How to really practice Smart Personal Finance …

piggy-bankThere’s a small, but growing movement to try and ‘package’ personal finance advice into various ‘systems’ …. heck, I am [still] working on my own Grand Unified Theory of Personal Finance …

Hint: it will come with all sorts of strings attached 😉

… for example, take these Tips on Practicing Smart Personal Finance from Think Your Way To Wealth [AJC: I’ll leave you to read the post, which has some great suggestions].

But, if I were to write some of my own tips on ‘practicing smart personal finance’, it would surely begin with the end: know your objective.

Then it would suggest that you find our where you are today and come up with a plan to bridge the gap between the two; for example, my list might look something like this:

1. Understand WHY you need money

2. Decide HOW MUCH money you need

3. Plan for WHEN you need it

4. Find the Annual Compound GROWTH RATE required to get you from HERE to THERE

5. Get Started … take the first step

6. Make sure you don’t spend the money that you need to grow

7. Plan NOW for how you ar going to keep your money safe once you get there

8. Ensure your plan (this is not the same as – but, MAY include – insuring your plan).

That’s pretty much what I like to call Making Money 101, 201, and 301 … and, if you do it right, it’s not merely ‘smart personal finance’ … it’s Stupendously Intelligent Personal Finance 🙂

Feel the power, Baby!


We all know one …

… you know, (usually) the guy who goes out and buys the biggest ‘muscle car’ that he can afford.

His # 1 criteria is the Number of Horses that fit under the hood of the car.

Unfortunately, those cars usually can’t get to/from the corner store as quickly as Little Johnny on his BMX bike (traffic and traffic lights), and they certainly can’t get around the track quicker than that guy from school who was always tinkering with engines and stuff … you know, Tony Romularo in his souped up 80’s bright red Alfa Sud, you know, that little Italian car with the tricked up suspension?!

You see, the muscle car has a a problem: weight.

In order to carry the engine … and, have the BIG/POWERFUL car look that muscle-car-lovers crave … these cars usually have to be big and heavy. That means that they can be slower than the simple measure of horsepower can lead you to believe.

So, you can do what others do … look for results: look at the specs, skim right past the power rating, and go straight to the only kind of performance that really matters – the one that takes into account BOTH Power AND Weight: how fast will the car do the 0 to 60 mph?

That’s the kind of results that I’m after … if it’s under 5.5 seconds, I’m there, Baby!

But, are you?

How do you explain Little Johnny and the trip to the shops? Or Tony and his ‘tricked up’ Alfa?

Of course you can’t unless you take a look at your overall objective first:

– If you want the most powerful car that you can buy, go ahead and buy the Muscle Car (after all, it looks good, sounds great, and you’ll be a hit with your mates at the pub), but

– If you want to get from A to B in the [Insert criteria of choice: fastest time possible, safest means possible, greenest way possible, lowest cost way possible … or, any specific combination thereof] then you have a more complex decision to make that may or may not include buying the biggest engine you can find.

Do you see where this is going?

There are so many financial ‘truths’ out there:

– Buy dividend stocks

– Max your 401k

– Choose only the most ‘tax advantaged’ real-estate

– and, there are many, many more

Each, in its own way, is like just one aspect of a [financial] vehicle: one is like the engine, another like the suspension, and another like the type of fuel you put into it …

… you COULD take on any of these just because it’s there; after all, millions do.

But, wouldn’t it be smarter to first look at your financial destination (your Number), the time that you have available to get there (your Date), and the skills/knowledge/interest/aptitude that you can apply, then look at the range of ‘vehicles’ (i.e. your Growth Engines) available to get you there and select only the most appropriate for you?

I like to think so …

So, how did my wife choose her current car?

She wanted a luxury, SUV Hybrid … that meant the Lexus R400h. Period.

Does it even save money (no … too damned expensive)? Does it even save the environment (uses as much fuel as the non-hybrid R300; and, what happens with the batteries once they need to be disposed of)? And, is it even a good SUV or a real ‘luxury’ vehicle (doesn’t even have keyless entry)?

