Three feet from gold …

This video summarizes a book hailed as the successor to Napoleon Hill’s classic: Think and Grow Rich. I’m not sure that you can just think your way to $7 million in 7 years … but, having a burning reason why you might need that much / that soon sure seemed to help me.

But, I can’t help feeling: did I think, therefore attract … or did I happen to think and happen to attract? I guess we’ll never know for sure, as we are all an Experiment of One 🙂

Reader Poll: Manifesting Millions?

IMPORTANT: Please read this post in full, THEN choose the FIRST answer that applies.

How much money have you manifested in the last 18 months?

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There are two groups of people in this world:

– those who believe that there are two groups of people in this world, and

– those who don’t 😛

At the risk of parodying myself, I think there are two groups of people in this world:

– those who believe in The Secret, and

– those who don’t.

I want to conduct an experiment, right here / right now, to see if The Secret works …

First though, in case you’ve been living in a cave for these past few years (in which case, you have probably already developed powers far beyond those of The Secret), you will already know that The Secret is the most recent in a long series of books, blogs, and banter about the ‘power’ of creative visualization …

… see it in your mind and you will manifest it into reality.

Believe it, and it will be so.

I don’t know how The Universe works, so I can’t tell you whether I manifested my millions (perhaps by concentrating on my Life’s Purpose and the Number required to get me there) or was merely driven to make it at all costs … you could certainly mount an argument either way.

Also, I am an experiment of one …

Fortunately, we have Steve Pavlina who is an expert in these matters, and  is also the creator of a very interesting project, aptly called the Million Dollar Experiment:

The goal of this experiment is to attempt to use the power of intention to manifest $1 million for each person who chooses to participate.

From what I can see, the experiment ran from November 2005 until July 2007 … just over 18 months. Here’s what happened:

In that 18 month period, nearly 1,600 participants reported ‘manifesting’ anywhere from $504,873.56 (in just one day; if you choose to believe him) down to just one cent.

The average was closer to $3,500 in less than a year, with the median being just $180.

I’m not sure what you would count as a worthy ‘manifestation’ amount (I mean, would you dream of anything less than $10k in a year?), but 120 people – just 7.5% of those participating – ‘manifested’ $10k or more in that period.

Cast your mind back 18 months: how much have you manifested in that timeframe? I guess by ‘manifested’, I mean by following Steve Pavlina’s instructions to his own readers:

Only count the new money you feel has come into your life as a result of your participation in this experiment (i.e. the manifestation of this intention), not your regular income. Obviously your interpretation of that will be subjective, but this is a subjective experiment. Just do your best, and trust your intuition.

Just pretend that you signed up to Steve’s experiment 18 months ago … what money (if any) that came into your life since then would you have reported on Steve’s blog?

Oh, and feel free to tell me what you think about the power of The Secret, Steve’s Million Dollar Experiment, and/or this post … but, don’t forget to scroll back up to the top and make your poll choice first 🙂

Popular in Finland …

I seem to be popular in Finland these days, with my blogging friend over at Kohti taloudellista riippumattomuutta still sending me the most new visitors daily [AJC: reciprocating may be a little hard as I am guessing that more of his readers are fluent in English, than my readers are in Finnish].

I also receive referrals from my other Finnish blogging friend Tarkan markan blogi, who asks (thanks to Google Translate) Million Not Enough For Any:

And, The Economist does raise a valid point:

How much money do you need to count as wealthy in the first place? Merrill Lynch’s wealth-management report starts counting at $1m in “investible assets”. That excludes people’s main homes, which may seem reasonable. But it means that a Londoner who sells his home and decides to rent can suddenly find himself “rich”.

After all, a portfolio of $1m these days would generate an income of only $30,000 if invested in Treasury bonds, which does not leave much scope for the playboy lifestyle.

I’m not sure what amount that you need to be ‘rich’ – I define it in terms of having enough to live your Life’s Purpose – but, I certainly agree that $1 mill. (even if it doesn’t include your own home) simply doesn’t cut the mustard 🙂

Is he really a clever dude?

[Disclaimer: Artist’s rendering of AJC … any resemblance to other bloggers living or dead is purely coincidental]

Have you noticed that I don’t have a category for debt on this blog?

[AJC: you can click on any of the keyword/categories in the orange header-banner above to see a list of blog posts focusing on that subject]

It’s not because we don’t talk about debt, as we clearly do

…. it’s because, to me, creating or paying off debt is just the same as investing (after adjusting for tax: a dollar saved in interest, is the same as a dollar earned in interest or investment income, right?).

