How to do a personal budget …

4fWhilst it’s very tempting to go to your 4-F‘s (friends, family, financial planner a.k.a. ‘lifestyle planner’, financial advisor a.k.a. accountant) for advice on budgeting, I find that it’s quite a personal exercise.

In order to budget they – actually, you – have to ‘get’ … well … you.


Let me give you an example:

I tried going to my accountant when I got back to Aus after a few years in the US, and here’s how the conversation went:

Him: Well, you could start off with a budget of $150k per year and see how you go
Me: Start by writing 4 things on your whiteboard:
1. Private Schooling for 2 children
2. One to two overseas trips per year
3. Invest in at least one startup per year
Him: OK, now what?
Me: Write $50k next to each of those
Him: OK, that’s $150k total
Me: That’s $150k per year, then you can add your $150k ‘starting budget’
Him: Oh shi …

The steps to perform the only kind of budget that really makes sense are as follows:

1. Do a One-Time ‘As Is’ Budget

I described this kind of budget in this post, and it truly is the one and only time that I have ever made a personal budget.

It consisted of everybody in my family (at the time, only my wife and me) carrying around a pencil and piece of paper for a whole month …

… and, writing down every single thing that we spent a penny or more on during that month, whether by cash, check, credit card, or electronic transfer.

At the end of the month, it was fairly easy to categorize the expenses and tally them up. Of course, we also needed to prorate in some expenses, such as insurance, that are paid one-time, and prorate out similar multi-month expenses that may have been paid during that month.

At the end of it, you should have a fairly accurate picture of what you are currently spending.

2. Create your ‘To Be’ Budget

After my earlier post, you should have a reasonable idea as to how to do a Top Down Approach To Investing analysis.

It consists of working out how much money you need in order to stop work (retire … early!) i.e. Your Number, and when you need it i.e. Your Date.

Then you can work backwards to find out how much compounding you need and what investment vehicles can get you there.

But, the missing step is working out how much starting capital you need …

… now, I can’t tell you that, as it depends upon what you have in mind.

But, the chances are – and, to me, this is the sole point of doing your budget anyway – you will need to find a way to increase your savings to build up that little investing war chest of yours.

And, the best way to do that, is to start by paying yourself twice!

[AJC: most of the ‘how to’ detail in this post has been covered in the earlier posts that I have listed, above … don’t be afraid … go click some links!]

Now, that’s how to do a personal budget 😉



Should I buy a new car?


Since you’re unlikely to win a car

[AJC: if you haven’t seen yesterday’s April Fools Day post, you can check it out here]

… you may be thinking about buying one.

For example, Michael asks:

My business is going well and I’d like to update my old Ford Ranger pickup (160k miles) with something new.  I saw that there is a bonus depreciation on vehicles over 6000 lbs GVW so I was looking to use that to save on taxes.  I settled on a new Range Rover Sport.  But here lies the issue…
It makes me uncomfortable to think about how others will perceive me in the Rover.  [But, if I buy another type of car] the lack of tax advantages would probably end up costing me more than the “pretentious” Rover.

Before we worry about what brand of car to buy, I would question why Michael’s buying a new car, rather than a new investment property.

Other than that, he should simply buy the cheapest car that meets his requirements.

You see, unless the vehicle specifically supports your business (think delivery truck), it’s just a depreciating liability (it doesn’t earn you any money, so it sure ain’t an asset!) …

… which means that any money that you don’t spend on it (or can claw back in tax deductions, etc.) is the next best thing to not spending the money in the first place!

Why spend money just to feel uncomfortable?!

Don’t spend more money just to get rid of the discomfort: spend less (e.g. buy a lower-profile American or Japanese car; one that costs less than 60% of the list price of a Rover) or none at all.

Why not put off buying the car, altogether?

On the other hand, if your business is producing enough cash to support its own growth and is producing enough to fund outside investments, there’s no reason why you shouldn’t spend what’s left …

… after all, that’s what money’s for, right?


