None of my friends know that I blog ;)

It’s true, I am the ultimate Secret Blogger …

… only two of my closest friends even know that I do blog – about personal finance – but, I won’t even tell them the name of my blog or my ‘pen name’!

[AJC: By now, you probably know that Adrian John Cartwood isn't my real name - only the Adrian part is. For no reason that I can understand, my daughter started calling me 'Adrian John Cartwood" when she was 7 ... well, when the idea to write this blog sprang to mind in 2008, AJC was the natural choice!]

It’s not comfortable to talk about money: but, I resolved from Day 1 that this blog would need to be authentic and I would have to share the most gruesome details of my financial life.

So, when Bob asked:

From your “I’m a money hacker” post:

What is some financial advice you could give our readers?

Most people don’t really know how much house they can afford, so let me give your readers some very specific advice that will help them through every stage of their own financial journey: never have more than 20% of your Net Worth invested in your own house…

Do I understand from this post that $5M of your $7M net worth is in your own house?

… I can, from a position ‘protected’ by semi-anonymity, remind our readers that my $7 million journey represents a 7 year ‘slice’ of my financial life from when I started $30k in debt in 1998 and ended up with $7 million in the bank in 2004.

My recent ‘bad beat‘ post talks about what happened between 2008 and now

But, the years in-between (i.e. 2004 to 2008) were very kind to me: dominated by a series of sales of my Australian, New Zealand, and US businesses to a UK public company … it was almost literally raining money for those years.

But, this is a personal finance blog, not a business blog, so I concentrate on the $7m7y because I believe that is repeatable by almost any of my readers.

Even so, my $5 million (cash) house certainly breaks the 20% Rule (my net worth would need to be $25m+) but, it doesn’t matter!

You see, the 20% Rule only applies when you are still chasing your Number!

When you have reached your Number (Making Money 301), THE RULES CHANGE:

Remember when you calculated your Number?

You:

1. Took your required annual living expenses (of course, adjusted for future inflation until your chose ‘retirement’ Date) and multiplied that by 20, and

2. ADDED in the value of your house (plus any additional cash required to pay off the mortgage), initial cars, and any other one-time purchases.

Once you reach your Number, you no longer require 75% of your Net Worth to be in investments: you ‘only’ require the amount that you came up with in Step 1.

So, you can buy as much ‘stuff’ (houses, vacation homes, cars, etc.) as you like with any extra cash that you happen to have!

For me, it doesn’t really matter how much house I bought, as long as I still have >$5m in investments, generating my annual living requirements.

So, Bob, you don’t have to worry about me … yet … I just like to complain

Who wants to be a billionaire?

Do you want $1 Billion? If so, I can’t help you much, but maybe this video can help …

For the rest of us, what will YOU spend your money on when your reach YOUR Number (list in the comments)? Even if it is only a paltry $7 Million in 7 years

To get you started, here’s my list:

House ($6 million; later ‘downsize’ to apartment worth ‘only’ $2 million)

Cars ($500k + $50k p.a. towards buying newer ones every few years)

Travel x 2 to 4 trips per year ($50k p.a.)

Startups ($500k) – Maybe these will pay off, maybe not

Speaking Tours (incl. in travel + $25k marketing budget) – as above!

Charitable Donations (at least $25k p.a.) + time: my wife’s

… then, there’s all the ‘living’ type stuff: house/parties/clothes/restaurants/sports/etc./etc. ($200k p.a.)

How about you?

I’m diversified …

Applications for the new $7 Million 7 Year Wealth System Guided Learning Experience are now closed. Thanks to all of those who applied … and, congratulations to those 30 who made it!

I’m not going to encourage my other readers to join, as I can’t see the point of paying $97/year for something that you could have got for free (well, for $1 a year). Anyhow, no advertising allowed on this blog … and, that even applies to me!

Instead, I hope that you will keep reading this blog, and that it will inspire and help you to make millions the good, ol’ fashioned way :)

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Yes, I am well and truly diversified …

… and, it sucks!

