Well, after a week of up/down – but, mainly DOWN – blog time, we have our new site up and running! Please let me know what you think?!

Thanks for your patience … FINALLY, here is today’s post 🙂

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Oh, if only we earned three times more than we do today …

… then we could tithe, save, and meet our financial goals. Life would be SO much easier 😉

Rick puts it simply:

Saving half your income is far easier if you make $180,000/year than if you are making $61,000/year.

I’m not so sure: there is a cruel financial joke; it goes something like this:

– earn $50k, spend $50k?
– earn $150k, spend $150k!

The good/bad habits are made when you ARE earning $61k per year … at least, in my experience. And, in Scott’s (who is an Ultra High Income doctor) experience, as well:

Even if we brought home a third of what we do now, we would simply have a smaller mortgage, lower taxes, lower resulting insurance and lower costs in several other areas and we would be saving a large percentage of our salaries as well. This is were delayed gratification comes into play

The reason WHY Scott can save half his income, is because he started off with low expectations, and kept them in check, even as his income grew and grew and grew:

I guess people think that i’m super frugal and living a little on the miserly side, since we are saving half of our net income per month. But, the thing is, we net 15-16k per month now. If I can’t find some kind of peace and enjoyment on half of that after growing up poor, then I have serious problems!

Peace and enjoyment is found in frugal living for some, and living ‘large’ for others; what matters most, I believe, is that you live within whatever means you decide to put together 🙂

Want to make money in real-estate? Then you need to know where the ‘hot’ cities to buy in are … this US News article from Luke Mullins should tell you just that!

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I classify ‘windfalls’ with all other Found Money: save 50%+ and spend up to 50%

I’m not going to tell you to spend half, but you can and should – at least – spend a significant portion: at least enough to fully celebrate your good fortune (even more so if it was a result of hard work rather than luck).

Interestingly enough, by chance, I came across this quote from Ramit Sethi (I Will Teach You To Be Rich):

I don’t recommend you sock away 100% of unexpected earnings. In fact, I force myself to spend 25%-50% of any unexpected money within a month, a technique I developed to keep motivating myself to earn unexpected income.

Of course, blindly following blanket rules won’t make you rich … you have to qualify them and assess against your own situation, which is why this blog (or others) cannot be misconstrued as personal financial advice … for example:

– If you find $20 on the street, buy yourself a latte and a magazine and then put the other $10 in your end-of-month savings ‘cookie jar’

– If you sell your business for $2 Million don’t spend $1 million

– If you get a $200 a week pay increase:

… do spend $100 immediately (enjoy!)

… don’t spend $100 extra a week (unless you HAVE to)

No rules, but some guidelines:

– If the ‘found money’ is life-changing (for me, that means getting you to your Number, or a Big Step closer) then spend a chunk … perhaps as much  as the top tier on your version of the 10-1-1-1-1 chart (provided it isn’t more than 5% – 10% of the total ‘found money’). Do me a favor: spend it on something you’ll remember (for me, it was the Maserati and the Villa-in-Tuscany vacation) 🙂

– For the money that you do want to spend – one-off, but not life-changing – still apply 10-1-1-1-1, but kick it all up a notch (e.g. you only need to think about spending $100 for 10 minutes) … but, ONLY until that allocated money is spent

– If it is an ongoing – and fairly reliable – stream of ‘found money’ (e.g. a pay increase), calculate how much of the increase you NEED to spend (i.e. add to your budget because you have been going without, or are behind, or have critical debt repayment, etc., etc.) then gradually wind your spending back to that number and save the rest.

An example may help to illustrate the last point:

You currently earn $500 a week, and are behind a little. You calculate that another $40 a week will be enough to ‘break even’ on your spending (you know: put food on the table; clothe the kids; pay down the remaining balance on the credit cards that you tore up, etc. etc.).

Now, you receive a pay-rise (I guess you got lucky and switched jobs, or decided to take on a second job) of $200 a week (after tax, of course):

1. You are committed to saving at least $100 of that, so $100 a week additional goes straight into the investment account

2. You are committed to spending $40 a week (see above)

3. So that leaves $60 a week undecided:

Week 1: spend $60 … enjoy!

Week 2: spend $40 …. enjoy!

Week 3: Spend $20 … enjoy!

Week 4: By now, you’re actually saving $160 a week extra … what do you expect? Every week to be Christmas?!

Enjoy! 😉

We all know the Richest Man In Babylon and the Automatic Millionaire approach to getting rich (very slowly, and if we ignore inflation … you wish!): simply save 10% to 15% of your gross salary …. and wait.