And, how did I choose my current car:2008_bmw_m3_convertible_in_blue_images_1

– Performance: 0 – 60 sub 5 seconds

– Convenience: 4 ‘real’ seats to carry the kids in the back

– Handling: Had to be ‘nifty’ around a track

– Safety: Had to have a high safety rating; good crash test results; airbags and other safety features

– Convertible: Had to have a metal-folding roof

But, even those are merely a list of features: I wanted a car that I could use all year around (be a true convertible in summer; a true coupe in winter … and able to flip/flop between the two at the drop of a hat); be a lot of fun (but safe), and be fast’n’fun – and safe – both on the road and on the track.

That pretty much meant the BMW M3 … fortunately, price tag (and, fuel consumption) was never on my list of criteria or I may have been ‘forced’ to go for the VW EOS 🙂

The 401k fallacy …

The objective of this blog is not to challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’ …

… that’s just a means to an end.

The objective is to help you become rich [AJC: after all the title of this blog IS “How to make $7 Million in 7 Years”], but in doing so we MUST challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’!

Do you see how one is the means and the other is the end?

So it is with many of these personal finance ‘myths’ … so many are treated as an end in themselves, rather than the means that they simply are; none more so than the Mighty 401k.

If we are to become rich, we must slay the temptation to lay at the feet of this great Financial Idol and see it not for what it promises (future financial freedom) but for what it really is: simply words written on a piece of paper.

That’s it, the 401k is just a tax-advantaged savings TOOL … it’s not even a scheme, as there is NO guidance as to what you should put in it (other than restrictions to tell you what you MUST NOT put in it).

Therefore, I have NO OPINION on whether a 401k is intrinsically good or bad for YOU … just as I have no opinion as to whether a stone carving is intrinsically good or bad for a pagan civilization … it’s what belief in its purported ‘power’ does for (or against) your [financial] future that concerns me.

It’s not the tool, but how you choose to use it that counts …

Now, I covered the 401k in many posts, but I thought that I would pick up on a great discussion going on over at my other site, where Scott says that he has no use for a 401k:

I can’t utilize many of the retirement accounts because of my income level and the ones that I can, I max so quickly that it just seems moot. For example, right now, I’m saving up cash as fast as I can to purchase the entire building that my practice is located in. This building also has another business next door that will be paying me rent, and in essence, will drop my personal mortgage significantly, while it’s getting paid off in a few short years, then I own the commercial building, not pay rent, AND receive passive income!

So my question to you would be; Should I delay the purchase date to buy this building and all the above said benefits to first max out retirement accounts that I can’t touch for 30+ years, AND get taxed on them when I do.

Which gets me to my Number faster? Purchasing commercial real estate NOW as fast as I can in my 30’s, particularly one’s that I would normally have to pay rent on and actually begin RECEIVING rent on as well, or fund a retirement account to shed some tax now?

After a bit of discussion around the possibility of finding other tax-advantaged investment vehicles, depending upon your financial positions, Jeff summarized the discussion quite soundly:

The only reasons I can come up with right now to not invest in these types of accounts first is either:

1. The amount you want to invest is greater than the annual contribution limits.


2. You don’t like the age restrictions and early withdrawal penalties that go along with these accounts.

Those are both very valid concerns and certainly reasons to not use typical retirement accounts.

Absolutely, Jeff!

If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so.

However, if you divert from a financial course that stands a reasonable chance of meeting your financial objectives – the type of course that Scott seems set to take – just so that you can take part in, say, an employer-sponsored 401k, that may not achieve your financial objectives (in the timeframe that you require, not the timeframe that the employer/government offers) then, in my opinion, you are making a huge mistake 🙂

The fallacy of dividend paying stocks – Part III

Today, in a final post in a long series, I show you how to put what you have learned about dividends into inaction 😛

But, to wrap up this important series, first it might be nice to go “all the way way to the beginning” with some history on dividends, courtesy of our friends over at Everything Warren Buffett:

During the first half of the 20th century, dividend income made up all of the 5.3 percent return U.S. stocks delivered to investors, data compiled by the London Business School show.