That’s why I was genuinely interested in finding out what was going through fellow-blogger Clever Dude’s mind when he loudly proclaimed:

We’re Free of Consumer Debt!!!!!!

As of today, we have paid off all $113,000 of our student loans, auto loans and credit card debt.

We are debt free!!!

My fellow blogger is right to be proud of his achievement … but, does that make it the right investment choice?

Check it out:

He paid off $113k … now, this is no small achievement, some people don’t even save that in their entire lifetime! Still I couldn’t resist asking Clever Dude for some details:

The rate on the student loans was 6.25%. The 2nd mortgage is 7.875%. First was 5.25%.

I chose to pay off the student loan because it was more manageable and I could get it off the books faster than the 2nd mortgage. Mathematically, the 2nd mortgage makes more sense until you factor in the tax deduction which brings them down to about equal.

I also wanted to know a little about his current net worth (after the mammoth debt-payoff feat) – nosey, aren’t I?! Anyhow, Clever Dude was happy to share:

Don’t mind the math as I rounded:

Cash: 17%
Investments: 37%
Home Equity: 6%
Autos: 17%
Personal Property: 12% (if I could sell it all right now)
Whole Life Insurance: 5% (yep, I got it, it’s expensive, but I’m not giving it up!)

So, Clever Dude has ‘invested’:

-> $113k in loans returning (by avoiding having to pay) around 6.25% after tax

-> 17% of his net worth in cash returning (I’m guessing here) 2%?

-> 6% of his net worth in his home returning some unknowable amount in future (potential) capital gains

-> 5% of his net worth in insurance ‘investments’ of dubious value after (often) exorbitant fees

-> 29% in (presumably) depreciating ‘assets’ such as autos and personal property

Now that he is debt-free, what  will drive Clever Dude’s investment strategy from here on in? He says:

Investing and savings are next up in our planning. Honestly, we’ve spent so much time just thinking about debt, we haven’t spent much time on the future. Now is the time.

Now, I’m not here to pick holes in Clever Dude’s investment strategy as he had a strategy and moved mountains to achieve it – not to mention, that we know so little about Cleve Dude’s true financial situation that we are in no position to advise / criticize …

…. but, I do want to use this example to show why following a blind – and, in my mind totally arbitrary – investment goal such as “reducing debt” is not always the best idea:

Clever Dude has only 37% of his net worth in investments right now (OK, he is working on his Master’s Degree, so he has had other things on his mind) and has limited the bulk of his net worth’s returns to only 2% to 6% (or so) by almost-totally focusing on paying debt.

Why?

So, that he can start “investing and saving”!

Now, does that make sense to you?

Even more on the debt-free fallacy …

I’m not a Ramsey fan, and I am equally not a fan of pithy statements that are supposed to make us financially secure, both for the simple reason that they are unlikely to help me – or, you – achieve a Number (i.e. retirement nestegg) amount that is large enough to live my – or, your – Life’s Purpose.

Now, if you don’t have a lot of travel and free time associated with your own Life’s Purpose, then you may be able to live nicely off $50k a year indexed (assuming that you have a $1 mill. nest-egg, in today’s dollars)  … but not me!

I aimed for – and, achieved – a $7 million in 7 year target (starting $30k in debt) because that’s what I decided that I needed (actually, calculated) … and, this blog is written primarily for those who want to achieve the same.

So, it shouldn’t come as a great surprise that I both agree and disagree with Jesse – the Debt Go To Guy– who says:

Risking $1,000 a month on a possible 8% return instead of a guaranteed after-tax ROI of 5% by paying down mortgage debt is NOT such a “Duh” decision. If you do get 8% you must pay taxes, and if you live in a state like CA, then after taxes you’re about even. Plus you have slippage… transactional fees etc for the investment / trade. So risking your $1,000 a month on 8% instead of a guaranteed after tax return of 5% is not always so smart, and a bad example.

People with double-digit interest rates on credit card debt, especially the many folks paying 20-30%+ interest, are not likely to find a better investment opportunity in their entire life than inside their own liability column. Every dollar in debt paid off is a guaranteed after tax ROI of 20-30%. Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time. What makes you think someone in debt could pull off such a stunt?

OK, that’s sound commonsense advice and hard to argue with:

– Sort your debts into high interest and low interest, and have a good crack at the high interest ones first, because the money that you save on interest is probably way higher than you could earn elsewhere. A dollar saved is a dollar earned, right?

