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My Money Blog gives me the excuse to revisit that old chestnut – a favorite of mine, since it is so emotive and is bound to piss off Ramseyphiles, saying:

I’ve been thinking more about whether I should commit some additional funds to pay down the principal on my mortgage and reduce my interest paid.

I like this opening sentence, because it clearly provides the financial motivation to pay off your mortgage early: to reduce your interest paid.

Since interest doesn’t gain you anything, why not pay it off as early as possible?

Simple: because you still need to decide what to do with the mortgage payments that you USED to make, once you stop making them?

If you want to get rich(er) quick(er) you’ll probably put them into some sort of investment that earns you at least an 8.5% long-term return … and, if you REALLY want to get rich(er) quick(er) you might even borrow money so that you buy an even higher performing investment (e.g. ‘start a business’ funds, investment property, margin loan on stocks, etc.) …

… you’re being smart!

But, if you are going to do that later, why not start earlier, when you have more time to:

a) allow compounding to really ‘kick in’, and

b) recover if things should go awry?

Your answer, of course, will be: “because I have a mortgage to pay” …

… when it should be: “you’re right, otherwise I won’t have a retirement”!

We would normally leave things there, but My Money Blog finished his article with a nice suggested strategy when deciding if to pay your mortgage early:

My idea is to simply look at the current yield of a comparable U.S. Treasury bond and compare it to my mortgage interest rate. If my mortgage interest rate is a lot higher than the bond rate, then I should pay extra towards the mortgage. Otherwise, if the Treasury rate is higher, then I should invest in bonds or bank accounts directly instead. If it’s close, stick with liquidity.

My Money Blog seems to have the right idea: compare the AFTER TAX mortgage savings with what you can earn elsewhere, but comparing to the cash / bond rate is too conservative for most people.

Look, you’re in this for the long-term (eg do you have 20+ years left before you plan to retire?), so put your money where you can get the best 20+ year return; this is the order:

Businesses

Real-Estate

Individual Stocks

Index Funds

Bonds

CD’s

Cash

Start as close to the top as you feel comfortable handling eg

You may have no interest/aptitude in either real-estate, businesses, or even learning about how to value companies/stocks, so you may simply buy a low cost Index Fund and wait 20+ years for your return …

… but, no matter which you pick (unless, you are wading down at the Bonds, Cd, Cash end) – and, you have 20+ years to ‘play with’ – it’s really no contest 😉

While we all know that straight lines are passe, even compounding – the panacea to the masses offered by the financial services industry – does far less for us than cursory examination would at first seem to indicate, so let’s finish this series by taking a close look at an amazing effect … it’s called:

The J Curve

I am, perhaps, guilty – along with Michael Masterson whom I quoted in this post – of providing the impression that, in order to make your Number, you simply need to ramp up the compounding effect … that is, a larger compounded ‘interest rate’ provides a larger / quicker outcome … all in a nice, neat geometric progression.

DrDollaz states the issue very nicely:

Sometimes I think the assumptions of 50%+ compounded growth rates over long extended periods of time is a little excessive. I own 2 fairly successful small businesses and have seen roughly 75%+ growth in my net worth over the past 5 years if I want to count “conservative” business equity and if that continues, then I’ll blow past my number ($12.5 Million in 5 Years from now will be more like $30 Million in 5 Years!). I just feel that at some point the growth rate is not “as” easily sustainable (although I’d LOVE to be wrong!!! )

But, Michael Masterson’s assumed 50+% compound growth rate for successful business startups is only true when planning your Making Money 201 strategies to reach your Number [AJC: assuming – as it will be for most of my readers, at least – that MM101 won’t be enough to get you there by then], however …

… in reality:

1. You PLAN your approach to your Number/Date by calculating the Required Annual Compounded Growth Rate, but then

2. You ACHIEVE your Number/Date through a series of unpredictable – and, often climatic – events.

The simplest way to explain this is to look at a recent phenomena with this very blog:

I write my blog daily and promote it enough (by leaving comments on other blogs; submitting to the occasional personal finance carnival; and so on) to have hundreds of daily readers; but, every so often, one of my articles is picked up elsewhere and … boom … readership skyrockets!

Here’s what happened to my readership when Kimberly Palmer asked me to contribute to an article that she was writing for US News:

Now, I could not have engineered this result, yet I instigated it by ‘cold contacting’ Kimberly some months ago and contributing this ‘guest post’ … it’s almost like I positioned myself for success, but then it actually came of its own accord!

