I’ve received an award!

Posted on June 23, 2010 by Adrian

I’m not sure who Awarding the Web are, but they have kindly just listed $7million7years as one of their ‘Top 40″ Business Blogs in the “Saving Money” category.

This is kind of ironic as I am keeping company with the likes of Frugal For Life, Bargain Briana, Bitter Wallet, and FruGal [AJC: I love puns … unfortunately for those around me, the more groan-inducing, the better] …

… but, this blog is about as un-saving money as you can get (!):

http://7million7years.com/2009/05/02/save-your-way-to-wealth/

Yet, we do spend a lot of time in Making Money 101 on saving tips:

The reason: habit.

While I stick to my guns and say that you can’t save your way to any reasonably large Number by any reasonably soon Date [AJC: Pick any Number north of $1 million, and any Date south of 15 years and see what you come up with, inflation adjusted], the reason why you should still save/save/save is twofold:

1. You create the seed capital that you might need for your first real-estate purchase and/or business venture … it’s these that will create your Number/Date, and

2. You create the habits that will stop you from spending your wealth once you get it.

Saving money is kind’a like the bookends to your financial life …

… but, true wealth building is in the bits you do in between that really have nothing at all to do with saving.

Well, not directly 😉

What difference does 1/10th of 1% make?

Posted on June 13, 2010 by Adrian

Brian Tracey makes an interesting observation of making tiny, incremental changes which accumulate over time to make huge differences.

You could apply this principle to anything: for example, if you want to save 26% of your income (not a bad goal if you want to get rich slowly, with inflation chasing your tail), just start by saving 1/10th of 1% of your income today, and increase that amount by 1/1th of 1% each day until you reach your goal.

Use your ‘golden hour’ to read the personal finance headlines at http://personal-finance.alltop.com/ looking for money saving tips and you’ll find plenty of fuel for your daily 1/10th of 1% increased savings goal.

How much is in your emergency fund?

Posted on June 9, 2010 by Adrian

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I think this is a good time to take another look at your emergency fund; I’ll explain next week …

In the meantime, answer the survey to let us know how much you have saved specifically as an emergency fund, and leave a comment (if you like) to tell us why!

The problem with Henry …

Posted on June 2, 2010 by Adrian

Actually, it’s not the problem with Henry, it’s the problem with HENRY: High Earner Not Rich Yet.

Included in this group, a group that most workers mistakenly aspire to, are those doctors and ceo’s (at least those not in the Fortune 500) that I mentioned in yesterday’s post.

Now, this is only interesting because I can now answer the question posed on Twitter [AJC: you can glance across to the right to conveniently find a link to my Twitter account].

Dianne Kennedy (CPA), I think erroneously, links HENRY’s to taxes then lifestyle, but (as my article some time back about doctors also said), I think it boils down to three non-tax (even though taxes hurt!) issues:

1. As your income grows so does your spending … then some!

2. Keeping up with YOUR Jones (i.e. other high-flying corporate executives and professionals) is VERY expensive

3. You can’t sell a salary package (like I can sell a business, some shares, or a property or two) when you decide to retire

[AJC: You need both a big 401(k) – see reasons 1. and 2. why this doesn’t happen – and a huge golden parachute, which may / may not happen to compensate for reason 3.]

If HENRY’s want to become rich, they have only two choices:

– Get lucky, or

– Invest a very large % of their annual earnings

Let’s assume that a HENRY – conveniently named Henry who happens to be ceo of a medium-sized business – is earning $290,000 and has already managed to save $1 million – our consummate Frugal Investor – and has arranged things so that he can continue to save a very hefty 35% of his salary (this is all pre-tax).

After 22 years, Henry will have saved just enough (in Rule of 20 terms) to replace his $290,000 ceo’s salary … by then, inflation adjusted to $661k per year, assuming that he wants to maintain his lifestyle [AJC: more importantly, assuming that he can – and wants to – ‘ceo’ for 22 more years … if he ‘only’ starts with $500k in savings, he’ll need to work for at least 26 more years].

Seems easy, but human nature [read: urge to spend it up] is what it is …

I should know: I was ceo of my own business, employing over a hundred people across 3 countries (USA, Australia, and New Zealand).

I paid myself $250k per year, and had cars, cell phones, laptops, and health insurance all paid for by my company – I reinvested all the remaining profits in these businesses.