– Now, when comparing the lower interest debts and investments, you really need to look at all the factors, such as risk, taxes, costs, etc. Often, it will be paying down the debt that wins, although I would be surprised if paying down a 5% mortgage ‘wins’ over any sensible RE, value stock, or business strategy in terms of serious wealth building.

But, I don’t really think that “Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time”. I know that Warren Buffett has produced 20%+ compound returns, and George Soros didn’t become a billionaire on less than 20% – 30% compounded returns.

That doesn’t detract from Jesse’s statement that “every dollar in [credit card] debt paid off is a guaranteed after tax ROI of 20-30%” and I do agree that it would be almost impossible for anybody except [insert: Forbes Rich 1,000] 😉

But, here’s where I disagree with Jesse:

I think Dave Ramsey provides sound advice for most people, and while I think it’s better to expand your means and increase your income instead of living like a popper, his advice has proven to help many hundreds of thousands of people to stop paying interest and start earning interest, and that’s the key.

– readers attracted to this blog are not in the same position (at least, no longer wish to be in the same position) as the ” hundreds of thousands of people” that Dave Ramsey has helped, and

– “stop paying interest and start earning interest” is not the key to reaching a large Number by a soon Date.

Look, there is nothing intrinsically right or wrong about paying interest, it’s merely a by-product of a loan that you have taken out. Just make sure that the loan produces more income than the interest expense that you paying, by a wide enough margin to account for the risk, taxes, and costs that may be involved.

This is a ‘no brainer’ when you realize that a rental property can produce income (assuming that your calc’s prove that it is all worth while … by no means the case on all – or even many – properties), and it is equally a ‘no brainer’ when you realize that borrowing money on your credit card to buy an LCD TV produces NO income, so why would you do it?

But, it takes a giant leap to suddenly realize that – for any existing debt that you may already have – paying down debt on a mortgage that costs you 5%, or a student loan at 2% may not be such a brilliant idea when an investment that can produce 15% compounded comes along and you now need to decide where to put your cash: into paying off those loans (to blindly achieve a ‘no interest’ outcome) or into the investment (hopefully, to produce an income-producing asset with excellent cashflows).

Of course, we’re making an assumption that reasonable people can achieve reasonable investment returns … but, if you think those kinds of investments are almost impossible to come by, take another look at:

– Value stocks (read Rule # 1 Investing by Phil Town),

– Real-estate (read Multifamily Millions by Dave Lindahl),

– Business (read The E-Myth Revisited by Michael Gerber).

[AJC: and, if these all sound too scary for you, just remember that over a 20 to 30 year period a low-cost index fund that tracks, say, the S&P500 will return circa 11% to 12% (yes, before taxes and ultra-low fees), and – if you are worried about risk – has NEVER produced less than an 8% return over 30 years]

I didn’t become a multi-millionaire by blindly entering into debt, but neither could I have become a multi-millionaire by blindly avoiding it … debt, for me, was a tool that I used sparingly, yet wisely.

I recommend that you do the same 🙂

Is your first home a good investment?

This is a loaded question, obviously, because I just revisited the subject of buying your first home (of which I am now an avid fan) a week or so ago; Rick suggested:

Since equities also have a good long term investment record, why not scale back on the primary residence somewhat and invest in both real estate and equities?

At the time, I responded by saying: “The effect of the 20% Equity Rule and 25% Income Rule is to ensure that you are always investing AT LEAST 75% of your networth elsewhere (could be business, RE, equities, etc., etc.).”

Of course, that doesn’t address the question, as I have also said that these rules are up for grabs – meaning, you can just ignore them – when considering buying your first home.

Now, I am clearly a fan of buying your first home – you just need to go back to one of my very first posts to see that – but, it wasn’t always that way …

… I started by believing that there were other investments out there that performed better than your first home.

And, that still holds true; after all, as my Grandfather once told my Grannie when they had the same decision to make soon after immigrating to Australia:

You can’t always buy a business from your home … but, you can always buy a home from [the profits produced by] your business.

This still holds true … as does the 20% Equity Rule. In other words, if you are absolutely committed to using the funds to start a business, or are ABSOLUTELY committed to ALWAYS investing at least 75% of your Net Worth, then by all means keep renting.

It’s just that 99% of people will – sooner or later – fall off the investing wagon. It’s human nature.

