This is a redux of a 2009 post, but it’s about time that I gave my newer readers a heads-up as to what we’re all about … if I had to point somebody to just one of my posts to get them started this would be the one; putting in all of the links nearly killed me 🙂
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I get a lot of questions, comments, and e-mails in general from new readers, and this one – from Chad – is reasonably typical of what I might see:
I’m turning 27; just got a job making 50k/yr.; on the market for my 1st condo to live in (and hopefully rent out a room); have 1 student loan at < 3% fixed interest. My goal is $7 million in 13 years.
1. I have very little to no knowledge of finance/investing. Do you recommend any resources to get me up to speed so I can understand what you write about?
2. Where does my situation put me in terms of Making Money 101 and 201, i.e. where do I go from here?
I appreciate ANY direction you can give me as I do not want to be stuck behind a computer in a cube for the next 30-40 years.
While I love reading these sorts of e-mails (AJC: I really do!], I have a hard time responding because I can’t / don’t give direct personal advice … but,
I can suggest that Chad think about:
1. Exactly HOW important that $7 million in 13 years is to him, and
2. Assuming it’s VERY important (critical even), how he is going to get there.
You see, my advice might change according to his Number – more importantly to his Required Annual Compound Growth Rate:
a) If low – say, no more than 10% to 15% – then I would point Chad to the various ‘frugal’ blogs (my personal favorite is Get Rich Slowly) and ‘starter books’ like The Richest Man In Babylon, or the more modern equivalent: Automatic Millionaire by David Bach, or anything by Dave Ramsey or Suze Orman.
Each would probably suggest something along the lines of:
– Keep your job; times are tough!
– Save as much of your salary as you can (max your 401k’s, then your IRA’s)
– Pay down ALL debt, following a Debt Avalanche or Debt Snowball, whichever is your favorite
– Invest any ‘spare change’ (after all debts are paid off and the requisite ’emergency fund’ has been built up) into a low cost Index Fund
… and, wait until your government-directed – or, employer-forced if you are retrenched and become unhireable – ‘retirement’. This is where that fully paid off home and a lot of candles and canned food stockpiled will really pay off … you won’t be able to afford real food 😉
a) If high – say, more than 10% to 15% (and, I would venture that $7 million in just 13 years would well and truly put Chad in the 50+% required annual compound growth rate category!) – then I would instead point Chad to books like Rich Dad, Poor Dad and The E-Myth Revisited and then towards this blog and its 7 Millionaires … In Training! ‘sister blog’ and suggest that he starts working his way through the back issues (well, posts).
After reading/digesting properly, he should be able to come up with his own plan … something along the lines of:
– Keep your job, but get into active stock and/or real-estate investing – better yet, start a side-business; because times are really tough(!):
i) A mildly successful part-time business might provide additional income to help you weather the financial storm and supercharge your savings, investment, and debt repayment plans
ii) A more successful part-time business might provide a built-in ’emergency fund’, tiding you over should you lose your job and/or unexpected expenses crop up
iii) An even more successful part-time business that can be started and/or survive during a recession may prove to become wildly successful once the clouds of the recession begin to lift, maybe even carrying you directly to your Number [AJC: do not pass Go, but do collect $200 million 🙂 ]
– Control your spending, and save as much of your salary as you can to build a war chest for starting / running your business
– Pay down ALL expensive debt, following the method laid out in the Cash Cascade, but keep your mortgage (lock in to current low rates) subject to the 20% Rule and the 25% Income Rule and seriously think about keeping your other cheap debt loans.
– Invest any ‘spare change’ from your job and business (after all expensive debts are paid off and the requisite ‘business startup fund’ has been built up) into quality ‘recession-priced’ stocks and/or true cashflow positive real-estate.
… and, wait until you have reached your Number (through sale of business and/or conservative valuation of your equity in your investment assets).
That’s it 🙂
Thanks for the heads up on Missed Fortune 101
Good advice you gave Chad, there’s always a slow way and a fast way
Great post!
The point about the required compound annual growth really hits home. Even 15% is challenging with stocks. I can “cheat” and get it for a single year (with an ESPP program), but that’s won’t help year after year, and my company’s stock hasn’t had such growth.
I consider myself reasonably successful, and I still need almost a 25% CAGR to reach my Number.
The Money 101 stuff (how to reduce bad debt and cut costs) is well defined on many web sites – the key is next step: Money 201. That’s the part that scares the most people, myself included.
With the amount of free time and my skill set and interests, I’m going to move into Real Estate investing and set up a “hobby” eCommerce website with a set of products that are scalable and hopefully unique. And I should be able to fund the latter project merely from selling some of the stuff I’ve collected over the years.
Neil
@ MoneyMonk – Thanks, also saw your post on the true purpose of money … a good read: http://www.moneymonk.net/2009/04/money-clearly-has-one-and-only-one.html
@ Neil – Since RE has every chance of hitting your required 25% compounded, it sounds like you “have a plan”. Good Luck!
Nice Post!
The tough part for me was finding a compound annual growth rate calculator that includes annual contributions. I ended up just making my own spreadsheet. Have you found a good one on-line?
By taking into account annual contributions, your compound annual growth rate can significantly drop. For instance, if Chad starts with $10,000, his compound annual growth rate is 65.52%. If Chad could also save and invest $10,000 of his salary a year, his compound annual growth rate drops to 52.52%.
If Chad’s Date is firm, annual contributions might not change his analysis much, but if he extended his term or could increase his annual contributions, (or both)…the difference can substantial. For example, if Chad extended his date out another 17 years (and adjusted his number for inflation), his compound annual growth rate drops to 19.81%. If Chad also decided to increase his initial annual contribution to $15,000 and then continue to increase the annual contributions by 5% a year, his compound annual growth rate drops further to 16.69%.
Getting 16.69% annualized return is no cake walk, but a lot easier to get than 65.52%.
@ Jeff – What’s 17 years and a drop in living expenses by $15k a year between friends 😉
Seriously, your point is true and the real secret: rather than gambling on the business or [insert speculation of choice: growth stocks and options; gold; oil; etc.; etc.] to pay off big time (deliver your Number in one neat check), you build a business for sale … but, in the meantime, you keep following Making Money 101 and save/invest in solid assets (e.g. income-producing real-estate and/or ‘value’ stocks); at least that’s how I made my first $7m7y (selling the business delivered the next $7m2y). Thanks for pulling us up on this …
Pingback: What’s 17 years between friends? « How to Make 7 Million in 7 Years™
Yeah that post has got around -http://earlyretirementextreme.com/2009/04/does-money-only-exist-to-be-spen.html
@ Money Monk – It’s quite funny, really. NOW, I’ll have to post as well! 😛
Wow, hard to believe it has been over two years since the original post (and my replies).
I was going over our personal finances and have the following items to report.
The good: We have exceeded our CAGR significantly and should reach it for 2011 as well. And this is despite a terrible real estate market flat stock market. Also, our CAGR needed has dropped by 5%.
The bad: I have not had the success on side ventures and for the last year have focused on my “day-job” to almost the exclusion of everything else. And many of our gains are not easily repeatable unless one stock goes crazy (different stock than last time).
So as we move into the second half of 2011 and after over a month of business travel and visiting a good friend I’m re-energized, resetting some goals, and reprioritizing.
My wife has a cool new side project, and a business partner and I have started a new venture. I don’t think anything will come out of it soon, but our business plan looks solid and there are lots of opportunities in the area.
Neil
@ Neil – Thanks for sharing … I guess I’ll need to ‘redux’ this post in 2013 to see where (and, what) you’re up to by then 😉