I had a $1.65 million house in the ‘burbs, paid for by cash (s0, no mortage), and two children in school (one private, one public). We traveled domestically and/or internationally once or twice a year as a family, ate at ‘normal’ restaurants (and, the occasional top-tier eatery).

I can’t see how I could have saved 1/3 of my salary … I couldn’t even save 10% 🙁

Of course, I could have saved 10% if I really tried, but my point is that it’s very hard to save 30% of even a high salary, unless you gear yourself up to do it from the very beginning.

[AJC: Look, it’s not my job to tell what should happen as you get richer, but the reality of what will happen and how to do better … when you get to $250k you will bring with you exactly the same spending and saving habits as you have today, if not worse. Moral: start MM101 today!]

In other words, don’t divert all of your creative energy into playing Corporate Lotto (i.e. chasing a higher salary) if you want to get rich – or, even to reach a more humble goal, such as becoming debt free (a dumb goal, IMHO).

First – and, as soon as possible – learn how to get rich (or debt free, or …) by taking action right now, with whatever you can bring to the table.

If your salary happens to improve along the way, all the better … but, don’t rely on it!

The Myth Of Saving Your Way To Retirement …

Posted on May 10, 2010 by Adrian

Quite a while ago, I published a post that took a look at the supposed ‘power’ of saving …

… if you didn’t read it then, now would be a good time to ask yourself if you really care that weekly contributions of $34 could potentially grow to over $76,000 in 20 years, as proudly proclaimed by Fidelity?

One reader, Concojones, thinks that I have underestimated the ‘power of savings’:

Let’s not dismiss too quickly the good old save-your-way-to-retirement advice. Saving $15k/year for 40 years yields an expected $2.5M in today’s dollars (for what it’s worth: $10+M in retirement dollars), assuming your investments go up 5-6% per year after inflation.

Let’s not dismiss it too quickly, indeed. Retiring with $10 million in your pocket (albeit, ‘only’ worth $2.5 million in today’s purchasing power) is none too shabby.

The only problem that I can see – actually, the only FOUR problems that I can see are:

1. You have to be happy (well, ‘happy’ is a relative term) to work for 40 years,

2. You have to save $15k per year – easy at the end of 40 years, very hard at the beginning … and, even harder in the middle when you might be earning ‘only’ $50k (before tax) and have to put away 15% to 30% of your salary “with four hungry children and a crop in the field” [AJC: if you’re old enough to remember that Kenny Rogers song]

3. You have to average 8% to 10% return on your type of investment – but it has to be one that lets you add $15k annual increments for 40 years (which ties you to ‘standard’ products like, CD’s, bonds, stocks, and mutual funds).

4. You MUST be disciplined enough to stick to this simple strategy for the entire 40 years WITHOUT WAVERING in up/down markets: the Dalbar Study [ http://www.canadiancapitalist.com/investors-behaving-badly/ ] says a firm NO to being able to achieve anything like this rate of return.

So, great on a spreadsheet, but I wouldn’t want to bet my life on it 😉

Pay yourself first or last?

Posted on February 1, 2010 by Adrian

Adam (a staff writer at Get Rich Slowly) wants you to “challenge yourself” by replacing the the standard ‘pay yourself first’ advice with:

Only pay yourself first if you deserve it.

Now, Adam isn’t suggesting that you stop saving that 10% to 15% of your gross income that the bulk of the personal finance blogosphere recommends …

… what Adam is really asking is:

Should You Stop Funding Retirement to Focus on Debt?

[This] is one of the most heavily debated dilemmas in personal finance. Unlike “spend less than you earn” or “track every penny you spend”, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.

This is a good line of questioning – and I encourage you to read his article – but, unlike Adam, I think there is a “cookie-cutter answer to this question”:

You should always ‘pay yourself first’ …

… but, where you place that money depends on where you earn the greatest after-tax return.

Keeping in mind that a “dollar saved is a dollar earned”, it could be in:

– Your 401k, potentially earning 8% plus the value of any employer matches (in an earlier post, we calculated this as providing another % point or two to your long term return),

– Your debts, potentially saving 10% to 30% interest on high-interest car, credit card, and consumer loans,

– Your real-estate investment strategy, potentially earning 15% to 25% in long-term rental increases and capital appreciation,

– Your seed capital for your new business, potentially earning 50%+ in future profits and windfall gains on the sale of the business,

– etc.