But, that sage advice is doled out like just something that you can easily do …

… but, there’s a couple of problems:

1. It’s not so easy to save that much if you’ve got a stay-at-home spouse, three hungry kids, a car loan and a mortgage to ‘feed’; I mean, not everybody started reading personal finance blogs in their diapers [AJC: that’s when they start writing them! 😉 ], and

2. It’s not enough: inflation, financial crisis, work crisis, home crisis, etc. all ‘eat’ into your savings and decimate your Save 15% Until You Die Or Retire Whichever Is Worse plans.

Fortunately, I have a solution to both problems:

We solve the first problem by remembering that ago old adage / riddle:

Q: How do you eat an elephant?

A: One bite at a time!

It’s the same with savings: set your target at 15% of your gross salary, then make a start by saving just 1% more than you are saving today. If you’re currently saving nothing, then I guess you’re now saving 1% … infinitely more than before 😉

As often as you can, but no less than monthly, increase that savings amount by 1%. Repeat until you reach 15%.

In Australia, we have $1 and $2 coins; I just automatically throw these in the center console of my car. Last time I checked, there was $50 or $60 in there … if I were poor, I guess I would trundle off the the bank and deposit that in savings account, until I had accumulated enough to add to my 401k.

You probably won’t even miss the ‘lost’ spending money …

Then we can solve the second problem by saving even more; here’s how, and you won’t even feel it, I promise:

You only save more when you are allowed to spend more!

It’s a trick that I taught my children: when they get money (any money: an allowance, a gift, find it on the street, etc.) half goes into Spending and the other half into Savings.

So, too, does it go for you: anytime that you get any additional money [insert ‘found money’ methods of choice: a pay increase, a second job, a windfall, loose change that you save out of your pockets, a gift, a manufacturer’s cash rebate, tax refund check, etc., etc.] you Spend half and you Save half.

Over time, you will find that your rate of savings goes up tremendously … and – almost – painlessly (because you get to spend the other half)!

Of course, there is a third solution: simply contrive to earn more money from businesses and/or investments such that your savings won’t make any difference to you …

… but, I encourage you to try my “eat the elephant” Making Money 101 strategies as well because the money that you have saved will help you to fund these ventures  – with enough left over to ensure that you have a safety net of some sort in case your plans don’t work out; and, even if things don’t work out the way you expected, if you followed those basic guidelines, you’ll probably find that you’re still better off than 90% of your neighbors 🙂

The blogoshpere is alive with posts that trumpet that Suze Orman has changed her financial advice .. some of it inspired by this excellent article from Yahoo Finance News:

Personal finance gurus usually treat credit card debt as the plague and urge consumers to pay it off–ASAP. But this week, Queen of Personal Finance Suze Orman announced on The Oprah Winfrey Show that the old advice is wrong. The recession has made job loss so prevalent, she says, that consumers now need to make creating an emergency fund with eight months worth of expenses their top priority.

Now, I also happened to be watching that Oprah show [AJC: I can blame my wife … she watches religiously … can I help it that I am sometimes also standing withing ‘eye shot’ of the TV 😉 ] where Suze said:

If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can.

Now, I think that Trent at The Simple Dollar hosted the best discussion on Suze’s comments, and I suggest that read both Trent’s post and all of the comments before you read on; Trent said:

In this environment, making the decision to jump from debt repayment to emergency fund building is about two years overdue.

I propose a different solution.

First of all, ignore a huge, long-term goal like an eight month emergency fund. Instead, if you’re worried about the downturn, focus on three key things through the rest of this year (and thus, likely, through the bottom of the downturn):

One, apply some realistic frugality in your life.

Two, acquire no new debt.

Three, build up your emergency fund a little now, but be prepared to reduce it in 2010.

I agree with Trent, asking people to save up to 80% of their salary for the next 12 months is way too much too late 🙂

And, I agree with Trent’s basic ‘bunker mentality’ of tightening the belt, but I am actually going to advocate a totally opposite three-step strategy, and here it is … 7million7years’ Patented Bunker Strategy For Surviving A 12 to 24 Month Recession:

One, ramp up your Making Money 101 strategies …. during recessionary times, double them if you can (i.e. save 20% – 30% of your income; save 100% of any ‘found money’).

Two, acquire some critical new debt.

Three, use that new debt to build up your emergency fund a lot for now, but be prepared to dramatically reduce it when the recession turns.

Question: Who of sound mind acquires new debt in a recession?

Answer: Anybody who wants to survive!