Then they’ll end up with no investments, little net worth, and no home. Buying your first home, and using that as a springboard into other investments, is a great way to go; just remember what I said, way back in the beginning of 2008:

 If you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key – ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

Is Mike aiming high enough?

Mike is a divisional CEO for JP Morgan (runs a whole country for them!), and he earns $250,000 in a bad year and $350,000 in a good year. He’s running fast and aiming high.

But, is Mike aiming high enough?

If you weren’t following the comments on this post, then you were missing out on more than 50% of the benefit of that post … I think that also holds true for most of my posts; our readers rock!

Anyhow, Mike said:

I’m 36 and have already got up to the savings level of someone who is 50 or 55… question is when do I want to take it easy and stop working for a while- or at least working make myself rich instead of JP Morgan, who owns the company I’m running!

Aspiring to the savings level of someone who is 50 or 55 is no great shakes; it’s where Mike goes from here that will dictate his future, so I asked Mike a few questions:

Disclaimer: We know next to NOTHING about Mike’s true situation, so nothing here constitutes financial advice* … it’s best if you – and, Mike – treat this as a hypothetical, merely illustrating how to apply 7m7y ‘rules’ to somebody on an income rather than working their own business/investments. On with the questions …

1. What’s your Number?

2. What’s your Date?

3. Why?

4. What’s your Current Net Worth?

It may be that Mike’s presumably super-high salary (after all, he is running JP Morgan in his neck of the woods!) combined with an aggressive savings / investment strategy will do the trick …

Mike’s response:

Salary isn’t super high – only $260K USD a year (base salary & guaranteed bonus) – max variable bonus on top of this is another $100K so it’s comfortable but not huge.

My number is abour 10 million – would like to hit it in the next 14 years or sooner.

Current net worth is 1.7M USD with $1.3 M in very liquid assets (cash…) Residence is fully owned and monthly burn rate is pretty low.

Given that Mike’s Prime Financial Objective should be to reach his Number by his Date, his financial strategy should be the one that he is most comfortable with that seems most likely to achieve that target …

… IMHO, he (or anybody) should only choose a more ‘active’ (read: risky) strategy if it’s a by-product of the strategy that he truly resonates with …. for example, I would start a business even if plonking my money in CD’s would have been enough – that’s just me [AJC: but, it wouldn’t have been all of my money – or even a lot – going into starting that business].

What does this mean for Mike … I mean, Hypothetical Mike? 😉

Well, let’s go through the steps:

STEP 1 – What is Your Number / Date?

Mike’s Number is $10 Million and his date is circa 2023.

STEP 2 – What is your Required Annual compound Growth Rate?

Starting with his $1.7 million Net Worth [AJC: reading between the lines, Mike’s paid off house may not even ‘break’ the 20% Rule – and if it does, not by much, so I don’t see a problem here] our faithful online calculator shows me that Mike ‘only’ needs a 13.5% Required Annual Compound Growth Rate on his Net Worth.

[Tip: If you haven’t used this calculator before, it’s simple: Mike’s ‘ending value’ is his $10 million Number; his ‘starting value’ is his current $1.7 million Net Worth – although, I would be tempted to subtract cars/furniture and any other personal ‘stuff’ that can’t be easily turned into cash and/or loses value … house is probably OK to include here – and, ‘the number of periods’ is just his 14 year Date

STEP 3 – Select your Growth Engine

This is where it gets fun … Mike simply needs to take a look at Michael Masterson’s table of ‘money making strategies’ – handily reproduced for you in this post – to see that any number of strategies will be enough to propel him from $1.7 million to $10 million in 14 years: anything from stocks to real-estate to small business.

But, not CD’s … this calculator shows that Mike’s biggest risk is actually the low-risk ‘investment’ option that he has so far chosen: cash …

… if he keeps ‘investing’ in cash, Mike’s Number will be struggling to reach $3 million in 14 years, rather than the $10 million that he needs 🙁

Rather than being the ‘safe haven’ that it appears, keeping his assets overly-liquid is actually stopping Mike from reaching his financial objectives … worse still, it’s forcing Mike to think about chasing more income, when it’s the exact opposite strategy that Mike should be following!

That’s why, I recommend that Hypothetical Mike choose stocks and/or real-estate in whatever mixture of either / both that suits his temperment.

Now, we are talking Value Stocks when we suggest a 15% compound growth rate, and reasonably well-geared (i.e. no more than 25% – 30% starting equity) commercial real-estate – mixed with stocks – when we suggest a 30% compound growth rate.