But, is unlikely to be found in paying off low interest student loans (saving 0% to 5%) or mortgages (saving 4% to 6%) or in investing in low interest savings such as bank accounts, bonds, or CD’s (earning 1% – 5%).

Blindly plonking your money into your 401k, or paying off debt, or paying down your mortgage is not the way to get rich(er) quick(er) … 7m7y readers always look at their options in terms of greatest contribution to reaching their Number.

Moneytopia?

Posted on November 9, 2009 by Adrian

Many thanks to my new blogging friend, Kohti, for pointing me to an interesting new online game purporting to teach me all about money …

…. but – with all the greatest respect to the game’s authors – if I had played this game 7 years ago, I think I would have been depressed.

You see, it encourages you to create a character (mine was a 20-something year old, single male earning around $24k p.a.), and make some buying decisions:

– some mandatory (accommodation; clothes; car; computer; etc.), and

– some optional … I didn’t choose any of these at all.

I also had to choose a Big Dream and a time-frame to aim for; for some weird technical reason I couldn’t put in what I really (would have) wanted back then, so I chose a $4million retirement goal, aiming to achieve that in 7 years.

Now, I tried to make reasonable decisions and spend/save money as I felt that i would have back then, so when I was given a choice like this one:

… well, I mostly chose the zero-cost option (in this case, “stay at home and ride the bike”). On the plus side, whenever I was asked to “pay my bills” … I simply chose the sensible option and paid them all, giving them scant attention:

…. anyhow, that’s one example of the benefit of a frugal lifestyle: choose a low-cost lifestyle and you can at least sleep comfortably that you can easily pay you meager bills as/when they fall due 🙂

BTW: Rather than choose some set amount to invest (that would have required more thought), I simply transferred money to my Investment Account whenever I had a couple of thousand dollars saved up … no doubt, I would have achieved a slightly better outcome (better compounding) if I had transferred the money weekly rather than 4 or 5 times a year, but I am sure the effect would not have been huge.

The only problem with this sort of ‘frugal living’ style of wealth management?

It doesn’t come close to helping you achieve any sort of Life’s Purpose that involves not working and/or travel; here’s how I did, with 9 months to go before I wanted to ‘retire’:

You see, the problem with this game – and, all the books/blogs/financial advisers peddling this sort of nonsense – is that they tell you how to maximize your savings, but not how to achieve the real goal: which is to reach your Number by your Date … and, for most people that seems to mean Getting Rich(er) Quick(er).

The funny thing is that this game encourages you to seek a mentor … see the guy pictured in the circle? He’s the Richest Guy In Town and he’s there to help you (according to the game’s instructions) …

… except that he conveniently forgets to tell you any of the real ‘secrets’ as to how HE became so rich! As playing the game makes patently obvious, he sure didn’t get there by saving / investing his meager salary 😉

What the game is missing is a ‘start a business’ button; nor does it have an ‘invest in real-estate’ button … so, we have to rely on a risky maximum compound growth rate for our investments of 12.5% (and, I even had to survive a market crash!) or ‘safer’ returns much lower than that.

In other words, this game proves that it’s impossible to make $7million in 7 years (or even ‘just’ $4 million in 7 years) by following ‘standard financial advice’. Don’t believe me?! Then check this out:

Go ahead and try the game … it could save you a great many years of otherwise lost ‘investing time’ by showing you what NOT to do 😉

The Myth of the Million Dollar Retirement Goal …

Posted on August 27, 2009 by Adrian

A couple of weeks ago, I posed the question: Will a million dollars be enough when I retire?

There was much discussion that makes it clear that you must also ask: WHEN do you want to retire?

You see, 4% inflation (say) eats away at your money, such that if you were to retire in 20 years – which is when you hope to get your $1 Million bill – it’s only ‘worth’ $500,000.

And, inflation continues even after you retire, which then means that you probably need to earn at least 9% on your Million Dollar Bill (4% to ‘cover inflation’ and 5% to spend) … this still leaves you only the equivalent of $25k today to live from (assuming that you want your $25k ‘retirement salary’ to at least keep up with inflation for as long as you need an income).

Assuming that this makes sense, let’s see how practical this Million Dollar Retirement Goal really is:

There are two schools of thought:

– There are those who believe that you should aim to approximate your pre-retirement salary in retirement, and

– There are those who don’t.

Now, I am in the second group – as are most people who have tried the same exercises that our 7 Millionaires … In Training! tried.