At the time, companies paid out most of their earnings to shareholders, compelled by a Treasury Department rule that established penalties for “improper accumulation” of income, according to the sixth edition of Benjamin Graham and David L. Dodd’s “Security Analysis.” The book laid out the principles of value investing followed by billionaire Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and the world’s most successful investor.

“The prime purpose of a business corporation is to pay dividends to its owners,” Graham and Dodd wrote.

Between 1980 and 2000, investors increasingly sought price gains as dividends contributed 25 percent of returns. The shift occurred as companies such as Cisco Systems Inc. and WorldCom Inc. increased profits by using excess cash for expansion and acquisitions. In the five-year bull market that ended in 2007, cash to shareholders as a percentage of earnings fell to a record low of 31 percent, based on data compiled by Yale University professor Robert Shiller, as profit growth juiced by borrowed money outstripped dividend increases.

Returning money to shareholders prevents managers from wasting it on investments that may not prove profitable, according to Bahl & Gaynor’s McCormick.

“It forces companies from empire building, stupid acquisitions and nefarious activities,” he said. “You can’t fake the cash.”

The last sentence pretty much summarizes the pro-dividend position: it stops companies from making mistakes with their cash …

… but, my perspective on that is simple: who is better placed to invest my cash? Me (Mr Ordinary Investor) or, say, Warren Buffett (Mr World’s Richest Man)?

In fact, at the 2000 Berkshire Hathaway Annual General Meeting, Warren Buffett was asked about the dividend policy at Berkshire, to which he said:

We will either pay large dividends or none at all if we can’t obtain more money through re-investment (of those funds). There is no logic to regularly paying out 10% or 20% of earnings as dividends every year.

Given my somewhat ambivalent stance on dividends – I can take ’em or leave ’em 🙂 – it was interesting to see this recent and nicely coincidental article in Motley Fool:

… it’s important not to focus on a dividend yield alone, as recent happenings in the stocks below make clear:


Problem With Dividend

General Electric Either must cut dividend or lose AAA rating, according to analysts.
Gramercy Capital Company forwent its fourth quarter dividend.
Education Realty Trust of Memphis Cut its dividend in half.

Even in a bear market, growing companies that pay dividends can be too good to be true — so be sure to do your research.

You see, the decision to pay dividends is a somewhat arbitrary decision of the board of directors … only loosely tied to the actual profit (better yet, cash flow) performance of the underlying business.

Profits are related to the internal performance of the business.

Dividends are related to the external relationship of the company’s management (as represented by it’s board of directors) to its owners (i.e. its shareholders).

So, when you invest in stocks, you should simply remember that you are buying a small share of a big business: and like any other investment, you should make sure that it makes a decent – and, steadily increasing – profit (called ‘earnings’) and produces strong – and, increasing – cashflows that management uses wisely.

This means that you will EVENTUALLY get your money back in some combination of two ways:

1. The share price will eventually rise to reflect increases in profits and/or

2. The board of directors may choose to distribute some of the profits as dividends.

So here are your Buy For Income INVESTING strategies if you do decide to choose stocks as an investment vehicle:

Making Money 101

You will probably be investing in a low-cost Index Fund and holding until you reach your Number; the fund will usually collect any dividends and reinvest them automatically for you. All you will see is a long-term increase in the total value of the fund (appreciation + reinvested dividends) … frankly, this is all you really care about right now.

Making Money 201

If the urge to invest in individual stocks strikes, you will probably purchase 4 or 5 undervalued stocks (i.e. where the current price does not fully reflect the current and/or future earnings of the company … notice, I haven’t mentioned dividends here) and hold them. You will probably reinvest the dividends into buying more of the same stocks as they probably still represent excellent value. You will keep doing this until you reach your Number (or decide to cash out for a ‘better investment’).