Here are my current holdings, roughly:

$5.0 million – House in Australia

$1.5 million – House in USA (soon to be a rental)

$2.5 million – Cash in Bank/s

$1.0 Stock in UK (actually, 70% has just been converted to cash)

$1.0 million – Equity in 5 condos

$1.0 million – Equity in two development sites (could be up to $3 million – $6 million once permits are issued)

$1.0 million – Value of business (I still have a finance company running on ‘auto-pilot’)

… aside from the fact that I’ve over-invested in my Aussie house [AJC: see this post for the problem and how I intend to fix it], you can see why I am not happy:

- Too much in cash,

- Too much overseas, in chunks too small to be meaningful

- Too many ‘small’ chunks of $1 million

Ideally, I would like to bring some of those small chunks together, merge them with my cash (like so many drops of mercury) and do something useful with them …

…. by ‘useful’, I mean plonk as much as the bank requires into my two development projects, then use the proceeds to buy as many investment properties in the $1 million to $3 million price range that I can find, as long as the net result is free cashflow of $500k+ p.a.

Nowhere here do you see me saying:

- 30% in cash,

- 30% in real-estate,

- 30% in stocks

- 10% in venture capital

Mine will look more like:

- 80% – 90% real-estate (albeit, over a number of properties, rather than just one big’un),

- 5% – 10% cash for contingencies (up to approx. 2 year’s living expenses or $500k to $1 million, whichever is the lesser)

- 5% – 10% for ‘fun projects’ (e.g. venture capital investments).

Why so much in RE?

[AJC: It doesn't have to be RE; how I invest my money is not how you should invest yours ... but, the principle of NON-diversification is what's important, here. And, I should clarify that, too: for you, non-diversification could be 95% in TIPS; 80% in AN index fund; 90% in just 4 or 5 stocks ... in other words: it means, avoiding spreading across asset classes]

I can’t find the online reference, but Warren Buffett was asked at the 2008 Berkshire Hathaway AGM (which I attended, so I am paraphrasing exactly what I heard, here) how much of his net worth he would place into one position (Berkshire Hathaway doesn’t count, because it’s really a conglomerate).

Warren said that his biggest problem right now is that his investment war chest is so large that he is forced to buy many investments, however, he did point out that he was very happy in days long gone, when his investment in AMEX comprised nearly 60% of his net worth.

Charlie Munger (Warren’s long-time business partner) said that he would be equally happy to have close to 100% of his net worth in just one outstanding investment.

BTW: Charlie is a real ‘character’; short on words … long on wisdom!

Having sat on both sides, I can tell you that - right now - I am NOT happy being so ‘diversified’ … it annoys me, and I feel hamstrung in that I can’t bring my full financial weight to bear on any project.

But, each to their own … it’s just that certain rich peoples’ “own” = non-diversification

_______________________________________

Adrian J Cartwood is on FaceBook … come and be friends!

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Paying down debt … an instant Net Worth fix?

I think we’ve covered this in brief before, but it’s a common – and, easy to make – mistake, so I thought that I should cover it again, here …

… Diane asks:

I’m withdrawing the funds in the IRA to pay [some of my] debt. So, is my Net Worth actually decreasing?

Unfortunately, that’s not the case; simply moving money between accounts (such as using some spare cash to pay down your home mortgage) doesn’t do anything to change your Net Worth, at least not on its own …

… it seems counter-intuitive, so try updating your NWiQ profile by, say, taking $10k from your retirement account and reducing one of your debts by the same amount … you’ll quickly see that your Net Worth does not change.

Here’s an example:

Let’s assume that Diane currently has a Net Worth of $66k because she has some assets (including a $93k ‘retirement account’) totaling $259,500 but she has to pay debts (liabilities) of $193,000 (including a $33k credit card debt).

