A hidden risk of reward …

I have postulated before on the $5m5y Phenomenon: why is it that 80% of lottery winners, winning absolutely life-changing amounts such as $5 million (all the way up to $150 million) lose 100% of their winnings within 5 years?

Think about it, it’s a staggering amount of money: how would you even go about spending $1m+ a year for 5 years, starting from an almost zero spending base?

Jake hits the nail on the head for at least one of those reasons:

When you hit your number or are well on your way toward it, how do you deal with family that are not making progress to their number (or likely ever will get there).

Specifically, how do you keep a cordial relationship – i.e avoiding acting like a heartless a-hole but also avoiding being the family patsy / sucker who pays for everything.

If you are making good progress toward your number, you are likely very hard working, talented and lucky. Chances are that family members lagging behind are lacking one or more of those traits, often the one associated with hard work.

Yes, after the houses, boats, vacations, girl/boy friends, and Ferraris come the financial-vacuum-cleaning carpet snakes:

Your friends and relatives

Having had [AJC: too much] personal experience dealing with exactly this type of issue, let me try and give you some random pointers, which you will need as your journey progresses:

Stage 1 - When you are still on your journey towards your Number

- Lie about your financial circumstances; the corollary is to keep your spending under control, which has the side benefit of actually helping you to reach your Number

- Complain about everything: business is bad, your investments aren’t doing as well as you hoped, and so on

- Take a preemptive step: actually try and borrow money from those most likely to put the hard word on you [AJC: don't try too hard though, you don't actually want to owe your relatives anything]

Stage 2 - Just as you reach Number

- OK, it might be difficult to hide behind a veil of poverty (unless you are some sort of miser); so, you will need to rely on the old “can’t confirm/deny anything” … this is best done by attitude rather than words: in other words, when one of your friends says “Frank’s really loaded now”, just smile wryly or – if you have to say something - try “don’t believe everything you hear”

- You could still try and borrow money from your relatives to “help pay some back taxes that I owe … nothing serious”; this works best if you also put a For Sale sign on your Ferrari.

- At least try and keep your post-windfall spending spree in check; and, it’s likely – if you’ve been following the advice on this blog – that your Lifestyle isn’t going to to take a big jump, rather you will not have to work to maintain it.

Stage 3 - Making Money 301

You have your Number, but you forgot to build into your chosen lifestyle a certain amount for ‘paying off the friends and relatives’ [AJC: if you're still calculating your Number, now's your chance to put something in there], what to do?

- You will have no choice but to do certain ‘good deeds of kindness’; for example, we paid for two tickets for family members to fly to the US to see us. We flew them coach, provided no spending money, looked after them generously while they were with us (we paid for all meals, etc.), but they were grateful.

- Keep these ‘acts of generosity’ few and far between, or they will be soon seen as ‘rights’ and you will end up wearing all the cost with none of the benefit.

- Simply accept it as a ‘cost of doing [family] business’ that you will be the one footing the bill at all family events; we find ‘prior engagements’ for as many of those family functions as possible: out of sight, out of our pocket.

- Give 30% to 50% (only for family … friends get no more from you than anybody else) more generously for gifts than others; it will be expected and there’s not much you can do.

- Ditto for tips; if they know who you are, you had better be a little more generous if you want to avoid your food being spat in.

- Listen politely but offer little when friends and relatives come asking you for ‘advice’ … they are really sounding you out to ask you for money (they will call it a ‘loan’, but you know it for what it really is); your only protection is preemptive (see above).

- You are far better off to be seen doing ‘good works’ and giving to charity; the aim is to be seen as a good role model and something that your good-for-nothing-freeloading-ex-friends-and-still-relatives can aspire to when they make their own money.

Just remember, unless you built a huge Charity Case Buffer into the calculation of your Number, you have no choice but to let your friends/relatives do the right thing and work on their own Numbers … unless, you no longer want to be able to live your own Life Purpose?!

You are already wealthy!