Look, if you didn’t start storing nuts for this recessionary winter in 2005 / 2006 then you probably have NIL chance of building a large enough emergency fund to tide you over if you do lose your job now or soon … worse, if you do lose your job, it could take months to find another one in the current market.

So, what to do?

Simple, look for where you already have nuts stored: for many of you, it will be in your house.

IF you still have equity in your house, simply refinance out as much as you can up to Suze Orman’s 8 months emergency fund limit (however much that may be for you) PLUS a sufficient ‘buffer’ to make 12 – 24 months of mortgage payments. Now may also be a good time to consolidate your credit cards and other higher interest loans into the same loan (not normally a strategy that I would recommend … but, this is an unusual plan that we are executing) …

… and, fix the interest rate (so long as the loan conditions allow you to pay off as much extra as you like when you like!).

Why?

Well, you now have peace of mind … for only the price of 12 to 24 month’s interest on your mortgage, perhaps a very small price to pay for surviving the deepest recession that you will likely see in your lifetime.

If you don’t lose your job, you can pay back the loan whenever you feel that things are somewhat coming back to normal (i.e. jobless rates are dropping again), and if you do lose your job, you have the cash buffer to help you survive.

Sure, this is a drastic strategy, which will cost you some unecessary interest and lost investing opportunity as you borrow money at 6+% just to have it sitting in the bank at 1.9% if you are lucky, so I am aiming this strategy only at those who:

1. Believe Suze Orman, but have no hope of meeting her criteria at this late stage, or

2. Believe that their job is at reasonable risk.

For a person on a gross income of $50,000 a year, with a current mortgage of $250,000 (a lot of house!), this rather unique ‘insurance policy’ would cost you less than $100 a week … a lot of money, sure, but small change if it helps you survive the Second Great Depression (well, at least  the worst recession since the Great Depression).

If so, this is counter-intuitively probably your best chance of protecting your home and family and riding the storm … but, if you don’t get a new job within a few months then you are probably slightly closer to foreclosure.

Or, are you?

You have 12 to 24 months protection (by way of the 8 months living expenses plus interest payments buffer), whereas without doing this you have whatever you can scrape up. Compare that with the alternative: what would you do if you lost your job next month and you didn’t put this plan in place? How could/would you survive?

Your honest answer dictates whether this admittedly ‘unusual plan’ is for you …

… if it is; if you do have the spare equity; and, if you do meet the two criteria listed above, now is the time to execute this plan. If you wait:

a. You won’t be able to refi if you have lost your job, and

b. A HELOC won’t save you, as the bank will probably pull it.

So, refinance your home now and put the spare cash into another bank instead!

Of course, if you don’t have the ‘spare equity’ in your house … cross your fingers 🙂

We just spoke about saving your way to some capital to start a business and here’s Steve Olsen talking on his blog about a man that he met who managed to do just that by saving 50% of his income:

I heard a 60+ year old man say this today…

When I was 18 I made a decision. I decided I never wanted to be under financial stress. I have lived that decision my entire adult life and have never experienced financial stress. How did I do it? I saved 50% of my take home income without exception. I’ve had months I’ve made $100, and other months I’ve made $100,000. But regardless, I still saved 50% of my income. My income has fluctuated but my saving percentage hasn’t. This has enabled me to purchase several business and a large ranch without incurring debt. I hear people say ‘I couldn’t possibly live on 50% of my income.’ Oh! baloney, you choose not to. Sure it’s harder once you have a 400K mortgage and kids in private colleges, but you decided to live that way. You don’t need to live that way. And if you had decided when you were younger to live differently, you could have your 400K home and private college today without a dollar of debt.

I’m not trying to preach. I don’t save 50%. But I know everything this man said is true. I could have saved more, and if I had, I’d be much better off today.

First of all, I stick to my guns: you CAN’T save your way to wealth!

For example, let’s look at Mark from our 7 Millionaires … In Training! ‘ grand experiment’:

My current monthly net income after taxes is about $6,425

I haven’t tracked my expenses in detail for a while even though I’ve been using Quicken and I’m surprised to see some areas where I can easily cut down.

Current Monthly Expenses (average for the last 12 months):

• Housing – $980
• Gifts (gifts for family and friends, mostly family) – $925
• Auto – $267
• Entertainment (been to many concerts, musicals, activities and events) – $266
• Utilities – $256
• Dinner and Lunch outside – $228
• Vacation (low number since I’ve used airline miles for 2 international trips) – $224
• Charity – $191
• Misc (Electronics, Clothes, Insurance, Cash) –  $406

The total is about $3,743.