For example, my salary throughout almost all (bar the last 3 years) of my working life was less than $50k – $100k (incl. fringe benefits) and my wife had to keep working, BUT that was a purposeful strategy designed to get me to a retirement in just 5 years (instead of the notional 20 years) i.e. at 49 y.o. on the equivalent of $250k+ a year income for life (indexed for inflation) post-retirement.

But, this post is aimed at those new readers who are still in the first group … they, too, fall into two (sub)groups:

– Those who believe that they need at least 100% to 125% of their final salary in retirement (because, they say, you spend more in retirement due to travel, leisure activities, and escalating health care costs as you age, etc.) , and

– Those who believe that they need only 75% to 99% of their final salary in retirement (because, as these other ‘experts’ say, you need less in retirement as your children are grown up and educated, weddings are already paid for, house is paid off or downsized, etc.).

… at least, that’s how the personal finance columnists seem to be split.

So, in our example from the last post, we work backwards:

Somebody who aims to retire with $1 Million in 20 years time is really saying that they want to live off an annual income of roughly $50k in retirement (that WE now know is only ‘worth’ $25k a year), which means that their final salary will probably also be $50k (+/- 25% depending on which financial ‘guru’ they happen to follow).

Now, if you follow $50k in 20 years time all the way back to today, that person is probably earning $25k today (i.e. assuming that they earn CPI salary increases for the next 20 years) …

… so, now we can work forwards again:

If you have a starting salary (i.e. today) of $25k and aim to retire with $1 million in the bank in 20 years, you will need to set aside about 45% of your gross salary AND earn 9% on your money (after fees and taxes) AND have a house that you can free up at least $250k from when you do retire (e.g. by downsizing or moving into a very cheap rental).

Of course, if you can save 45% of your salary for 20 years, then you must be in the Salary-LESS-45%-In-Retirement camp, which is another story altogether 😉

So, it seems to me that getting to $1 mill. in 20 years for somebody on a salary of $25k is all bar impossible … and, even if you do scrimp, save, and ‘frugal’ your way there, you have only made it to the ‘lofty heights’ of living off about twice the poverty line, for a two-member household:

2008 HHS 100% Poverty Guidelines

Members of household————- 48 Contiguous States———–Alaska————–Hawaii

1———————————$10,400 ———————–$13,000————– $11,960
2———————————-$14,000 ———————–$17,500—————–$16,100
3———————————$17,600 ———————-$22,000——————$20,240
4——————————-$21,200————————–$26,500——————-$24,380

For each additional person, add—–3,600———————4,500————————-4,140

SOURCE: Federal Register, Vol. 73, No. 15, January 23, 2008, pp. 3971–3972

So, I think the Million Dollar Retirement Goal really is a myth – or, at least a very low bar to aim for – how about you?

How do you stack up?

Posted on July 27, 2009 by Adrian

OK, so I’ve found a few online calculators that I don’t like, but it’s time to quit bitchin’ … here’s one that I do like:

This one asks just two questions to determine how your Net Worth ‘stacks up’ against others, by age and by income.

Here’s how I stacked up just before I retired (a.k.a. Life After Work) at age 49 and was still drawing a ‘salary’ of $250k:

[AJC: OK, so I’m ignoring all of my other business and investment income, etc., etc. for the purposes of this particular rant]

Again, the obvious question is: how much SHOULD I have accumulated in my net worth?

Let’s assume that I just want to replace my then-current gross income of $250,000 by the time I reach 60 … a reasonable goal, if you ask me, but still way, way more optimistic than the general population would hope for:

Step 1: $250k is roughly $385,000 by the time I reach 60 … a simple estimate of adding 50% every 10 years to allow (very roughly) for 4% inflation gets close enough to the same result without using an online calculator or spreadsheet.

Step 2: So, if I want to keep the same standard of living – with all the arguable pluses and minuses of grown up kids and greater health and insurance costs … not to mention more green fees 😉 – I’ll need to generate a passive income of at least $385k that, according to our Rule of 20 (which assumes a 5% ‘safe’ withdrawal rate), means we need $7.7 Mill. sitting in the bank (well, in something that will give us a RELIABLE 10%+ annual return).

Step 3: If I plug my starting Net Worth (let’s go for the generous starting average for people on my super-generous assumed current income) into this online annual compound growth rate calculator, I can see that I need just over a 19% average annual compound growth rate between now and then.