This guy actually talks a lot of sense … the subtext being that – in historical and/or Third World Country terms – we are already wealthy …

… so, don’t make your life about making money, make ‘making money’ about supporting your Life.

No more, no less

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

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

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

Last week I gave some unsolicited advice to those who may have finished 6th, 7th, 8th, or 9th in last years’s World Series of Poker – Main Event – pocketing a tidy sum in the range of $1.2 to $1.5 million.

Sounds like a lot, but not if you are aiming to retire on a helluva lot more than $57k a year (plus a $60k ‘one off’ spending spree’) …

… so, what if you finish 5th, where the prize money jumps to a tidy $1.9 million?

Well, where this poker-listings article suggests that you could buy a 1977 Learjet 36A, it’s probably not a smart idea if you want to use it more than once or twice ;)

Well, you now have a $95,000 spending spree on your hands (of course, you don’t have to spend it all), and you could just retire and live off $90k a year.

Job done!

But, if you are still chasing that $7 million in 7 years, then you still need to follow the advice from last week’s post … but, I would tend towards investing more in real-estate (commercial RE with a good spread of tenancies) and, I would not risk too much of such a ‘once in a lifetime’ windfall in my new/existing business (it’s best to start/stay lean ‘n mean, anyway).

But, if you come 4th (picking up a tidy $2.5 million, in the process) then you can afford to live this $100k lifestyle (and, still have $125,000 – once off - to splash around to help you celebrate). Similarly, if you make it all the way to the final 3 before busting out with $3 mill. jangling in your pocket …

Next week, I’ll tell you what to do if you come 1st

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

While you are evaluating whether you can even afford to enter the WSOP this year [Hint: I don't pay $10k to enter a poker tournament; but I don't mind playing a few satellites to try and win a seat], consider what last year’s winners COULD have bought with their money: http://www.pokerlistings.com/blog/what-to-buy-with-wsop-main-event-moneyz

Let’s say that you do beat 6485 ‘losers’ to make it to the Final Table of the Main Event (a.k.a. The November Nine), what do I suggest that you do with your winnings?

You finish 9th (pays ~ $1.2 million):

Firstly, you need to console yourself with being in the most embarassing position of having all of your friends, relatives, and hanger’s-on watching you bust out first by buying yourself a gift or two [AJC: I'm not suggesting that you buy the Chopard Super Ice Cube Watch!] …

… my usual Making Money 101 advice for those dealing with large amounts of ‘found money’ is to spend no more than 5% of your windfall [AJC: for this post, I am assuming that (a) you are not a professional poker player, and (b) the amount that you win is life-changing].

Now, before you go spending most/all of that ‘guilt free’ $60k on a car, realize that in a number of years it won’t be as new and exciting as it was when you bought it, and you may not be able to afford to replace it.

Why?

Well, the 5% Rule accounts for ALL of your possessions (incl. furniture, clothes, art, knick-knacks, guitars, consumer electronics, etc., etc.), not just your car … if you spend 5% of your entire net worth on a car now, you may have problems buying ‘other stuff’ later.

 [AJC: Remember, the 5% Rule states that ALL of your possessions other than your house and investments must not account for more than 5% of your entire Net Worth at any point in time. In fact, a good rule of thumb is that your car/s should not be worth more than half your possessions - or 2.5% of your Net Worth - leaving plenty for other purchases]

So, buy a smaller (but, still nicer/newer) car, and a vacation, and some celebratory rounds of drinks with family – but, do NOT start paying off their debts and buying them stuff as you ain’t their ‘rich cousin’ even though $1.2 million may sound super-rich to them

Now, how about the other 95%?

Well, if your Number is $1,140,000 then you get to retire!

But, if your Number is larger than that, then realize that what you have just earned is seed capital to reach your Number.

Think about it: $1,140,000 x 5% (which is regarded as a reasonably ’safe’ withdrawal rate) = $57k a year to live off. Nice for some, but hardly a $7 million in 7 years lifestyle.