This indicates a savings of $6,425 – $3,743 = $2682

Jeff put it best:

Your “living the good life” activities account for about 43% of your monthly expenses (gifts, travel, eating out, entertainment). I’m not proposing eliminating everything, but if you cut those expenses by 1/3 – 1/2, you could increase your monthly surplus (or profit ) by 20-30%. In an extreme case, eliminating them all together could boost your monthly profit [savings] by 61%.

Sure adding an extra, say, $800 p.m. can put Mark into High Income / High Saver territory, producing a HUGE $11 mill. in 25 years …

BUT:

1. That’s ‘only’ $4 mill. in today’s dollars and Mark has to wait 25 years to get it … Mark’s Life Purpose requires $5 million in just 10 years

2. In 10 years of frugal living Mark will ‘only’ have $1.25 Mill. in today’s dollars … certainly not enough to even reopen up the spending gates

It seems that you really can’t ‘save your way’ to your Number – even if Mark saves 50+% of his income – unless he’s happy with the $4 Mill. in 25 years scenario (better than being broke, right?) …

… but, the secret is in what the person in Steve Olsen’s article did with the money he saved; here it is again:

My income has fluctuated but my saving percentage hasn’t. This has enabled me to purchase several business and a large ranch without incurring debt.

Now, what do you think the businesses and ranch did for his income and lifestyle?

So, the reason why I promote making Money 101 activities such as saving more, paying cash, and delaying gratification is that it allows you to build the capital required to make a lot more money later …

… you really need to be saving more to help you increase your income:

a) By building up a ‘war chest’ (working capital, R&D costs, etc.) for your investing activities and/or business ventures, and

b) By building up a ‘backup reserve’ in case things don’t work out.

As I told Mark:

Save a little now, so you can still afford to spend more later …

… but, ONLY if you are serious about your Number, otherwise spend away! Go ahead and enjoy your life as it is, you’re already ahead of 99% of those in your age group

Yesterday’s post was about Suzy Welch’s “life transforming idea” (her words, not mine) about the Power of 10-10-10, which I believe can be applied to financial decisions as well.

Now, here’s an even better idea:

How do you know WHEN something is a ‘major financial decision’ worthy of asking Suzy’s Three Big Questions?

Simple, use this table:

If you’re on a low-to-average income, or still well-entrenched in Making Money 101, then you may want to replace each ‘$1..’ with a ‘$3..’ but, if you’re super well-off, then you just start adding zero’s to the dollar amounts to suit!

But, the ‘default table’, as presented above, is a pretty good place to start …

So, next time you’re walking past a store and see that little $99 ‘number’ on sale that you simply “HAVE to have … and, look … it’s ONLY $99! [squeal]” pull out this little table – that you’ve laminated [ AJC: don’t worry, you’ll wait at least 10 minutes in line at Kinko’s to give yourself plenty of time to decide if the cost of laminating is worth it :)) ] – from your pocket and check to see that you really need to come back in 24 hours to complete the transaction …

… chances are you won’t.

Think about even the small expenses that you may be tracking, if you keep a budget; take a glance down the list for even one or two random days and see how many you would have not bought (or bought less of, or fewer of, or the cheaper one of, etc.) had you taken even 10 minutes ‘time out’?

Is this being frugal [AJC: shock/horror … 7million7years on a frugality drive?] – perhaps, overly so? I don’t think so, because you can still make the purchases that you want to make … it’s just that you may change your mind IF you:

(a) allow a little time out, and

(b) ask yourself Suzy’s 10-10-10 questions.

Instead, you may just end up suffering a little less buyer’s remorse …

Does this work?

Well, when the ML Mercedes first came out, I simply HAD to have one of those [squeal] little SUV’s that drives like a car … after some self-imposed ‘time out’, I decided that I really didn’t need the car right now.

Sure enough, the burning desire to buy the car – right then and there – dissipated to the point that I forgot about it; sure enough, a year later the opportunity fell in my lap to buy a factory executive-driven vehicle (genuine … I bought it directly from Mercedes Benz head office), virtually no miles on it, for $11k off the best dealer price that I could get.

Oh, and last week I was hungry … but, after 10 minutes of waiting decided I was even more hungry, so I bought more 😛

Give it a try and let me know how 10-1-1-1-1 works for you … use the Contact Me form on the About page or just drop me a line at AJC at 7million7years.com, I love hearing from readers (but, not spammers) …

Let’s face it, if your whole goal in life is to simply get rid of your debt you are probably reading the wrong blog ….

