The Optimistic Millionaire

When people look at charts like these, I wonder what they see?

Sure, I see a drop in confidence … Blind Freddy can see the panic in the market right now.

But, I see something FAR more important:

Do you see how the Millionaire line (> $1,000,000 Investable Assets) is ALWAYS higher than the Affluent line (>$500,000 Investable Assets)?

One of characteristics of rich people is that they are Optimistic … the richer they are, in general, the more optimistic they are.

As the chart shows, they have their ups and downs … overall, though, they are always more optimistic than others and their highs are higher!

You see, Rich people are used to buying low and selling high … right now, optimism across the board has dipped …

BUT, I guarantee you this:

The Rich are now thinking about buying whilst the rest are still thinking about selling ... I’m out there looking for bargains right now!

What are you doing?

Deal or No Deal

Howie Mandel - Deal or No Deal 

Who would have thought that you could learn so much just by watching television? Maybe, my kids are right? … In their dreams!

A few nights ago I watched NBC’s Deal or No Deal, the Howie Mandel tour de force. It basically works by having people select one suitcase out of 26 offered then accepting or (usually) rejecting larger and larger offers by a mysterious ‘banker’ (just some guy in the control booth punching out a simple computer algorithm) as they eliminate suitcases.

If the contestant stays right to the end, they get keep whatever is in ‘their’ suitcase … a 1-in-26 chance of being $1,000,000, but, much more likely an amount from$0.01 to $500,000.

 Ho hum …. usually …

But, the episode I was lucky enough to witness was a SPECIAL episode, because they put out TEN (10) suitcases containing $1,000,000 (with the other 13 suitcases having smaller amounts … the largest suitcase without $1,000,000 in it now held just $10,000. In other words it was a close to 1.3 : 1 chance of winning a million for the contestant, in theory.

Why was this so special … besides the obvious?

Well, it allowed two or three chances to really see

(a) How the ‘banker’ stiffs the contestants on the ‘offers’, and

(b) How the clueless contestants make their decisions.

 Usually, it is very hard to work out the correct ‘odds’ when the ‘banker’ makes his offer and Howie sells a hill of beans to our hapless hero (i.e. the contestant) … just try this online version of the game to see what I mean …

But, last night, because there were so many $1,000,000 suitcases left at the end, there was (all approximately) one 1-in-4 chance offer, one 1-in-3 offer, and TWO 50/50 offers that even Blind Freddy could see.

Here were the odds and the ‘banker’ offers on each (now, these are approximate because I didn’t write them down and I didn’t record the show):

Offer 1: $170,000 for an (approx.) 25% chance of $1,000,000 being the chosen suitcase

Offer 2: $240,000 for an (approx.) 33% chance of $1,000,000 being the chosen suitcase

Offer 3: $330,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Offer 4: $380,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Would you have accepted any of these offers?

To me, and my maths is probably off, but 33 cents in the dollar on a 50/50 chance sounds a bit light … and, I would not have accepted ANY of these offers.

Anybody who regularly chases 50% chances with only a potential 33% payout will VERY QUICKLY go broke!

What did the contestant do??? She ….

…. rejected the offers [big anticlimax here].

But, I think that she should have accepted ANY ONE of these offers … in fact, I was shocked when she didn’t accept offer 3. or 4. on my table above!

Why?

Because, we haven’t considered her investment and return. You see, she invested NOTHING (except some time) in the ‘deal’ yet was offered hugely large amounts to simply pick up and go home …

… life changing amounts … possibly more money that she is likely to save in her entire lifetime …definitely, 2, 3, or even 4 times the Net Worth of the typical American family!

What does all of this mean?

If you are investing relatively small amounts of your portfolio on investments, gambling, game shows – basically anything where you are chasing a commensurate return –  then pay close attention to the ‘odds’ (otherwise known as risk/reward).

But, if you are making the occasional BIG BETS – those all or nothing, bet the farm-type of gambles (such as changing careers, starting a business, etc.) – then you had better have a clear idea of how life changing the outcome will be.

… then, go for broke!

Save your way to a fortune? I don't think so …

You’ve read the blogs … you’ve bought the books … you’ve talked to your financial advisor (your wife).

They’ve all told you that you need to pay yourself first! So you are … 10% of your gross salary !