Making Money 301

You will talk to your accountant about the tax advantages of withdrawing any dividends v reinvesting v selling a small portion of your portfolio every year to live off … other than that, you won’t care if you make your yearly ‘retirement’ income by selling stock, withdrawing some/all of the dividends, or any combination of the two.

Still confused?

Think of it this way:

Dividends are what you MAY get if you speculate on some stock (i.e. a piece of paper) …

… Profits are what you WILL get if you invest in a solid business.

If you invest well, eventually the stock price PLUS the dividend (it’s not terribly relevant in what proportion) WILL rise to meet the steadily increasing profits … Warren Buffett has averaged a 21%+ annual return by this simple assumption.

Suffice it to say that I have NEVER (yet) bought a stock for (or despite) its dividend … how about you?

The upside down car?


Trees Full of Money shows us how to deal with a situation where we’re ‘upside down’ on our car loan:

If you can no longer afford your “upside down” vehicle, here is a a better way to get out of your loan:

Step 1
The most important step in unloading a vehicle with negative equity is to accept the situation for what it is. Saying “if I sell my vehicle now I’ll lose money” is not a plan. The quicker you sell your “upside down” vehicle, the less money you loose due to further depreciation.

Step 2
The second step in selling an “upside down vehicle” is deciding on a fair market value. Lately, the value of used vehicles has been just as volatile as the stock market or the price of oil. The fair market value of your vehicle may be significantly more or less than used vehicle pricing guides such as NADA and Kelly Blue Book suggest.

Step 3

Once you’ve established a competitive price, you need to secure funding for the difference between what you owe and what the vehicle will bring.

Step 4
Once you have met the obligations of your loan, it’s time to do a little marketing and salesmanship. I little effort in the marketing of your vehicle can pay huge dividends.

Step 5
When you have identified a prospective buyer for your vehicle, be sure to ask your bank how to proceed with the transaction. Each state has different laws so be sure to contact your state’s motor vehicle division as well.

[AJC: If you do want to sell your financed vehicle, I recommend that you read the full post here, as I have only extracted TFoM’s highlights]

But, where is Step 6??!!

It should be the one that says: how do I buy a replacement vehicle?

You see, unlike many things that you may choose to own, a car is probably a necessity … now, that doesn’t mean that you need the best car, but you do need a car that can achieve [Insert objective of choice: get to/from work; haul stuff around the farm; schlepp the kids; etc; etc].

So, what do you do?

Well, you first try as hard as you can NOT to get yourself into a financed vehicle in the first place …

… you see, almost anybody who has a financed vehicle is in a negative equity situation:

– As soon as you walk a new car off the lot it has depreciated 10% to 30%, yet you still owe 100% – deposit + payout costs on the loan,

– If your loan is longer than a year or two, the car is probably depreciating at a faster rate than you can pay down the loan.

If you’re not convinced that you are already ‘upside down’ on your loan, ask for a ‘payout figure’ from your finance company – this is the amount that they would expect in a check today to hand over the title to the vehicle to you ‘free and clear’ – and, get ready to choke! Go on, try it …

So, don’t get yourself into this predicament!

But, if that is the only way that you can get into your first set of wheels (is it really, truly the only way? Or, are you just kidding yourself?!), or you are already into a financed vehicle, don’t sweat it.

Just take a look at your current monthly payments and the payout cost … if you can payout the vehicle and buy a cheaper one with cash, go for it. But, the chances are you will need to hang onto your current vehicle, as long as you can afford the payments.

Now, if you can’t afford the payments and you ARE upside down on the loan (as you surely will be), you will need some help to negotiate your way into handing back the vehicle, walking away from the loan and finding a way to start again. Now, that’s a whole can of worms that you just don’t want to open …

… so, next time you’re thinking of upgrading your car with a nice little “low-interest dealer loan” … don’t 😉

401k … a means or an end?

There’s still this general expectation that if you earn an income then you will have a 401k … it’s seen as an ‘end’ rather than the ‘means to an end’ that it really is.