Now, let’s see what happens if she takes $10k out of her Retirement Account to help knock a hole in her expensive credit card debt (let’s also assume there are no taxes or other penalties involved):

All that’s happened – from a purely Net Worth perspective – is that the Retirement Account has gone down $10k (to $83,000), but so has the credit card debt (from $33,000 down to ‘only’ $22,000). Do the math and it’s clear:

Diane’s Net Worth hasn’t changed … it’s still $66,000!

What will change is that Diane will earn less in her retirement account, but she will save more interest on her debts. I’m betting that paying the debt down (thus saving, what, 10% – 20% interest p.a.?) will put more money into her pocket than the 6% – 10% that she is ‘losing’ in long-term mutual fund returns (after fees and charges) …

… and, it’s what Diane does with THAT ‘found money’ that will dictate what happens to her future Net Worth

Spending your Net Worth

Currently, over at the 7 Millionaires … In Training! ‘grand experiment’ we have been looking at the 7MIT’s cars and their attitudes, thereof.

I introduced them to the 5% Cars + Other Possessions Rule, which Jeff seems to have forgotten covers all of your possessions outside of your home … not just your car:

It seems like all you’d need to do is wait a bit and eventually your car will depreciate enough to be under 5%.

Does anyone really count their cars as part of their net worth? I view them more as a disposable item and not something that I try and calculate my net worth with.

But, Jeff does touch on an interesting ‘quirk’ of cars and other possessions that is different to what generally happens with houses and investments: they go DOWN in value over time.

This depreciation is something that we can take advantage of …

… you see, we can use the fact that our Net Worth should be increasing – while these other items are probably decreasing – to allow us to go shopping every few years or so!

[AJC: But, don't forget to always pay CASH!]

Think about it, if 75% of our Net Worth is in investments (this is called your Investment Net Worth … it does NOT include your house, cars, and other cr*p that you may have lying around) and 20% is in your house and 5% in your cars/possessions, then you may have a Net Worth IQ asset column that looks like this:

Investments: $75,000 (75%)

House Equity: $20,000 (20%)

Cars: $2,500 (2.5%)

Other Possessions: $2,500 (2.5%)

But, in 3 years time – assuming a ‘normal’ market (and, who can really assume anything these days?!), it might look something like this:

Investments: $105,000 (80%)

House Equity: $25,000 (18%)

Cars: $1,250 (1%)

Other Possessions: $1,250 (1%)

Which allows you a number of options:

a) Pay down some of your mortgage (up to $2,500) to bring your house back to the maximum equity that these rules ‘allow’, or

b) Buy a newer car or some more cr*p (up to $2,500) to reward yourself for your good work, or

c) Decide to become rich(er), quick(er) by realizing that the rules were designed to have a MINIMUM of 75% of your Net Worth in investments … but, there’s nothing wrong with investing more

d) Some sensible combination of any/all of the above

I like (d) … to be totally honest, I don’t go for the overly-frugal nonsense: once I reach a financial milestone, I see nothing wrong with allowing myself a little enjoyment … that’s why I’m sitting back on my hammock right now with a Pina Colada and enjoying the Aussie sunshine ….

… regardless of how YOU choose to look at it, when you have a set of guidelines that you can follow, doesn’t it make it easy to at least see what the choices are?

Devolving the Myth of Income … Part II

In Devolving the Myth of Income … Part I we explored the following question: “what’s your definition of ‘rich’ … would being a highly-paid professional (such as a doctor) or a high-flying executive (such as a high-tech sales rep) earning megabucks-per-year do it for you?”

Today, I want to finish exploring this subject by looking at question recently posed on Networth IQ a web-site for people to track (and discuss) their own Net Worth.

The question was posted by mario  (you may need to register and log-in to see his Networth IQ Profile):

Like many Americans, I have a great deal of equity in my home, built up by “trading up” over the past 20 years. At this point I have over $2M of equity in my home, which represents two-thirds of my overall net worth. While this is all good, I am starting to feel like this flies in the face of my diversification goals; how can I consider myself diversified if I have 66% of my net worth tied up in one piece of real estate? I would sell the house in a minute except for the tax consequences. Does anyone have a strategy other than selling?