But, here is the key …

… for Mike, and anybody else whose primary Making Money 201 ‘accelerate your income’ tool has been climbing the corporate totem pole to a position where (a) income is [relatively] high, (b) expenses are reasonably low, so (c) saving rates are high, their net worth will most likely grow even if they merely plonk their money in their 401k and/or Low Cost Index Funds…

You see, Mike will continue feeding his Net Worth with both Investment Returns AND additional salary contributions.

This means that Mike will most likely reach his Number simply sticking his money into low cost index funds:

Mike should follow the advice that Warren Buffett gives to all the Hypothetical Mikes of this world … in fact, it was virtually tailor made for his situation:

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.

Given that Mike’s current salary / job makes reaching his Number a virtual gimme – with such a variety of relatively low impact [AJC: certainly in the context of amassing a $10 million fortune!] Index Fund, Value Stock, and/or Real-Estate investment strategies available to him, what would you advise him when he says:

Right now my best option is to continue to get a successful track record (already turned around the business and changed it from major losses to modest profits) and maybe I can find a better gig.

What advice would you give to Mike?

I know what I would say 😉

* [Insert: ‘Not qualified financial advisor; not financial advice; seek qualified advice before investing; take two Tylenol and call me in the morning; yadayadayada’ disclaimer message of choice]

Stuck for a new business idea?

I’m not sure why anybody would be stuck for a business idea?! We get at least one million-dollar idea a day [AJC: you may not think so, but it’s anytime that you are dissatisfied … inside every problem is a million dollar solution just waiting to break out], but we either fail to recognize it or – more likely – act on it.

I have two solutions:

1. Carry a small pen and a notepad (yes, an iPhone or PDA is a great substitute) and …. use it!

Write down every idea that you get, then make sure that you act on each: do something to verify that your first idea has / hasn’t merit and … act further: do some research, talk to somebody in the industry, etc., etc. If you feel, at any stage, that it isn’t for you, put a line through it and REPEAT for Idea # 2 and so on.

2. Or, if you are The Vacant Parking Lot Of Business Ideas, don’t fret … just buy this book (Hint: buy the .pdf from his web-site at half the price that Amazon charges).

Disclaimer: I haven’t read the book, but that’s not the point … as far as I am concerned, it only needs to give you a list of ideas to explore – any additional valuable content is a bonus.

Still not sure that you want to spend the ten bucks on helping you reach your Number? Shame on you … but, here’s an excerpt, anyway:

What would you do if you won the 2010 World Series of Poker – Part III?

Congratulations!

You’ve fought through a field of thousands, and now you’re sitting across the table from Phil Ivey – heads up for the most coveted bracelet in sport.

Of course, you’re just thinking that you already have the $5 million runner-up prize ‘in the bag’ (allowing you to have a very nice – and, ‘guilt free’ – $250k spending spree, and then live this quite pleasant $250k/year lifestyle) …

… but, you’re hoping-against-hope that you beat Phil senseless and pocket the $8.5 million first prize!

Firstly, let me burst your balloon: you’re still a ways off the $11 million (plus a bit extra for up-front ‘splurging money’) that you’ll need if you want to live this rather lavish $550k per year lifestyle … but, you’ve still made your own $7 million in 7 years, and then some! 🙂

I’m now assuming that you’ve made your Number …

… so, the key is to protect your wealth (to ensure that you have that $250k – give or take – to live off, inflation-adjusted, for the rest of your life); you do this in any number of ways:

– Invest in Index Funds and live off 5% (dividends + selling off some shares each year), enduring the ups and downs of the market,

– Invest in Inflation-Protected Federal Government Treasury bonds, suffering the low returns currently available, with the option to ‘spice things up a little’ by using up to 5% of your capital each year to buy 12 month call options over the market,

– Invest in real-estate; since you’re not trying to create new money, you can afford to pay cash and simply live off 75% of the rents (setting aside, perhaps, another 5% of your starting capital and 25% of all net rents against vacancies, repairs/maintenance, and other contingencies).

Of these, the last holds the most attraction for me, because:

– I don’t require much liquidity (I’m looking for steady income), but can always keep aside another couple of year’s of living expenses (say, $500k) in cash … just in case,

– My income (i.e. the rents) is generally inflation-adjusted (and, rents usually go up – over the long’ish run – in line with inflation),

– I never need to worry about eating into my capital: it’s sitting there in bricks and mortar – also growing at least in line with inflation!

Of course, you could always just blow it all on a mansion and a garage full of Ferraris 🙂