Let’s look at the advantages:

1. Tax free on deposits into your 401k … ‘boosts’ your investment buying power by up to 25% to 35%

2. Possible employer ‘match’ … further ‘boosts’ your investment buying power by up to 50% to 100%

Now, let’s look at the disadvantages:

a) Generally, limited investment choices (e.g. managed funds)

b) High fees (both explicit and hidden)

c) Restricted access to your money until government-managed ‘retirement age’

d) A fairly low ‘cap’ on amounts that may be invested

But, similar lists of advantages and disadvantages can be draw up for ANY form of investment, tax scheme, etc. etc. …

… it’s just that we mostly don’t bother. We blindly accept the 401k as the ONLY way to go.

Ryan says:

I share your distaste for 401Ks, and their fee’s and penalties, but I have to believe that there is some advantage to having tax shelters (be them 401k or not). Otherwise, won’t the government just take all of your hard earned (and passively earned!) money?

Ryan’s right … the Government WANTS you to pay tax, but only the minimum that you NEED to pay … they don’t expect a penny more. The problem is, the government is only interested in the tax portion of your personal ‘Profit & Loss’ … YOU should be concerned with all of it!

As Scott says:

Robert Kyosaki states that the wealthy aren’t the one’s paying the lion’s share of the taxes. The middle and upper middle class do.

A 401k, ROTH, ROTH IRA, etc., etc. are all simply methods of protecting assets from taxes to a greater or lesser extent …

… the problem is not with these ’shelters’ in themselves, it’s in their design. You see, they were designed for the ‘average American’ to encourage them to save for retirement.

You and my other readers are probably NOT average Americans – if you are like me, you are aiming for a Number in the millions – and will surely hit the ‘roof’ (i.e. the maximum amount that the Government ‘allows’ you to sock away during any one year) of these vehicles very quickly, as your income starts to sky-rocket from Making Money 201 activities …. then, once you achieve your Number, the limits that you can have socked away will mean little to your Making Money 301 wealth preservation strategies … it’s why I don’t even bother!

It doesn’t mean that you shouldn’t tax-protect your money …

… it’s merely that Scott has hit the nail on the head: these aren’t the ONLY tax shelters available, or even the BEST tax shelters available.

For example, and as Robert Kiyosaki suggests, investing in income-producing assets via corporate structures (LLC’s; trusts; C- and S-Corporations; etc.; etc.) and taking advantage of all the tax deductions available to you (e.g. depreciation, 1031 Exchanges; etc.; etc.) will blow away any ‘tax advantages’ of 401k’s and similar (even WITH the ‘free’ money from the employer match factored in).

So, let’s not put the cart before the horse:

– FIRST look at the types of investments that you need to make in order to reach your financial objectives – be they long term (i.e. your Number) and/or short-term (e.g. flipping a house / trading some stocks and options)

– THEN look at the best ‘vehicle’ to house them in.

As an extreme example, if you decide that a business is the way to go – and, put up 100% of your savings as ’seed’ capital’ – then having a 401k is hardly going to help you, is it?

Blindly setting up a 401k first, then seeing what investments you are allowed to make in them is putting the cart well before the horse!

What price Russian Roulette?

If you scroll forward to about the 3.5 minute mark and start paying VERY CLOSE ATTENTION you will hear Warren Buffett impart one of the most important Making Money 301 lessons that you will ever hear …

[AJC: The lesson is simple: STOP WHEN YOU HAVE ENOUGH!]

… it might also help to explain to my friends why I am not rushing out to find “the next big thing” and why I have decided to limit my ‘venture capital-style’ investments to no more than $150k each (and, preferably ~$50k for each of my internet startups); then again, I don’t give my friends the same information that I give you … that would make me insufferable 😉

If you only take away one thing from this whole post, let it be these wise words paraphrased from Warren about certain ‘greedy rich people’:

To make money that they don’t have but don’t need, they risk what they do have and do need.

Can you see the idiocy in that?

If so, then you truly understand why I ask you to find your Number: it’s the ultimate antidote to playing Russian Roulette with your own finances!