Keep your job, invest the entire $1,140,000 in something as motley as Index Funds, and you could double your capital in 10 years (assuming an 8% return). Put it into Real-Estate ($100k down, and $140k buffer against vacancies and repairs/maintenance) and you could end up with a lot more. Invest a portion in your next start up, and invest the rest (“just in case”), and you could be the next Bill Gates.

This advice probably also applies to the 8th ($1.3m), 7th ($1.4m), and 6th ($1.5m) place finishers …

Next week, I’ll tell you what to do if you finish 5th

Are you a Money Hacker? I am!

Welcome MoneyHackers!

Here are three of my favorite posts to get you started; if you want to find out:

1. If $1 million will be enough to retire with, then click here, or

2. How much house you can afford, then click here, or

3. Why buying a new car is such a losing proposition, then click here.

Otherwise, please enjoy this article, then bookmark my home page (click here) and come back often …

____________________________________________________________________________________________

For those who don’t already know, I am a member of Money Hackers – a group of personal finance bloggers – and Lydia has just interviewed me; you can read the interview on the moneyhackers.net site by clicking here, or read the extract below:

What influenced you to start writing 7million7years?

I started out $30k in debt and made $7 million in 7 years, but the road was bumpy and I found that I had to learn most of the hard financial lessons myself. I started my blog so that others wouldn’t make the same mistakes that I did.

What encouraged you/where did you hear about becoming a 7 time millionaire in 7 years?

When I started out, I had two businesses which barely paid their own way, and I was in serious debt. But, I had no clear goal or reason to do any better. That all changed when I discovered my Life’s Purpose, which is to always be traveling physically, mentally and spiritually. I suddenly realized that I would need both a lot of free time and plenty of money to achieve what I really wanted in my life. In fact, I calculated that I needed $5 million in just a few short years. That epiphany started the amazing journey that took me from $30k in debt to $7 million in the bank in just 7 years.

What financial topic do you most enjoy blogging about?

My own financial journey and showing others how they can also free themselves from a life of work, debt, and drudgery by applying the same financial lessons that I learned. There are no scams or schemes needed to replicate what I achieved, if they just follow some good, old fashioned financial advice.

What crucial point have you learned through this experience of gaining 7 million?

Your money is there to support your life, yet most people act like it IS their life. No amount of money will ever be enough if you have no clear idea what you really need the money for. Find out what it is that you really want to do in with your life (and by when), then calculate how much passive income that you will need to get you there. Then come to my blog to find out how to safely build that income stream. But, once you have enough … STOP and smell the roses.

What 3-5 blogs are essential to understanding how to save money?

My blog isn’t really about frugal living and saving money, but more about accelerating your income through work, business, and investing. It’s also about protecting your wealth, through passive investment strategies (for example, using stock or real-estate). So, if my readers want to know more about saving than investing, then I recommend that they read:

1. JD Roth’s Get Rich Slowly

2. Steve’s Brip Blap

3. Pinyo’s Moolanomy

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, and no more that 5% in all of the other ’stuff’ that you own (e.g. cars, furniture, computers, etc.). You can adjust the equity in your house by refinancing periodically (always lock in your interest rate when it is below 6% – 8%).

This means that you will always be investing at least 75% of your Net Worth, which is the only real chance that you have to get out of the financial rate race.

If you have your own blog, I’d like to hear how/why you started it … there’s plenty of space to share in the comment section, below …

I’m going to be a millionaire!

You don’t get to become a millionaire without style and confidence …

… you have to admit that this guy has at least a bit of both!

Betting on the lottery …

Ill Liquidity candidly (yet, I am sure, at least a little tongue-in-cheek) shares his plan to make $7 million:

Coincidentally, on the same day that I settled on one of my development sites (it was the $3 mill. one) I was offered a lottery ticket by a vendor … I declined, to which he said “it’s only $7 and you can win $15 mill.”

If anybody can afford $7 it’s me … yet, $15 mill. would offer a huge benefit to me, too … my blog would become $21 mill in 9 years, for example

However, I still politely declined and the look on his face was one of clear non-belief i.e. “who in their right mind would turn down $15 mill. for $7″.