You’re putting some aside in your 401k (with some employer match) and you have a little change going into the cookie jar next to your bed.

Great!

You’re already doing two-and-a-half times better than what CBS News calls ‘most people who only save 4% of their salary”.

But …

… it won’t make you rich!

It will stop you from being poor and may even fund a retirement if you start early enough and are willing to take a 30% pay cut.

The problem is, you can’t just save yourself to the retirement of your dreams on the average salary … you have to at least earn more and save most of the extra.

Look at it this way … the amount you can save is limited …

… limited to less than 100% of your salary, and for most people, limited to something between 0% and 20% of their salary.

But, the amount you can earn is only limited by your imagination and your capacity for hard work.

Here are some examples of ways that you can increase your income:

– Change jobs (maybe)

– Work longer shifts (yuk)

– Ask for a payrise (why not?)

– Take on a second (third?) job (horrible)

– Join an MLM ‘opportunity’ (do your homework carefully!)

– Renovate some houses (now may be the time to get back in)

Start trading some stocks (better know what you’re doing?!)

Start a business ‘on the side’ (my favorite!!!)

Whatever you choose: Start Small … Finish Big!

The point is not how YOU should do it, the point is you CAN do it … if you are prepared for some hard work and sacrifice now for a better future. Are you?

If you keep paying yourself first at only 10% of your current salary in your day job, and 50% of the additional money that you earn (after paying off debts), THEN …

… you just may retire RICH!

Let me know if you think this can/can’t work for you …

Groovy gurus or scheming scammers?

There is plenty of ‘investment advice’ floating around im books, in newspaper ads and, yes, even in blogs!

You know you need the financial education to get ahead, so how do you tell the good from the bad?

For a start, try the Fedral Trade Commission’s Test Your Investment IQ …

Done? Now take a look at this BS Detector – it’s aimed at real-estate ‘gurus’ but will work pretty much for any type of financial advice.

And, if you have an interest in investing in real estate, and want to read some books, here is a very opinionated assessment of a number of the s-called real estate gurus out there and some of their books.

You might be surprised at some of the names ….

It seems that this guy doesn’t like ANYBODY, but he has some interesting things to say about them.

If you’ve been to some of these seminars or read some of these real-estate investing authors, let me know what YOU think.

A retirement dream – Australia

I read an article from the Epoch Times in Australia recently. Apparently, Australia is the country most people around the world would like to live in 20 years time (presumably, this means when they retire).

So, how well does the typical Aussie live in retirement?

AXA (the big French multinational insurance giant) questioned workers in 26 countries and here is how the Aussies perform:

The average retired Australian EARNS $1917 a month.

The average retired Australian SPENDS $1437 a month.

By my reckoning, that means that the average Aussie is living an idyllic retirement lifestyle of $17,000 a year (I couldn’t buy much more than a Big Mac and a Starbucks Latte a day for that!) …

… and, for the really big yearly shindig, they have a whopping $5,800 a year spare to spend on holidays, cars, boats, cigars! By the way, these are Aussie dollars, so take off 20% to convert to US.

The concept of an ‘idyllic retirement’ in Australia (or the US, or most Western countries) takes a lot more money than that … unless, your only passion is surfing every day!

So how do financially astute Americans compare ….

Average Monthly Retirement Income

… pretty similar: living off $27,000 a year in retirement, and somehow ‘saving’ $11,000 for all those fine things the Aussies are also chasing!

My question is this?

When you calculated your Number, was it anything like $30,000 or $40,000 a year? I bet it was MUCH MORE. And, that’s the problem with these surveys … they assume that you can (or want to) live off just 70% (or even 100% or 120%) of your current salary when you retire.

Do you?

How much to spend on a house?

In a previous post, I weighed in with my thoughts on the Rent v Buy question. The answer for most people, at some stage in their lives, is to … buy.

But, how much to spend?

Boy, this is a biggie! I mean, your house is usually your biggest personal purchase. So, here goes …

You should INVEST no more than 20% of your Net Worth into your house!

[To calculate your net worth, try this calculator at CNNMoney.com: http://cgi.money.cnn.com/tools/networth/networth.html , then come back and read on, because you need the second half of the equation …]

The ‘20% Rule’ tells you how much of your current net assets you should INVEST, it doesn’t tell you how much house you can actually afford to buy …

… because, houses can be financed!

