according to the formula. Right now, we have about $730,000 including home equity. This mean we are a pair of PAW!”

 That got me thinking … when was the last time that I actually bothered calculating my own Net Worth?

 Why even bother? 

You see, the problem with all these external measures is just that … they are external.

If that’s what you want, Networth IQ has a free tool that helps you measure your own Net Worth … and then compare it to others.

But, the real definition of wealth is how much YOU need to live off each year (indexed with inflation) for the ‘life of your dreams’ …

… your real dreams (hint: for most people that does not require a Ferrari and a Lear Jet).

Multiply that annual amount by 20 – 40 (to be 99% sure your money will last as long as you do) … if you already have that, congratulations, you are RICH!

Simple and accurate … for you.

To buy a new(er) car … or not?

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Should you upgrade your car … or simply keep the one that you have … you know, the old rust-bucket that gets you from A to B but not in any sort of style?
It DEPENDS!
Is the vehicle a TOOL OF TRADE? Is it an ESSENTIAL requirement for your business (e.g. if you are tradesman, you need clean/reliable/fuel-efficient transport)?
Or, is it simply a mode of transport for you and your family (in which case you have MANY transport options to choose from: new v. second-hand vehicles of all shapes and sizes; public transport; etc.)?

If it is simply ‘transport’ then by hanging on to your old ‘rust bucket’ (within reason), you have made a GREAT choice!

Why?

A car is NOT an asset, it’s clearly a liability … as Robert Kiyosaki says in Rich Dad, Poor Dad, the definition of an:

ASSET is simply something that puts money INTO your pocket, and a

LIABILITY is something that takes money OUT of your pocket.

The ‘rule of thumb’ is that you should INVEST (into real long-term ASSETS) 75% of your Net Worth: a max. of 20% into your house, and the remaining 5% into your ‘stuff’ …

… once you pay for a new(er) car, it doesn’t leave a lot left for other ‘stuff’, does it?

How to get a guaranteed retirement …

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If you are planning for retirement, check out a book called Worry Free Investing by Zvi Bodie.

Then ask a Financial advisor if you can substitute INFLATION PROTECTED MUNI’s (a specific type of Municipal Bonds) for the TIPS (Treasury Inflation Protected Securities) that he recommends in his book …

… THEN you just may have ‘guaranteed protection’ against BOTH inflation and taxes, possibly for life.

Now, THAT’s a winner!

Let's not confuse 'saving' with 'investing' …

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This goes back to a comment that I received in response to a question posted on another finance blog – one that I happen to like for early-stage savers …

I suggested that for many people, their retirement savings actually won’t be enough to fund their ideal retirement … if they’re happy to accept less, fine!

If not, then I suggested that they may need to do something a bit more active to pick up the pace …

Here is a response that I received:

“Your investing approach of “actively (business, real estate, trading)” sounds more like speculating and your savings approach (CDs, 401ks, etc.)” sounds more like investing to me. Just based on the statistics of individuals who trade rather than index…most get eaten up by fees while compounding growth usually is the better way to go using monte carlo analysis, But who knows what will happen in the future.

Posted by: klauss | February 08, 2008 at 12:21 PM “

My point is simply this:
IF your retirement plan is on track, then keep doing what you’re doing.
But, the vast majority of people can’t simply SAVE themselves into their ideal retirement; they have to INVEST in their future.
I call it ‘investing’ – investing in our future – but, if starting a part-time, work-at-home business, experimenting with actively trading stocks or options [not my personal choice], renovating then holding an income-producing property, etc. is ‘speculation’ to you …
… I simply say:

Bring it on baby!

Where do you stand?

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In a recent post, I shared one view (not mine) on what it takes to be considered rich …

…it’s $5 million !

Now, here is an article by Bankrate that brings that number right down to the other end of the scale …

Check out this table showing the spread of annual income:

Income level (percentile)

 Median income (rounded)
Level VI (90 to 100) $170,000
Level V (80 to 89.9) $99,000
Level IV (60 to 79.9) $65,000
Level III (40 to 59.9) $40,000
Level II (20 to 39.9) $24,000
Level I (less than 20) $10,000

Source: Before-Tax Family Income, 2001 Federal Reserve Board Survey 

First, let’s see where you stand in relation to this table?

If you aren’t in the top brackets (although, many of our readers are), it might be comforting to note (according to the Bankrate article): “if you are bringing in $40,000 a year, you’re doing better than half the households in America. Or, as a Washington think tank recently pointed out: If you’re a teacher married to a policeman, your combined household income puts you in the top 25 percent of all households in the nation.”

What intersted me most, was the relatively low income that it takes to be at the absolute middle of the top 10% of all income earners in the USA … ‘only’ $170,000.

This amount seems to correlate with a New York Times survey that said the ‘rich’ were bringing in between $100,000 and $200,000 per year …

… and, if you are like most Americans – earning less than $40,000 – this sounds like a king’s ransom … but, it’s not.

You see, there’s a big difference between what you might bring in as income and what some people call sustainable retirement income .

Take a look at what the Bankrate article tells us how much these same people currently have as their Net Worth:

Net worth (percentile)

 Median net worth (rounded)
Level VI (90 to 100) $833,600
Level V (80 to 89.9) $263,100
Level IV (60 to 79.9) $141,500
Level III (40 to 59.9) $62,500
Level II (20 to 39.9) $37,200
Level I (less than 20) $7,900

Source: Family Net Worth, 2001 Federal Reserve Board Survey 

Look at the top level, the same ‘rich’ people who earned $170,000 a year in the first table, only have a median net worth of $833,000 according to the second table.

Now, if you take this $833,000 and apply the ‘safe’ annual withdrawal rate of 4% as advocated by most misinformed financial advisors (for me, the safe withdrawal rate is more like 2.5% p.a.), it seems like these so-called ‘rich guys’ can only afford to spin off $33,000 a year.

Now, that’s less than the teacher and the fireman! So, what’s wrong?

Well, for a start there are actually very few really Rich people in this country – so few that there should be another category in BOTH of the above tables: the top 1% of the USA population by Net Worth and Annual Income. 

Secondly, the so-called ‘rich guys’ earning $170,000 are just like the rest of the working population working at a JOB … Just Over Broke.

When their job stops, they stop being ‘rich’ … period.

So, where do you stand?