You might want to screen the advice from your ‘experts’ a little better …

You can’t fully accept Charles Darwin’s Evolution Theory until you explain the Bombardier Beetle; equally, you can’t fully accept Larry Swedroe‘s support of Modern Portfolio Theory [MPT] until you explain Warren Buffett …

… having said that, perhaps I was little harsh when I suggested to my blogging-friend Pinyo that:

You might want to screen the advice from your ‘experts’ a little better …

But …

Larry Swedroe is a guest expert on Pinyo’s Blog, and Larry has published a number of books – including a highly-regarded one on the ‘workings of the stock market’ – so, I read the post with interest; it was a response to a reader question:

How can a person justify support of modern portfolio theory [MPT] when there is a Warren Buffett in this world?

Firstly, you already know my views on MPT and the so-called Efficient Market Hypothesis, which basically says that everybody has access to the same information (illegal trading based upon insider-information, as well as scamsters like Messieurs Ponzi and Madoff, aside) so, stocks must be priced correctly at all times.

Which doesn’t mean that you can’t buy ‘cheap stocks’ from time to time (e.g. now), but more that you can’t beat the market … nobody can, and if someone can, it’s either luck/randomness or can’t be predicted up front.

So, how do you ‘explain’ a Warren Buffett (or, the others)? Or, is this a case of the ‘exception proves the rule’?

First, it was no surprise to see Larry answer the question, in summary, as:

That is an easy question to deal with. First, with thousands or millions of investors we should expect some to outperform the market every year and some to do so for many years, randomly. The question is: Is there any more persistence of performance than would be randomly expected. The evidence from hundreds of academic studies is there is not.

Another answer to the question is that Warren Buffett is not the typical investor. He is not like a mutual fund manager. He often buys companies and then manages them. He provides them with economies of scale, lower cost of capital and the benefits of his managerial wisdom. And when he takes large positions in companies he often gets a board seat. So perhaps his great returns are more a result of his managerial skills than his investment skills, or some combination of both.

When I got this question a few years ago I went to do a simple check on the performance of Berkshire Hathaway for the prior ten year period and then compared it to the five major U.S. asset classes of large, small, small value, large value and real estate. During that period BRK had underperformed all but the asset class of large stocks (as represented by the S&P 500) and had underperformed an equally weighted (20% each) portfolio of the five that was rebalanced annually by several percent.

So we know that Buffett had delivered great returns in the past but we don’t know that he will in the future. In fact, during that ten year period BRK underperformed. So now what would you forecast regarding the future?

So, Larry answered the questions along the following lines:

1. Warren’s performance could be random – but, we already know that’s not the case, and I pointed Larry to the scientific study (…..or-a-fool/) proving that Warren’s performance is no fluke, it’s simply only explainable by skill.

2. Warren often buys companies and actively manages them – this is true, for 78 of his investments, but not true for all of his stock holdings (in companies such as Coke, Kraft, etc.); he may – or may not – take board seats, but the reality is that he runs a hundred billion dollar company employing thousands of staff with only 19 people to apply all of his ‘managerial skills’; no, what Warren has is a system to effectively use excess cash from an already well-performing business to buy more (a perpetual money machine on steroids!).

3. Warren underperformed the market for 10 years – Warren agrees! He had too much cash and prices (as ‘perfectly and efficiently and modernly’ priced as surely as they must have been?!) were way too high … cash under-performs stock in a rising market. Let’s rerun that study over the next 20 years and see who wins?

4. We can’t use Warren’s past success to predict his future success – Oh yes we can; if Warren’s success is based upon skill, not luck, and the fundamentals of the market that have allowed that skill to succeed in the past are mostly true in the future, then of course Warren will be more successful in the future.

After some back and forth, Larry changed his ‘story’ somewhat:

I think we can agree on two key issues. Buffett’s record is almost certainly the result of skill. But the market’s have become much more efficient over time and the size of his assets under management make the challenge of beating the market now so much greater. Even Buffett himself has made this last point.

The other point is this. Likely we will see another Buffett 20 years from now, but there is no way to identify that person TODAY, we will only know who that person is ex post.