So, the 20% rule tells you how much deposit you can afford. And, the bank will then tell you how much you can afford to borrow (unfortunately, they won’t tell you how much you SHOULD borrow … only how much you CAN borrow).

Put your deposit + mortgage together, and there’s your house!

For example, say that you have saved $200,000 and it is sitting in the bank. And, assume that you have a job, but no other income or assets. Then you can afford to put down a $40,000 deposit on your house; the bank will look at your income and tell you how much you than then afford to borrow.

Why 20%? After you ‘invest’ another 5% of your Net Worth in ‘stuff’ (car/s, furniture, possessions), it means that you are never investing LESS THAN 75% of your Net Worth (that would be the $150,000 that you have left in our example) in income producing assets (like investment property).

It also tells you that you should never build up more than 20% of your Net Worth as equity in your own home without then borrowing against the remaining equity to invest.

So you should conservatively revalue your house at least every 3 – 5 years and withdraw any excess equity and add it to your investment pool!

If you can’t afford to trade up to a bigger house without breaking this rule … don’t trade up! When you get rich later, you’ll be happy you waited now.

But, if you can’t buy your FIRST (very small!) house without breaking this rule, then buy it anyway … as soon as you have enough equity, borrow against it to invest in long-term, income-producing assets, and keep rechecking this post.

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How much should you take out of your business?

This is one of the most difficult questions if you are a business owner and, like most business owners, it is your primary source of income.

You might say, of course it’s your primary source of income .. that’s why I’m in business! But, that is the fallacy that we will be exploring in upcoming posts.

For now, let me tell you about a conversation that I had with a friend over dinner last night:

My friend said that he had a friend who owned a payday lending business – sounds a bit unsavoury to me, but generates mountains of cash for him.

My friend’s point was that this guy would admit that he’s not very smart, but has a very simple system for dealing with the $3 mill. that his business spins off every year:

1. He gives $1 mill. to Uncle Sam

2. He invests $1 mill. (my friend didn’t ask where or how)

3. He spends $1 mill.

Simple!

But, it’s also wrong …

What would happen if the business had to close down tomorrow (e.g. change in government regulation)?

Unless this guy had managed to save $20 mill. to $40 mill. he wouldn’t be able to keep up a $1 mill. lifestyle (common wisdom says that you should only withdraw 4% from your portfolio every year … I say about half that) …

I believe that it is 10 times HARDER to go backwards in your life (in the event of a financial disaster like if this guy’s business had to close down) than taking a slower run-up in lifestyle in the first place.

This is what I did:

I always drew a minimal salary and tried to live at the median level of the circles that I moved in (for me, this was upper-middle-class college educated professionals).

When my businesses started throwing off more money than that, I invested EVERY penny of the rest, in my case mainly into: (a) reinvesting in the business to expand it, and (b) opening new businesses (3 more), and (c) passive real estate investments.

As I built up equity in (c) – I ignored the ‘value’ of any business until I sold it – I used my ‘divide by 20 – 40 rule’ to decide how much I could spend each year.

Maybe my friend’s friend should have given $1 mill. to Uncle Sam, spent $250k a year to start off with, and invested the rest?

Maybe, after a few years, if financial disaster struck it wouldn’t matter any more what happens to his business …

I’m about to find out if you can make money online … Part 2

The story so far: in my last post I mentioned that I was trying to see if it’s possible to make money with these internet based ‘business opportunities’ (just try googling ‘online business opportunity’ to see how many are out there).

I randomly came across Ty (yeah, the half-naked guy in my last post); he only wants $3k from me to join an MLM travel marketing thing.

Now, here’s the problem: he wants me to sign up NOW and ONLY on the basis of making money … he never mentions how good/bad the product is!

So, this is how I look at any business opportunity that comes my way (and, I have seen plenty of good ones and bad ones):

FIRST: do I like the product?

My view, and one shared by anybody with an ounce of integrity, is that you simply can’t sell something that (a) you don’t use yourself and (b) wouldn’t recommend to a friend.

Fortunately, this particular product is something I COULD use … I travel a lot, and easily spend $2k – $4k a week on just the accommodation portion, so this product has the CHANCE to say me a lot.

