What difference does 1/10th of 1% make?

Brian Tracey makes an interesting observation of making tiny, incremental changes which accumulate over time to make huge differences.

You could apply this principle to anything: for example, if you want to save 26% of your income (not a bad goal if you want to get rich slowly, with inflation chasing your tail), just start by saving 1/10th of 1% of your income today, and increase that amount by 1/1th of 1% each day until you reach your goal.

Use your ‘golden hour’ to read the personal finance headlines at http://personal-finance.alltop.com/ looking for money saving tips and you’ll find plenty of fuel for your daily 1/10th of 1% increased savings goal.

I’ve committed a blogging faux pas …

It seems that I’ve committed a blogging faux pas … unintentional, but a faux pas nonetheless.

You see, Planting Dollars ‘tagged me’ way back in January and I was supposed to tell you 8 Random Things about Me!

The fact that I only stumbled across the back-link now – not to mention that I have no idea what ‘tagging’ really means, but I’m guessing it’s some sort of ‘chain letter’ in blogging post form – tells you a little about how much I really know about blogging (even though I’ve been doing it for a couple of years, now).

Anyhow, it seems that Planting Dollars and I have some commonality, so here goes:

Planting Dollars has been unlucky enough to break bones on 5 separate occasions. I’ve only done this once, but it was a beauty: broke my tibula (shin bone) and fibula in a compound (multiple breaks i.e. I broke both bones) and complex (because I got to see a sharp end of bone poking through my skin), and have 4 screws in my leg (still there, to this day) and a nice long (36 stitch) scar to remind me of the unpleasant teenage episode.

He can’t get enough of scuba and sharks! In fact Planting Dollars studied abroad in Australia for the sole purpose of having the ability to dive in the Great Barrier Reef and with sharks. On the other hand, I already live in Australia, can barely swim (although, I somehow managed to get some sort of swimming certificate for swimming the length of a pool fully clothed, including shoes … I think I was just progressively drowning, and randomly ended up at the other end), and much prefer card sharks to white pointers. 

Planting Dollars is a myers-brigg ENTP personality type.  Apparently that means he’s “most attracted to the idea of being a renaissance man or jack of all trades.  New experiences and ideas are what motivate me, I cannot stand routine.” As much as I hate ‘pop psychology’, I must also be an ENTP-type as this describes me to a tee … I detest routine, but love “new experiences and ideas”. 

His highest bench press thus far is 350lbs. Mine? About 35 lbs … haven’t you seen my videos?! But, I used to be pretty athletic: an excellent runner, and an avid lacrosse player (I had no idea that those uniforms denoted FULL CONTACT until it was too late!).

Planting Dollars plays the piano and drums and will eventually learn the cello. I love music but have almost zero talent; I try to sing (a lot), but even my kids don’t let me! But my musical tastes are eclectic, to say the least: I have everything from (the real) AC/DC to Pavarotti, Il Divo, Eminem, and The Fugs on my iPod. Oh yes, I also have Kelly Clarkson, and I’m proud of it 🙂

As a kid, Planting Dollars drove his mom crazy wanting to have a lizard as a pet. Now, I’m not sure what this says about me psychologically (but, I can assure you that I have no homicidal tendencies), as a child my sister and I used to hunt for little lizards (calls skinks) when on vacation in the Australian countryside. We would invariably come back with a few in a box (of course, some would always escape and run around the house, which my mom just loved …. not!). I won’t tell you how I fed them … 

Most of his role models are dropouts. I have no role models. I think everyone is equally flawed (no doubt, Ghandi picked his nose; Warren Buffett gossips; and, the Queen swears in private), so we should all be our own man / woman / or both. Still, it doesn’t hurt to learn from others, but I strictly look for ‘how to’ lessons: so, if I go to a Warren Buffett AGM I’m looking for a tidbit of information, not how to duplicate his style. 

Planting Dollars absolutely loves Blue Moon Ice Cream. I’m lactose – and, people (mainly family) – intolerant.

‘Nuff said 🙂

How much is in your emergency fund?

How many months do you have in your emergency fund?

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I think this is a good time to take another look at your emergency fund; I’ll explain next week …

In the meantime, answer the survey to let us know how much you have saved specifically as an emergency fund, and leave a comment (if you like) to tell us why!

Would you donate your last penny?

They say that the will to give – to donate – generously is governed by a gene. 

For those readers in – or approaching – MM301 (i.e. you’ve made your millions, now you are struggling with what to do with it), I want to test that gene to its fullest, by asking you a question:

Would you donate your last penny?

I can honestly say that I would not …

Which brings me to a related topic: it seems that many people who come into money take a chunk of it to donate. Perhaps to have the wing of a school named after them, or to do some other ‘good works’.

Whether the sum is $1,000,000 or $100,000 or $10,000, when donating what you consider to be a large sum, think about what you are really donating; you are not merely donating $1,000,000 (or $100,000 or $10,000), you are donating the future value of $1,000,000:

Let’s say that you plan on living for another 40 years, and you can invest your money at 5% above inflation, then the real value of your donation is not $1,000,000 but more than $6.7 million!

