Monthly Archives: August 2010

The Zero Dollar Emergency Fund …

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17

If you own a boat that’s large, expensive, and is likely to take on water from time to time, you plan well ahead and put in a bilge pump.

But, if you have a dinghy and you’re paddling out on Lake Michigan, far away enough from shore to make swimming a poor second choice, then you carry a bucket … and, if the boat springs a leak (highly unlikely … it’s not a bad dinghy) or, water happens to come over the side from time to time …

… well, you start bailing water!

An Emergency Fund’s a little like that:

What you do depends on whether you expect the emergency [AJC: I know, it’s an oxymoron] or not. Of course, if you expect it – or, can reasonably foresee it (like problems with a beaten up old car), then it’s not an emergency at all … just something that you can’t budget an exact amount for.

But, you can provision for it; at least, as best you can.

But, true emergencies do arise – or, semi-expected events blow up bigger and/or sooner than you ‘expected’ – so what do you do?

Try and build up and emergency fund but not spend it even if a really great investing opportunity comes up [AJC: what’s the opportunity/cost of that?!]?

Or, why don’t you simply find a bucket of money that you can tap into IF an emergency arises … but, one that costs you zip (or, even makes you money) in the LIKELY event that an emergency does NOT arise.

Here are some examples of In-Case-Of-An-Emergency-Please-Break-The-Glass Funds:

1. A HELOC (home equity Line of Credit) that you put in place on your home ‘just in case’

Use an online mortgage calculator to make sure that you can borrow enough to cover your likely living costs + the repayments for as long as you think it will take you to get back on your feet and repay the loan. This is a pretty good, flexible option that only costs what you use.

The other advantage is that you should be able to raise a LOT more than you can save … and, it will be available as soon as you put the paperwork in place (a true emergency fund could take YEARS to save).

On the other hand – say, if you lose your job and the bank finds out – the HELOC may be revoked just when you need it the most … of course, if you’ve already drawn down the funds before the ‘pink slip’ is in your hands …. 😉

2. Your 401k

There are usually provisions that allow you to borrow or withdraw funds against your Retirement Account; again, this may allow for ‘protection’ against fairly large emergencies (say, a few months off work), but it may come at a hefty opportunity cost … particularly, if the fund rules don’t allow for the funds to go back in on a tax-preferred basis, if you’ve managed to recover quickly enough.

Also, the tax and/or penalty interest costs may be quite high.

3. Your Car

Maybe you can do a sale and lease-back on your car .. or, maybe you can sell your car for cash and either use some of the proceeds to ‘trade down’ (therefore, freeing up some cash) or even make an exception to the “don’t finance a depreciating asset rule” by financing a (cheaper) one, instead (thereby, freeing up a lot more cash).

Remember, you’re really borrowing some money to tide you over in an emergency … you don’t expect to get out of it squeaky clean.

4. Credit Cards

Yep … this is the time that a bunch of credit cards sitting in a drawer can be really useful … but, it’s very expensive (19%+ p.a.) so make sure you only take this route for really short-term emergencies that you KNOW you can trade your way out of really quickly (i.e. less than a year).

5. The Three F’s

And … don’t forget that getting on your hands and knees and grovelling to your Friends, Family, or other associated Fools is also an option!

Anybody have any other true ‘Emergency Fund’ source ideas?

This will teach you all you need to know about marketing your product or service …

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PAY CLOSE ATTENTION TO THE NARRATOR’S INSTRUCTIONS!

After you’ve seen the video, read on:

I said that if I found a video that was a real cracker, I would do one of my famous-in-my-own-lunchtime Videos on Sundays …

… well, I found this one on Youtube.

In fact, it’s the exact same video that I used to show students of our training division (before I gave it away to my ex-business-partner).

If you want to learn about WHY this works and HOW you can use these concepts in your own marketing, read Ramit Sethi’s spot-on post:

http://www.iwillteachyoutoberich.com/blog/why-personal-finance-experts-continue-writing-worthless-advice/

But, first be sure to let me know what you thought of this video!

Suffer any bad beats lately?

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I have to admit that it’s very exciting seeing my two real-estate development projects coming to fruition [AJC: this is the architect’s rendition of just one of my two condo projects … click on the image to enlarge it … go ahead … do it … I’ll love you for it].

I’ll get back to that in a sec’ …

… first, let me tell you about a conversation that I just had with a friend, while we were playing poker today:

FRIEND: Do you find any parallels between business and poker?

AJC: It’s uncanny, but yes I do … and, it’s caused me to totally rethink the way that I think about money

Well, not so much ‘totally rethink’ as remind me about some important Making Money 301 lessons that I seem to have forgotten …

…. but, I keep getting side-tracked; back to the poker:

Case in point: I had quickly tripled my starting stack in a cash game but, just as quickly lost it on a series of bad beats; bad calls (by them, not me); and bad luck.

When you’re running hot, you feel invincible.

When you’re running cold, nothing that you do turns out right.

… and, your poker bankroll quickly slips away.

Well, it’s pretty much the same thing in business and personal finance:

Your investments and/or businesses are ‘on fire’ … the market’s running hot, and – if you’re smart – you cash out at the peak, building up quite a bankroll.

Maybe you even reach your Number.

What should you do then? STOP and smell the roses!

But, the trouble is, greed and the adrenalin kicks in … you believe that you’ve got the Midas Touch. And, you push for the next project.

… and, that’s the one that gets you.

You know, market downturn, bad luck, bad advisers, etc., etc. sob, sob, sob.

Which is, perhaps, why Ill Liquidity asked me:

I don’t get it. You make a tidy sum and retire from the rat race, paying yourself a salary… why go forth and try new money making ventures?