Now, it seems, Larry agrees that Warren isn’t a random aberration, he is skillful, but that will be less important as time goes on. Well, I agree – and, more importantly, Warren does also agree, to a point: Warren says that the smaller investor (around $1 Mill. to invest) should be able to beat him (hence the market) because Warren’s investments are getting too, d*mn big and he can’t move in/out of positions as quickly as he used to (well, more in than out as he is strictly ‘buy / hold’).

Larry, if Warren’s return via Berkshire Hathaway was 21%+ over the past 40 years, do you really think it will suddenly drop below 11%+ (or whatever the ‘market return’ happens to be) over then next 40? You may say “I don’t know …” (which is your point, I believe) …

… so, here is the kicker: if Warren felt that he could no longer beat the market, he would issue dividends!

Warren wouldn’t risk decreasing his shareholder returns by having them sit in cash or in BRK performing no better than the market – unless, he was expecting to be able to expend this vast ‘war chest’ on future ‘bargains’ – when he could just issue excess cash / profits as dividends and let the shareholders invest in a market-matching Index Fund, presumably at much lower overhead cost than Warren’s BRK can provide.

Therefore, Larry, I can confidently predict that Warren will beat the market (say, over the next 20 or 40 years), simply by ensuring that I invest with him until he changes his mind (on his dividend strategy) 😉

The point that Larry SHOULD be making is that this is not a common result … so, for the ‘average investor’, simply plonking all of the funds that you have earmarked for stock investing (e.g. in your 401k) into a simple, low-cost Index Fund – and, waiting 30+ years for Modern Portfolio Theory to run it’s ‘magic’ – will provide the best ‘bang for buck’ stock market performance that you need.

Rich Dad. Rich Kid?

theaddamsfamily-011Let’s not mince words: by most measures The AJC Family is Rich!

But, does that mean that our children are rich? Does it mean that Mom and Pop will buy them cars, vacations, etc.?

The inspiration for this post comes from a comment (on a post by Diane about her car), where Debbie says:

I think most 16 year old’s get cars these days.

I had one before I turned 17, although I had to pay for it with my own money and get my own insurance (but I think the trend is now parents buying their kids first vehicles and insurance from what I’ve been seeing and in fact- I wrote a post about how teenagers are in the perfect position to put aside some money during their high school years on and do you know the comments I got?!

Parents saying that the idea was ridiculous, kids shouldn’t be expected to save the money they earn on jobs nor would they do it if they understood the value of compound interest and how much those first few thousands would be when they were ready to retire; if kids work during the summer how will they take trips to Europe and attend soccer or music camp, etc. I am still in shock!)

I must admit that I am in ‘shock’ as well …

… but, this brings me to an interesting point: how do ‘rich parents’ bring up their kids?

After all, when you all reach your Number, maybe you need some guidance as to how YOU should face these same issues?

All I can tell you is what we do:

We are in one of the highest socio-economic levels, yet our children (11 and 14 years old) already know that if they want cars, they will need to buy their own. We will contribute (prob. up to 50%) … but, they will need to save up their portion and fund the running costs.

I’m guessing that most of you reading this blog had to do it the same way (?) … at least we had to, so why shouldn’t they?

We feel that just because your parents are ‘rich’ doesn’t mean that YOU are … at least these are the conversations that we have with our children 😉


We feel that the best FINANCIAL gifts that we can give our children are:

a) Teaching them to take sole responsibility for their own financial situation, and

b) Teaching them how to become rich on their own

… we hope, leading them to the type of confidence and independence that only self-sufficiency can provide.