Here is a guy with a high-flying sales career, earning more than $250,000 a year and he’s less than 50!

He also has a house worth $2,000,000 …

…. now, you could be describing me!

But, there’s only two differences:

1. If I choose to stay in bed tomorrow … that’s OK. Stay in bed the next day … fine. The day after, the day after … it doesn’t matter. Even if I never bother getting out of bed again … the money keeps rolling in.

2. I can afford my $2 Million house, my Maserati and my $250,000 a year lifestyle!

Let me explain …

In a recent post I wrote about the Fisherman and the Investment Banker; ‘Mario’ is the Fisherman, I am the Investment Banker … what happens when Mario’s ‘fishing career’ stops?

When Mario stops, his income stops, and he can no longer afford his lifestyle. This is mainly because, Mario’s Investment Net Worth is much lower than his Notional Net Worth.

Here is what the Mario’s of this world – that is, those with high-flying corporate jobs and those in high-income-producing businesses (and there are plenty of both!) - need to do to ‘bullet proof’ their lifestyle:

1. Stay in the habit of saving - maintain the same good savings and debt control habits and (relatively) low-cost lifestyle as I hope you had when you were starting out, because you will need these habits when the income eventually stops flowing in … that will happen when you retire but it may happen even sooner than you think.

2. Only buy as much house as you can afford – obey the 20% Rule  and make sure that you only carry enough mortgage that you can afford without compromising you savings and investing goals.

3. Revalue your house every 3 to 5 years  – whenever your equity exceeds 20% of your Net Worth (Mario!), refinance the house and put 100% of that money towards your Investment Plan.

4. Accelerate your Savings Plan- save at least 50% of non-reinvested business income, every future pay increase, bonus, tax refund check, found money (the loose change in your pockets, Aunt May’s inheritance, that lottery win … anything and everything!). Enjoy the other 50% … go ahead … you worked for it!

5. Implement your Investment Plan – Every time that your Savings Plan builds up sufficient funds, add to your investments by buying and holding for ever any mix of the following that suits your skills and interests (do NOT trade with this money … build up a separate ‘spec fund’ if you want to do that):

a) Income-producing real estate, and/or

b) 4 or 5 direct stocks in companies that you understand and would love to own, and/or

c) Low cost, broad-based Index Funds.

I prefer investing in exactly this order, simply because you can leverage (i.e. borrow more) and improve returns by selecting/managing carefully (a) over (b) over (c) … but, that’s personal choice.

This simply boils down to saving more and spending less (now) to live well and securely (later) … no matter what you income is today … delayed gratification in action!

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How to avoid being 'house rich' yet 'cash poor' …

I recently read about a very interesting predicament for a reader on Free Money Finance  – one that is, unfortunately, all too common.

 Here is what the reader asked on the post on FMF:

 To start off, my husband and I purchased our home in 1987 for a little over $100,000…..[ her husband died after a whole series of family tragedies]……The house is the only asset I have left and the only thing I have to pass down to our children.

Now, you will need to read the entire post on FMF just to understand the tragedies that this poor woman has had to endure …

…. on top of that, she now has to face an uncertain future because their only form of ‘financial planning’ was to own their own house.

 This is an all-too-common story. In fact, I am reminded of two recent stories from my own family:

1. My wife’s mother died living on a government pension, no vacations, walked wherever she could, and otherwise penny-pinched to survive. Yet she died and left her three daughters (including my wife) a house worth nearly $800k and no mortgage!

2. My 95 y.o. grandmother (still living!) spends all of her income on supporting my mother and two sisters (all capable of working, but choose not to), struggles to pay her own bills (she had to borrow $40,000 from me to pay a Land tax bill). She gave my son a check for his birthday when we went to visit her last Christmas … the check bounced!

However, she just sold an investment property that she had held on to for many, many years (clearly, it became so run down that income was very low) for $4.5 Mill!