OK, so I have my target, now let’s take a look at how likely I am to achieve it (you see, it’s not as bad as it sounds: I can keep adding a % of my salary to my Net Worth, as well as reinvesting any investment gains and/or dividends) …

… to my mind, I’ve had 27 years of ‘practice’ to get where I am today – if I match CNN Money’s ‘profile’ – using:

– How much I had saved when I started working, and

– What % of salary I’ve managed to regularly save over those years, and

– What average investment returns I’ve managed to achieve in that time.

Well, I’ve been working for about 27 years, and I started full-time work with about $6k of car and pretty much nothing in the bank. So, if I plug in my current net worth (again, assuming that it’s what CNN Money says is ‘average’ for my super-high assumed income); what I started with; and 27 years between the two … the calculator shows that I must have averaged 21%, so no problem!

Except that I had to receive massive salary increases to get from my starting salary of $15,000 [AJC: I thought that was huge! And it was … in the early 80’s 😉 ] to my current (assumed) salary of $250,000 … in fact, my pay increases would have needed to average between 11% and 12% every year for 27 years! Now, that’s hardly likely to continue …

So, if I assume an average compounded investment return (e.g. stock market) of 12% for the past 27 years … which seems pretty darn generous, if you ask me … then, I would have needed to be smart enough to save nearly 40% of each pay packet for the entire 27 years (including putting some of it … a lot, I suspect … in my home).

Running that forward (assuming a more sedate, and probably much more likely, 5% salary increase each year until I retire at 60) and I CAN reach my Number!

In fact, I overshoot by about $1 mill., so I can even afford to drop my regular savings rate to ‘just’ 35% of my before-tax pay packet … easy, huh?!

So, it seems doable, except that I see four problems:

1. I need to have a starting salary of $250,000 per year

2. I need to have a Net Worth of at least $1.12 million by age 49

3. I need to be able to save 35% of my GROSS pay packet

4. Even after all of that, I still NEED to work until I’m 60!

[groan]

Adrian.

PS How DID I stack up at age 49? Easy: $7 million in the bank. What did I start with just 7 years before that? Nothing: I was $30k in debt. So, is it ‘doable’? Absolutely: And, this is just the place to find out how 🙂

How much should you have saved by now?

Posted on July 15, 2009 by Adrian

dates This is rapidly appearing to become a blog about your Number … of course, that’s not the case: it’s a blog about money, specifically about how to make $7 million in 7 years, but you can pretty quickly see that having a real financial goal in mind is a powerful focusing tool.

It’s also a ‘comparator’ – a tool to use whenever you are presented with two financial alternatives … for example, Scott who is deciding how many clinics to open: 1, 2, or 3+ [Hint: only one of these is the right answer, and it’s not the obvious one!] … it was ONLY by having a clear understanding of his Number / Date that he came to this conclusion.

Without that understanding, Scott could have made a terrible (OK, far better than terrible … more, non-optimum) decision that would have had the opposite effect to that intended: it would have committed him to working for 10 to 20 more years.

So, now that I have provided the hint, let’s look at today’s conundrum, posed by Money Magazine in March 2008: how much money should you have saved by now?

Well, given the current market the chances are that what you have saved has halved, but what you should have saved hasn’t … bummer 🙂

But, here’s what Money Magazine advises; to see how much you should have saved by now:

If you are age 45 multiply your current salary by 4.1
If you are age 50 multiply your current salary by 6.1
If you are age 55 multiply your current salary by 8.5
If you are age 60 multiply your current salary by 11.4

So, if I said my current salary was $250k (well, that’s what I most recently paid myself before I retired), then I should have saved $1.525 million by now …

Can you see the obvious problem?

Well, it assumes that I am going to want to keep working for another 15+ years!

Why? Simple: $1.525m can only support a ‘safe’ 5% annual withdrawal rate of $76,250 (before tax) … so, unless I want to take a HUGE pay-cut, I’m going to have to keep working until I’ve saved at least $5 million … lucky that’s exactly what I did 😉

So, here’s how you should calculate how much you should have saved by now:

1. Calculate your Number,

2. Decide your Date,

3. Subtract your Current Net Worth from 1.

4. Subtract today’s date from the Date

5. Divide 4. into 3.

That’s how much you need to have saved each year between now and your Date, if you want to reach your Number.

Now, you can get fancy and use an online compounding calculator to do the year-upon-year calculations, but this is a good place to start.

7million7years

How to make 7 million in 7 years …

Category Archives: Saving