You see, most people’s only plan to make $7 mill. is “betting on the lottery” …

… but, that’s NEVER been my plan.

I wonder if that’s one reason why I’m rich today?

The new way to measure wealth …

… well not exactly a new measure, more a new definition.

Let’s think about some stages of wealth:

1. Debt Wealthy

At some stage, after half a lifetime of struggle, you will most likely have a mortgage, a partially paid off car loan, some residual student loans, and probably a few credit card bills hanging around.

If you’ve come to this blog via the other personal finance blogs floating around, then this probably bothers you enough to want to do something about it …

… as for the rest, many will struggle with this debt until the day that they die.

But, not the Debt Wealthy!

These lucky few will have risen up the corporate or business ladder high enough that their income is enough to service this debt and a little more:

- They can finance their house, car, boat, and caravan/vacation home

- What they can’t finance, their job or business provides (car, phone, laptop, corporate dinners)

- They have enough left over for a domestic trip or two every year sitting up the back of the plane,

- And, enough to eat and clothe themselves well, and to educate their children.

Their only problem – one that they choose never to voice, yet the one that has the bread-winner tossing and turning in their sleep every so often – is the ‘what if” …

… what if:

- They lose their job/business?

- They get sick?

- They get divorced?

They have no plan other than hoping for the best … and, for many, this is enough and for the rest …

… well, sh*t happens

2. Rent Wealthy

But, for a lucky few – and, never through saving but always through Their Big Lucky Break – a huge wind-fall gain comes in; it could be:

- Selling their business

- Retiring (or being retrenched) with a huge Golden Parachute

- Winning the lottery or the Inheritance Jackpot

Presuming that they understand how to deal with this situation and don’t go crazy [AJC: reading this blog should help], they can probably:

- Finally stop working

- Begin to live their Life’s Purpose

- Pay off all of their debts (houses, cars, etc.)

… and, they should still be Rent Wealthy … a really nice stage of life, because they should have enough passive income (again, if they don’t go crazy) to rent whatever they want, whenever they want it; for example, they can rent:

- Seats somewhere towards the pointy end of the plane (or, even by charter),

- Hotel rooms anywhere in the world that come with at least a few stars,

- A Really Nice Convertible for a drive in the country once or twice a year,

- Time on the golf course as often as they want

… and, the list can be virtually endless.

I should know, because with $7 million I am Rent Wealthy

3. Buy Wealthy

Of course, if their Big Windfall is really an Obscenely Big Windfall, then a Really Lucky Minority becomes wealthy enough to buy everything that I can rent, either in whole (or, in multiples if they are Oprah) or in parts (eg fractional ownership):

- They own their own personal jet either outright or by fractional ownership,

- They have one or more vacation homes (owned in full or fractionally) around the world,

- They own at least one Really Nice Convertible or share ownership of a few,

- They have memberships at one (or many) Really Nice Private Golf Clubs.

The interesting thing about all of these stages is that they have one thing in common …

… can you guess what that might be?

You are much more comfortable at the top end of each stage than you may be at the bottom of it!

At the bottom, you are always trying to keeping up with The Jones (you know, the ones who can borrow, rent, or buy much more comfortably than you). Others think you are fine, in reality, you are struggling:

- to pay the mortgage, if you are Debt Wealthy

- to pay the bills for all of those discretionary expenses, if you are Rent Wealthy

- to pay for the maintenance and upkeep of all that stuff you own, if you are Buy Wealthy

So, what’s the lesson, other than a cute observation?

It’s simply this:

When you consider your Life’s Purpose, don’t pop yourself into the bottom of the next stage.

Instead, hold yourself back either permanently or until you have enough passive income to drive you to the ’sweet spot’ of the next stage.

Aim toward the mid-to-upper part of the stage that you think may be enough for you …

… for example: for me, Rent Wealthy is plenty

How about you?