[AJC: if inflation runs at 4%, and you can get an average return of 9% over 40 years your $1 million will grow to almost $29 million, but inflation takes away a huge chunk of it!]

When thinking about donating that $1 million [AJC: The Cartwood Family Wing does sound tempting], I’m not really thinking too much about that $6.7 million [AJC: or, $28.8 million … ounch!], I’m actually asking myself:

Would I donate my last $1 million?

You already know the answer to that 😉

But, why?

If all goes belly-up in my financial life, I really may have just given away my last $1 million … in other words: if I lose $6 million, I am now broke (since I already gave away the 7th million of my 7m7y).

That’s why I would never donate a lump sum … instead, I would invest that $1 million for the benefit of charity. Further, I would not even pledge the capital or the income stream in advance, I would simply make the requisite donations annually and anonymously.

It may not get my name ‘in lights’ [boo hoo]; it may not help the charity with capital acquisitions; and, it may not be the most tax-effective method of donation (compared to, say, charitable trusts and the like), but it will help both the charity and me, long-term:

1. The chances are that I can invest $1 million far better than the people running the charity can [AJC: after all, I’ve made 7m7y]

2. It’s likely that the charity – or, some other equally worthy casue – can use $6.7 million more than they can use $1 million, albeit spread over 40 years; but, I admit that I’m just making a wild guess that the world will need philanthropy for at least the next 40 years.

3. If all goes belly up, and I end up becoming the one in urgent need of ‘charity’, I can ‘donate’ my last million (at least the income thereof) to myself and my family.

4. When I die, if I feel so inclined, I can finally donate either the asset or the income stream (or both) to the charity as I will no longer require it as insurance for myself. On the other hand, I may choose to pass it on to my family and let them decide.

I guess nobody will be talking about “AJ Cartwood, the great AustraloAmerican investor, raconteur, and philanthropist” … at least, not during my lifetime 😉

The problem with Henry …

Actually, it’s not the problem with Henry, it’s the problem with HENRY: High Earner Not Rich Yet.

Included in this group, a group that most workers mistakenly aspire to, are those doctors and ceo’s (at least those not in the Fortune 500) that I mentioned in yesterday’s post.

Now, this is only interesting because I can now answer the question posed on Twitter [AJC: you can glance across to the right to conveniently find a link to my Twitter account].

Dianne Kennedy (CPA), I think erroneously, links HENRY’s to taxes then lifestyle, but (as my article some time back about doctors also said), I think it boils down to three non-tax (even though taxes hurt!) issues:

1. As your income grows so does your spending … then some!

2. Keeping up with YOUR Jones (i.e. other high-flying corporate executives and professionals) is VERY expensive

3. You can’t sell a salary package (like I can sell a business, some shares, or a property or two) when you decide to retire

[AJC: You need both a big 401(k) – see reasons 1. and 2. why this doesn’t happen – and a huge golden parachute, which may / may not happen to compensate for reason 3.]

If HENRY’s want to become rich, they have only two choices:

– Get lucky, or

– Invest a very large % of their annual earnings

Let’s assume that a HENRY – conveniently named Henry who happens to be ceo of a medium-sized business – is earning $290,000 and has already managed to save $1 million – our consummate Frugal Investor – and has arranged things so that he can continue to save a very hefty 35% of his salary (this is all pre-tax).

After 22 years, Henry will have saved just enough (in Rule of 20 terms) to replace his $290,000 ceo’s salary … by then, inflation adjusted to $661k per year, assuming that he wants to maintain his lifestyle [AJC: more importantly, assuming that he can – and wants to – ‘ceo’ for 22 more years … if he ‘only’ starts with $500k in savings, he’ll need to work for at least 26 more years].

Seems easy, but human nature [read: urge to spend it up] is what it is …

I should know: I was ceo of my own business, employing over a hundred people across 3 countries (USA, Australia, and New Zealand).

I paid myself $250k per year, and had cars, cell phones, laptops, and health insurance all paid for by my company – I reinvested all the remaining profits in these businesses.

I had a $1.65 million house in the ‘burbs, paid for by cash (s0, no mortage), and two children in school (one private, one public). We traveled domestically and/or internationally once or twice a year as a family, ate at ‘normal’ restaurants (and, the occasional top-tier eatery).

I can’t see how I could have saved 1/3 of my salary … I couldn’t even save 10% 🙁

Of course, I could have saved 10% if I really tried, but my point is that it’s very hard to save 30% of even a high salary, unless you gear yourself up to do it from the very beginning.

[AJC: Look, it’s not my job to tell what should happen as you get richer, but the reality of what will happen and how to do better … when you get to $250k you will bring with you exactly the same spending and saving habits as you have today, if not worse. Moral: start MM101 today!]

In other words, don’t divert all of your creative energy into playing Corporate Lotto (i.e. chasing a higher salary) if you want to get rich – or, even to reach a more humble goal, such as becoming debt free (a dumb goal, IMHO).

First – and, as soon as possible – learn how to get rich (or debt free, or …) by taking action right now, with whatever you can bring to the table.

If your salary happens to improve along the way, all the better … but, don’t rely on it!