Given my own ‘stop and smell the roses’ advice in that regard, I agree, it’s hard to understand. Sometimes, it’s even hard for me to understand 😉

So, let me take a stab at explaining it; the story so far:

I made my $7 million in 7 years (mainly through reinvesting the profits of my businesses into buy/hold real-estate), and then made a heap more (by selling those businesses just before the 2008 crash), but ….

… then the crash hit, and here’s where my money went:

1. $1.5 million cash into my house in the US (you know I can’t sell that, right?)

2. $5 million cash into my house in Australia

3. 25% of what I sold the businesses for in taxes [AJC: sheesh!]

4. Lost 100% of my $3 million bonus on company stock price crash + taxes paid on the full $3 million [AJC: double sheesh! … but, it’s nice to know that I have a heap of capital gains tax credits to use for the rest of my life]

5. Gave my accountant $1 million to invest in the Aussie stock market for me … he promptly lost 75% in about 6 weeks. My fault for trying to time the market, not his 🙁

Don’t feel too sorry for me: when others try to get to sleep by counting sheep, I count millions!

My problem is this:

All of this bad luck and bad management has left me with assets – not including my $5 million primary residence – that I consider just enough to live my Life’s Purpose.

But, I am an über-pessimist and I really want a large margin for error.

Now, in my rational moments, I realize that my house provides me that i.e. as soon as the kids move out, in approx. 10 to 15 years, we will sell down into a, say, $2 million apartment, which would free up another $3 million (all in today’s dollars, but the price differential should still hold true).

But, even that’s not good enough for me.

So the question that I am wresting with – and, have decided to put off answering until I have building permits for both projects in my hands:

Will I take my own advice and sell both development sites (with permits) for a tidy profit (if all goes well), or will I pull the trigger and dump most of my net worth into these developments to get the Really Big Bucks?

Only time will tell … but, you will be amongst the first to know 🙂

In the meantime, have you suffered any ‘bad beats’ lately?

Riding the profitability curve …

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Take a look at the chart on the left … yes, the one that I’m busy drawing for you 😉

… because, if you’re in business – or aspire to be – whether online or offline, this is a lesson that you simply have to ‘get’ … and, early:

For those of you who have been to business school, there is a space between the sales [blue] and expense [red] lines called PROFIT.

Profit is for growing the business and returning value to the shareholders.

But, in a small business it’s mostly known as OWNERS’ SALARY, because the owners live off this instead of taking a wage … and, it’s usually (barely) enough to fund their ever-growing (assuming the business is becoming more and more successful) lifestyle.

Instead, it should be known as CAPITAL.

You see, large businesses (particularly publicly listed ones) find it easy to raise capital: they simply issue stock.

They trade bits of paper (stock) for more bits of paper (cash) to go ahead and do all the things they need to do in order to expand their businesses (e.g. buy new machinery, open new branches, fund acquisitions).

But, small business owners can’t do that … it’s very hard to raise money as a small business owner, for anything … including expansion.

So, my advice is to fund your own expansion, by retaining profits (instead of spending them on yourself) and using those retained profits to grow the business.

There’s your capital!

Fellow Aussie and business/success coach, Jon Giaan (knowledgesource.com.au) similarly advises aspiring business owners:

When starting a business, most people focus on generating income and lose sight of their long-term goal of having a successful and ‘sustainable’ business that will provide freedom, independence, wealth and support many years into the future. Keep focused on building a long-term asset.

No doubt this is true; Maslow’s Hierarchy puts food/shelter/clothing right at the top …

But, once your business has grown to supporting those needs, your mind starts to look at wants, and before you know it, you NEED your business just to survive mortgage payments, expensive car leases, private school/coach/country club fees, and the list goes on.

Right from the beginning, we had a different view, one that saw the owners of an [eventually] profitable business jointly deciding that the partner not working in the business – my wife – still needed to work her $60k – $90k per year ‘day job’ (as an IT Project Manager with a major telco).

The reason was exactly as Jon says: we wanted to keep “focused on building a long-term asset”.

We knew that it was only by reinvesting the cashflow produced by the business – both within (reinvesting in the business) and without (buying good quality buy/hold real-estate and other investments) that we would eventually reach our Number.

[AJC: Right there, in a nutshell is how we reached $7m7y: use the cashflow from the business to invest instead of spend. A side benefit being that we didn’t need to rely on the ongoing success and/or sale of the business to reach our Number. Too easy, huh?]

In fact, we eventually blew our first $7m7y out of the water … but, that’s a whole, other story 🙂

Panning for gold …

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Some minor changes to the 7million7years format:

Previously, I had been trying to post to a Monday/Wed/Thur schedule PLUS a video on Sunday. Unless I really find a video that knocks my socks off, I’m going to drop my Sunday video (for now) and shift my posting schedule to Mon/Wed/Fri each week.

I should also point out some key differences between this free blog and my paid membership site (7m7y.com): my blog (i.e. the site you are on right now) is much more ‘chatty’ and random than my membership site; my blog simply reflects my thoughts, feelings, and experiences gleaned from my own journey from $30k in debt to $7 million the bank in 7 years.

My journey – hence, what I share on this blog – is absolutely authentic and I believe that there is real gold to be gleaned simply by reading this blog 3 times a week.

IMHO, it’s the best 6 minutes that you’ll spend each week, besides your love life 😉

I liken reading this blog regularly to wading in a shallow stream and panning for gold: stand there long enough and you get what you need and, hopefully, enjoy yourself in the process. But, don’t expect instant results …

On the other hand, my NEW membership site (The $7 Million 7 Year Wealth System) is a complete course on wealth; if you’re a regular reader of this blog you’ll immediately recognize the main modules (Finding Your Number, Making Money 101, Making Money 201, and Making Money 301) but it’s covered to a depth that this blog simply doesn’t – and, can’t – go.

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