Think about the second one: what an advantage is it to have parents who have gone from $30k in debt to $7million in the bank? It’s got to be better than reading a blog, or having an occassional mentor … of course, the disadvantage is the child’s natural inclination to rebel from their parents, so, we add a couple of extra advantages:

c) We pay for their formal education. 100% … no “if’s” and “but’s”, for any course, in any reasonable location (we’re not sending them to Switzerland to go to Finishing School!) as helps them achieve their academic goals … but, only their first ‘real’ degree. If they want to sacrifice current earning potential for future by earning Masters, PHD’s, and/or MBA’s, that’s their financial trade-off to make, and

d) [AJC: This is the secret advantage that we do NOT tell them about up front] They will never starve … if all else fails, we are their Safety Net. But, they will not be able to “mooch off the folks” … this is simply an ‘insurance policy’ against disaster.

To that, we add all the ‘normal’ non-financial parenting, PLUS the luxuries of private schooling; after-school activities; bedrooms with private bathrooms, robes and studies (equipped with MacBooks, of course!) for each; as well as the swimming pool, tennis court, travel, etc. lifestyle that living in a ‘rich household’ provides …

What do you do (or plan on doing) with your children?

Exciting Money Making Opportunity? Horses …

horsesassThanks to all of those who responded asking for further information on this Exciting Money Making Opportunity! But, applications – for suckers – are now closed 😉

It seems that the ‘scam radar’ of my regular readers was well and truly up [AJC: And, I didn’t even have to publish on April 1st, like I was first planning … too obvious, huh?]; take Rick, for example:

I look forward to the follow up post where you outline the lessons to be learned from this post. You did a great job including all of the hallmarks of a sca.. ah, questionable investment: limited time offer, “GUARANTEED”, astronomically huge returns, no knowledge or effort, a new secrete system, and an inherently shaky premise :-) .

Seems like I won’t be able to sell any snake oil on this site …

For those of you who are wondering, here is some ‘scam sniffer bait’ that I threw out for you:

1. Making an offer like this is a HUGE departure from my previous statements: no advertising on this blog; no product sales ever; etc.; etc.

2. If you did a Google search on Derren Brown – or, even just click on the link that I conveniently provided … not all scammers are smart 🙂 – then you would find that Derren is actually billed as “the maestro of mind control” and is a “performer … [who] is in a class of his own, exhilarating audiences with his unique brand of intelligent and theatrical entertainment”. Hardly a “horse racing phenom” ….

3. As in most scams, there is a crumb of truth to my claim that the “foolproof horse-racing system that has been making him … and subscribers … millions of pounds.”

– It IS foolproof, but not profitable (you have to bet on every horse to ‘guarantee’ a win … d’oh!)

– It has made him, and the subscribers to the stock of the various TV stations airing this special, millions of pounds in broadcasting rights …. nice.

4. I am excited to be able to lie “that I have acquired SOLE RIGHTS to the package WORLDWIDE” …. c’mon, I can’t flag every obvious BS statement for you!

5. It’s always good to have testimonials … scammers are masters of those; trouble is, if you Google this one, you’ll find that it’s for something that has nothing to do with The System … in fact the whole section was just ‘lifted’ from another racing product promotional site and I merely cut/pasted the product names:

“Punters look for winners, not fancy color adverts endorsed by famous racing personalities. The System© may come with modest presentation, but has proved to be an explosive winner-finding system that leaves its flashy competitors far behind. The System is definitely an investment and not an expense.”
Odds On Magazine

6. I think that the best one is the banner ad that I put on the next day’s post (you can see it here); it’s actually for some other product entirely – I have no idea what, nor do I care, but I did leave the product name in to make it even easier for you to play ‘spot the scam’!

In fact, you’ll be pleased to know that I don’t even know Derren Brown, and I know even less about horse racing; I haven’t put money on a horse, even socially, in about 20 years 🙂

The point of all of this?

Well, next time you think you’re getting something from the horse’s mouth just make sure that you’re not being the horse’s ass 🙂

Applying even a little common sense will stop you from losing an AWFUL LOT OF MONEY in life …

… and, money saved is EXACTLY the same a money earned (just with less upside).

PS I strongly encourage you to watch the videos that I linked you to … now that you have some idea what it’s all about, it may lose a little of it’s ooomph … but, just seeing how Derren can flip heads on a totally fair coin toss 10 times in a row is a hoot!