Secondly, I looked around on the net for good or bad feedback on the company … I couldn’t find anything either way, which is probably a good thing. I even checked Ripoff Report and the Better Business Bureau … nothing! Is this a good or bad thing? I don’t know … 

So, I also checked the travel sites like Trip Advisor and Epinion and that’s where I started to see the ‘aha’ issues with this ‘opportunity’ …

… this company, and many others like it seem to source their rentals from the big resort and timeshare exchanges.

Whilst many of these are free, this company charges $3k for a ‘platinum membership’ which gives you access to their database AND the rights to sell memberships to other people.

So that brings me to the SECOND part of the decision making process: how can I sell something to somebody else for $3k that they can at least similar for free (or close to) elsewhere?

I can’t … and I won’t; oh well, sorry Ty … can’t help you.

… and, I’m no closer to finding out if it’s possible to make money online!

Never buy a new car … really.

[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=Pev892H_dCs[/pro-player]

A quick tip for you …

… never buy new, this is more true for cars and even more true the higher the price of the car.

For example, the sticker price on my car, was $120k, but I looked around (actually, I just did a quick google search or two) and found the exact make/model/year (2007) that I wanted at a specialist dealer.

I found a car, in my own city no less, that was just 6 months old with only 1,700 miles on the clock in perfect condition for less than $90k … $30k buys a lot of enchiladas in anybody’s book!

I don’t think that I just got lucky …

I have found that the higher in price you go, the more fickle the customer … they buy cars on a whim and churn them quickly when they find out they would have rather had a boring ol’ Merc!

This works at pretty much any price range, too. If you want a more standard car, check out the leasing company sales (maybe at auction) for executive vehicles … a downturn means executive redundancies … redundancies means near-new cars available cheap!

The effect is even more pronounced when you buy imports (except for top line Italian sports cars, and certain Mercedes and BMW’s) because they depreciate by as much as 20% the minute that you drive them out of the showroom!

[Hint: next time don’t even go into the dealer’s showroom to buy that new car, just wait for the ‘other guy’ to drive their’s out, then offer him 85% of what he paid … give the poor sap your card … you just might get a call].

I once had a SAAB and every time I tried to sell it the price dropped more than I could accept: the first time I tried to sell it, I wanted $45,000 for it, but was only offered $35,000. So I waited a year …

Then when I tried to sell it for $35,000 I was only offered $25,000; the next year I got sick of waiting and just sold it for only $15,000!

I would rather have been the guy offering $15,000 than the guy selling.

Happy bargain hunting!

I'm about to find out if you can make money online … can you?

I’ve made my money in real world businesses, real world property, and real world ‘paper assets’ (actually, I think I’ve lost more than I made in speculating the stock market!).

But, I have a theory that the internet is the new ‘wild west gold rush’, where people can lay a stack to some turf and mine for internet gold without outlaying much cash.

It’s only a theory right now, so I am launching two internet businesses (one is being developed right now, and the other is still in the business plan stage) … on paper, they both look good! I’ll let you know in a few months how they turn out …

But, those businesses require development skills, business planning skills, etc.

 What about the ‘average Joe’ who just wants to make some money part time? What about all of those ‘get rich online’ ads that you can find just by googling keywords like ‘money making opportunity’?

Are they GENUINE or are they SCAMS?

Well, I’m about to find out …

Yesterday I randomly searched the net and came up with this ‘opportunity’ (yes, it really is a half-naked guy named ‘Ty’):

Ty

The first thing I was asked to do was pay $50 ‘application fee’ to prove that I am ‘genuinely interested’ and a ‘go getter’ … smells a bit fishy, huh? … so, what did I do?

I paid it!

After a barrage of e-mails and a conference call invitation that I missed, I got a link to the page in the image above. I’m listening to the audio right now … I think they want me to pay $3k to join a multi-level marketing system to sell memberships to some exclusive travel club.

I’m told to “… Embrace the fact that you are surrounded by a team of leaders that care about you and are going to show you exactly how to bring it all together. Your life will turn around and you will succeed!!

What will I do? I don’t know yet … but, I’ll let you know … right now some guy on the audio is telling me “it’s the best thing that I’ve ever done in my life” … do you think the half-naked guy really has something?