You can see on the graph the J-curve effect – not once, but twice – as the article was first published in US News … then syndicated by Yahoo! Finance.

And, this is the way Making Money 201 seems to work (yes, the most powerful growth strategy – as always – belongs to MM201): a series of dramatic spikes interspersed by plateaus and sudden drops …

… it’s not a smooth ride to the top, but a hairy roller-coaster ride to (we hope) ultimate success. This is why most people aren’t rich: they can’t stomach the dramatic up’s and down’s 🙁

Looking back on my own career, I realized that my financial and business success could be traced back to three ‘explosive events’ (hence the ‘elbow’ or the ‘J’ in the curve):

– I had been trundling along with my business barely breaking even when I finally ‘hooked’ the big one; a large corporate whose client base matched the demographic of my prospect list, and whose products complemented mine (actually, mine complemented their product set); I picked up two other major clients at the same time: my sales quadrupled in just 6 months.

– Later, I signed a $20 million, 5 year contract that saw me open my business (as the 51% majority stakeholder in a Joint Venture) in the USA; this quadrupled my business again.

– Later still, I signed a series of transactions (so, I guess this was really a series of slightly smaller ‘explosions’) to sell my businesses at excellent, pre-crash, valuations.

Each J-Curve Event produced a 400+% growth spurt, generally followed by a long flat (or even slightly declining, as customers dropped off) period, leading up to the next J-Curve Event, and so on …

… the combined effect over the entire period of owning the business would have approximated a 50+% annual compound growth rate, but I never ran the actual calc’s (since I started with $0 capital, my actual $$$ return is technically infinite, anyway).

So, you need to position yourself to take advantage of all of these different types of curves if you have a Large Number by a Soon Date …

… then just sit back and wait for the explosions

I must admit, the only reason why I’m writing this post is because I happened to read Bill Shrink’s post with 16 Depression Era Money Saving Tips and saw this photo (under the tip: “buy in bulk”) …

… and, the only thing exciting about that is that I have an empty cup of that incredibly spicy ‘instant soup’ (the one in the photo with the Chinese character that looks like a black lantern on a pole) sitting on my desk in front of me, and my mouth is still burning! Yum …

While the tips themselves are sound, I was getting ready to give him a metaphorical pasting, when I saw that he actually did include an increasing-income tip, as well:

Develop Multiple Income Streams: it wasn’t called the Great Depression for nothing, but the gloom and doom we associate with it overshadows the fact that not everyone was hurting. Amidst all the mass suffering and despair, a small minority of people actually managed to thrive by diversifying and developing multiple income streams. You can do the same! Whether it’s investing (Warren Buffet says to be greedy when everyone else is fearful), starting a business, or picking up a second job, anything you can do to spread your risk across more than one thing will make you safer and more secure.

Of course, the aim is to get rich(er) quick(er) – so, that we can reach our Number – which leaves me to wonder, how do people actually get rich during a depression? Well, according to this forum – where this exact question was posted – you can get rich by:

– If you have money buy up assets at depressed values. The key is to have money during the depression. If you don’t then you are in a very tough position as jobs and business opportunities are scarce,

– Save all the money you can in good times, spend it in bad times

– Wait a few days, see if there are further losses and then put in a buy order

– Become a Beer distributor

– Make bras or get into entertainment

– My grandfather worked for a factory that made thread and other home sewing supplies and rode out the depression that way. I guess today it would still be cheaper to buy your threads at WalMart, but there must be other recession-proof businesses.

– In a recession people and companies repair what they have in Capital Equipment

– I knew a family that benefited from an ancestor who wisely saved his cash…and when the Great Depression hit, he bought land…and lots of it and at cheap prices.

– Funeral homes, toilet paper and trailer parks

… and, there are plenty more.

Look, when you buy into a rising market, the chances are that you are already too late … but, the same applies in a ‘depression’: by the time you read about it, it’s too late to panic, you’ve ALREADY been caught. So, it’s simply time to buck the trend and invest.

The opportunities to get rich for the ‘little guy’ are actually MUCH more prevalent in a down-market than in an upmarket: so, buy up assets (land, stocks) at depressed prices and hold for the long-term and/or buy into businesses that are always needed (i.e. the ‘boring ones’) … that’s pretty much all it takes 🙂