… but, I am working on the assumption that you feel that paying off debt will help you get rich(er) quick(er).

How?

Well, most people that I talk to say: “I will become debt free then I will have all that money spare to start investing … stress-free because I’ll have no debt to worry about”.

Stress free, until I point out that paying off debt early to start saving up to invest later is the long road to nowhere. You see, they will simply start investing too little, too late to make a dent in their true retirement needs … assuming that living on an ashram, eating rice-cakes three times a day isn’t their ideal future 🙂

When I point this out, they say: “Oh no, I’ll be accelerating my investment plans because I’ll be borrowing to buy an investment property … you see, I’ll have paid off all of that BAD DEBT (on my car, my TV, my house) and be ready to put all of those monthly payments into a big, fat GOOD DEBT loan on an investment property”.

Then they point me to all the methods that might be used to quickly and efficiently pay down all of this ‘bad debt’  – conveniently and cleverly collated in this blog post by my good blogging friend, Pinyo, over at Moolanomey – and:

BANG!

I’ve got ’em right where I want ’em …

You see, the concept of ‘good debt’ and ‘bad debt’ only applies when you are deciding whether to take on debt or not.

Let’s take the following two examples:

You want to buy a car on finance = BAD DEBT

You want to buy a ‘positive cashflow’ investment property by borrowing 80% of the purchase price from the bank = GOOD DEBT

Still with me? Good.

Now, here’s the twist: once you have acquired the debt, there is no more ‘good debt’ / ‘bad debt’ anymore … there’s only EXPENSIVE DEBT and CHEAP DEBT.

I don’t think that this is something that you’ve ever seen anywhere else (at least, I certainly haven’t!), so let’s take a simple example to explain:

You used to have a $25,000 student loan (at 2.5% fixed interest) and a $5,000 car loan (at 11.5%) … and, you cleverly and diligently worked at paying off the car loan at the rate of $150 a month (your minimum payment was $50 a month, so you paid it off pretty quick … good for you!), while maintaining your minimum payment of $25 a month on the student loan.

Now that the car is paid off, you are naturally planning to apply that whole $175 a month to the student loan and have it paid off in only a few years (yay!) … is this the right thing to do?

Well, let’s apply the cheap debt / expensive debt test to the alternatives available to us:

1. Pay down the student loan (save 2.5% interest), or

2. Spend the extra $150 a month on all the stuff we’ve been going without (an effective 0% earned or 100% ‘interest’ expense on the money spent, depending on how you want to look at it), or

3. Stick the money in a CD (earn 1.9% interest).

Clearly paying down the student loan is the best ‘bang for buck’ that we can get, here, and spending the money is the worst.

But, what if we add a fourth option:

4. Use that $150 a month to save up for a deposit, then apply for an 80% loan to buy an investment property (pay 6.5% interest).

Using my ‘cheap debt / expensive debt’ rule, you would immediately work on reducing your most expensive debt, which is the 6.5% mortgage loan … and, the best way to reduce it is by keeping $25k of it in the cheaper (2.5%) student loan.

However, the ‘Ramseyphiles’ would pay off the student loan (BAD DEBT), then save up the entire $175 ($150 + $25) for the deposit on the investment property (GOOD DEBT), and spend a lot more in interest for the privilege.

Now, do you see the sense in doing this?

Well, I can’t!

Why pay down a $25,000 loan at 2.5% just so that you can replace it with another $25,000 loan (plus ‘another loan’ for the remainder of the amount that you will need to buy the investment property) at, say 6.5% or 8.5% or whatever the interest rates will be a few years down the track.

Not, only do you pay more in interest, but you delay the purchase of the ‘cashflow positive’ property which means that you are putting less cash INTO your pocket and missing out on all of that extra appreciation on the property, not for the benefit of being debt free (because you will have a nice, fat mortgage on the property), but for the very minor advantage of only have one larger loan to pay rather than two smaller ones (student loan, plus $25k smaller mortgage).

If you don’t think the property is going to make you money, why buy one at all … and, if you do think it will make you money, why delay?

When thinking about finance, it’s much better to shift your focus from the means (paying off debt) to the ends (having enough passive income to fund your ideal life) …

If you’re interested in understanding more about how this works, read Pinyo’s post to get the basic Debt Snowball mechanics set in your head (he has a nice diagram), then read the Cash Cascade where I explain in video and words how to make this work – even better, in my most humble of opinions – for you 🙂

But, if your sole goal really is to become debt free, why not consider doing it the easy way as the cartoon above, suggests?