Kind of reminds me of the guy who lives like a miser but has a secret $1,000,000 stash of cash stuffed into his mattress.

These are examples of being ‘asset rich’ and ‘cash poor’ and, unfortunately, describes so many Americans reaching retirement age.

The solution is the 20% rule …

If you didn’t read the original post, this ‘rule’ says: have no more than 20% of your net worth tied up in your house (plus another 5% max. tied up in cars, furniture and other possessions).

That is simply another way of saying that you must have 75% of your Net Worth in income-producing assets (if you are at or near retirement age) or in a mix of income and growth assets (if you are at least 10 years off retirement).

If you are nowhere near retirement, and this will be your first home purchase … go ahead and break the 20% rule … but, reassess every year and make it your goal to build up enough free equity (that is, more than the 20% rule allows) … when you do, be sure to use that equity to invest or you will end up exactly where this post says you don’t want to be!

Having a house … and only a house … is no way to live.

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Devolving the Myth of Income … Part I

What’s your definition of ‘rich’ … would being a highly-paid professional (such as a doctor) or a high-flying executive (such as a high-tech sales rep) earning megabucks-per-year do it for you?

If so, strap in, because I am about to devolve the myth of income by looking at two case studies, both from Networth IQ a web-site for people to track (and discuss) their own Net Worth.

To start, here is an excerpt from an e-mail that I received from docsd  (you may need to register and log-in to see his Networth IQ Profile):

I have been awaiting approval on a home that I am purchasing and just received word today that I was approved for the loan and that the closing process will proceed. My wife and I plan on staying in the home for many years to come, as it is an older historic horse farm on several acres outside of Louisville, KY and this home fulfills my wife’s dreams of being able to have horses. I actually came to a compromise with her regarding this house because my goal has always been to live as far below my means as possible while accumulating wealth and her goal was to have a considerable and high-end horse estate on several acres (obviously not inexpensive living, especially if this is a 500k-million dollar home that you plan on staying in). The compromise we made was to wait as long as we could to find the best deal possible so that we can fulfill both of our desires between the property and the low personal overhead to help with wealth accumulation. That time has come and we found the property, basically stole it for tens of thousands below its most recent appraisal and we qualified to purchase it while still holding on to our current home. We are purchasing the new home for 325k and our current home is valued at between 307k and 314k.

I feel I am in a unique position as the owner of 2 homes this early in starting my career and have a feeling I can make a much better situation out of my current home by holding on to it instead of selling it quickly in this market….however, I am worried that it is too pricey to be able use as a rental property investment at this time. Provided I refinance it to the going rate, around 6%, which is considerably better than the 8% we qualified for when we bought it just over 2 years ago, the total monthly liability for us would be just over 2k per month and I’m just not confident we can get that much monthly for rent here at the moment. This house is a very nice and large house in one of the more exclusive parts of town (in an area that has been averaging nearly 10% appreciation for homes per year across several years and not impacted near

What would you do if you were the ‘Doc’?

Obviously, we don’t know nearly enough about his situation … and, we can’t give specific financial advice, anyway … but, we can make some general observations:

Firstly, we can see a hard working professional (we presume) earning over $150k per year … easy street!

Then we see the problems that go along with it: too much house, too much lifestyle, too much debt … even though our ‘Doc’ says that he is focused on saving and wealth creation.

But, Doc has some bigger issues to deal with:

1. Student debt and other debt (plus his mortgage) of nearly $160k that must be paid off!

The ONLY reason not to concentrate solely on paying it off now is if (a) the interest rates on these loans are lower than mortgage rates, and (b) the money that should be used for paying off these loans will instead go into long-term, buy-and-hold, income producing rental property.

2. The ‘doc’ has a negative Net Worth!

Now, that’s always understandable for a professional with large student loans to pay off early in their career; I don’t know how long ’our doc’ has been working, but to be looking to compound this Net Worth deficit by upgrading lifestyle is not something that I would usually recommend.

But, there is also an emotional/lifestyle decision to be made here: 

For example, we need a wife who is onside, so it would be tempting to simply swap one home for the other (keeping in mind it’s probably ‘only’ a $50k – $100k ’swap’ … new house is slightly more expensive than the existing, but there will also be closing costs and selling costs, etc.).

But, I have a question around the horses … this house comes with a new lifestyle: are the horses just an expense (i.e. buy, feed, maintain) or also an income (e.g. agisting other people’s horses, selling horses, giving riding lessons, etc.)?

If the latter, I would consider upgrading just to keep the ‘little missus’ happy, but only if I was committed to earning more and using that extra income to accelerate debt repayment … if the former … hmmmm.

Given that we are not really assessing the Doc’s situation, because we don’t know enough, we need to realize that high income = high wealth only when that income is put to:

a. Debt reduction, then

b. Passive Investments

Lifestyle comes from the perpetually sustainable income that good passive investments should spin off … at least, that’s how I live.

In Part II, we’ll look at the super-high-flying-sales-rep …

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Calculating your Investment Net Worth

I found a site that I really like; it’s called Net Worth IQ and it’s a social network around calculating (& sharing if you feel so inclined) your net Worth.

 To be conservative in calculating your Net Worth, you should LEAVE OUT:

a) Any ‘equity’ in your house that you NEVER intend to release as investment (i.e. borrow against for purchasing, when the timing is right, income-producing-buy-and-hold-investment-real-estate).

b) Any supposed ‘equity’ that you have in your business.

Let’s call the result your INVESTMENT NET WORTH …

 It’s the only one that matters!

Why?

Well,there are only TWO reasons to even bother calculating your Net Worth:

1. To ensure that your ‘portfolio’ matches the Rules of the Rich (e.g. the 20% ‘rule’ on home equity that I talk about in a recent post), and

2. To check whether your INVESTMENT NET WORTH (which should be in passive income-producing investments by then) can FUND your ideal retirement with at least 99% chance that your money won’t run out before you do.

I must confess that for the purposes of the Net Worth IQ site … I broke those two rules, so I should lower my Net Worth by approx. $2.5M, and I may make that change later – I haven’t decided yet.

BUT, I have already done the calcs and am acutely aware that my INVESTMENT NET WORTH can EASILY fund my retirement starting next year (I’ll be 50 … now, that’s old, Man!).

If this makes sense to you … check out some Tips that I have already left on that site and this blog.

Now, what’s YOUR Investment Net Worth … more importantly, can it fund your IDEAL retirement?

The 4-step, never-fail plan to making a fortune in real estate …

There is a lot of BAD stuff written about real estate and a little bit of GOOD stuff … start by finding and reading some of these good books (google “John T Reed” and see which books he recommends and which ones he pans).

The truth is that most people MAKE money through a business, then KEEP money by investing in real estate.

If you can’t (or won’t) start a business (even on the side) then you can at least accelerate your LIFE SAVINGS PLAN by buying and holding income-producing real-estate.

Right now, it’s very simple:

1. If you don’t yet own your own home (but would like to) BUY one now and LOCK in the interest for 30 years.

Why?

Home prices are relatively cheap (if you think they will get cheaper then wait a little longer … if you’re not SURE they will get cheaper, buy now).

Money is cheap – mortgage rates are probably 2% lower than they will be by 2009 or 2010.

You want to keep buying that cheap money for as long as possible …

… but, only IF you are prepared to take the next step, which is to …

2. Assess the increased / excess equity (what your house is worth – what you still owe) in your house yearly and use that excess equity to buy another as soon as you can scrape up a reasonable deposit (20% if you are conservative).

3. Lock in the interest rates for 30 years; rent the property out; keep raising rents; reassess the value of all of your properties yearly.

4. Repeat until Rich!

Now, this will take 10 to 30 years … to accelerate: start that little (or big) side-business and use the excess cash-flow to buy more investment properties rather than Porsches!

Simple … and, you couldn’t be starting at a better time in history.