Why the poor get poorer …

What’s your favorite excuse for not having $7 million? Let’s make it easier: what’s your excuse for not having $1 million?

It will probably be something to do with lack of luck, opportunity, income, and so on …

And, that may all even be true (but, if you keep reading this blog, you’ll find that all changes pretty quickly).

But, tell me what excuse anybody has for not being able to retire with a paltry $1 million in 20 to 40 years time?

Take a look at the chart above: people on low incomes are spending nearly twice as much on entertainment as they spend on saving for retirement!

Now look at the same comparison for other income groups:

That ‘saving for retirement’ ratio reverses as income increases …

But, take a look at those earning high incomes of $150,000 or more: they spend nearly 3 times as much saving for retirement as they spend on entertainment.

So, let me pose a question:

Was it their high income which allowed them the ‘luxury’ of putting away so much for their retirement?

Or, was it the same mindset that compelled them to begin thinking about their financial future that set them up to:

1. Increase their income so greatly, AND

2. Save so much?

I know what I think. How about you?

The problem with income …

I’ve been thinking a lot about income lately, which is ironic as I don’t have any right now (at least, not in the traditional ‘work for a paycheck sense’).

It’s also ironic because, when I did have an income, I didn’t worry about it at all:

Back in 1998, I had two businesses that, between them, managed to earn exactly $0 …

… what one business made (about +$5k a month), the other one managed to lose (about -$5k a month).

But, I wasn’t at all worried.

That’s because this break even scenario already took into account the cost of my (then) still-quite-basic basic lifestyle.

For example:

– I could deduct the cost of my cars as a business expense, so my business paid for those

– I could deduct the cost of my travel as a business expense, so my business (or the occasional consulting client) paid for those

– And, I could afford to pay myself a fairly basic (at least, for a guy with a family) $50k salary a year

So, with my combined businesses breaking even (after these expenses were taken into account), together with the fact that I could control my cost of living by delaying gratification (not to mention, my wife was still working and bringing in a decent income), I simply didn’t worry too much about earning an income.

But, all that changed when I started investing actively, and built up my first $7 million (in 7 years) fortune …

It changed for the worse!

Firstly, my cost of living increased. A lot.

Then, my wife stopped working. Of course.

And, my actively-generated income stopped. Because I sold my biggest business.

Now, I mostly have to rely on ‘passive income’ which is really just spending the money I have in the bank while I figure out how to make more money from investments than I spend on their expenses + the cost of my lifestyle.

And, that’s now a big number!

So, ironically, just when most people think that I have “f**k you” money, I have started to worry about income …

… simply because I have to create my own.

How about you? Do you worry about income? Why (or, why not)?

A financial playbook for professional athletes …

A couple of weeks ago I wrote about the dismal financial track record of professional athletes:

78% of NFL players and 60% of NBA players are bankrupt within two years of leaving the game.

Before you jump to the stereotypical conclusion that sports people have had one too many hits to the head, realize that the IQ of professional athletes is no better or worse than yours or mine:

The l.Q. of superior athletes ranges on average from 96 to 107

That’s why I think the reason is simple and generic: anybody who gets money quickly loses it almost as quickly.

To prove my point, look at the financial longevity of lottery winners, who should represent a fair cross-section of society [AJC: setting aside that you must have a low IQ to want to enter the lottery]:

More than 1,900 winners of a Florida lottery who won between $50,000 and $150,000 went bankrupt within five years.

So, if making money too quickly is a sure indicator of later financial disaster, what do you do? Refuse the money?

Not likely!

But, the one advantage that pro-athletes have over the rest of the pupulation is their ability to follow a playbook …

… so, here is the $7 million 7 years playbook for dealing with Found Money (i.e. any large amount of money that suddenly falls into your lap):

If you’re lucky enough to receive such a windfall (e.g. win the lottery; land a professional sports contract; star in a major motion picture; get acquired by Google; etc.), you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work rather than luck).

But, the amount you spend should be a reflection of how much Found Money you have, up to a maximum of 50% of the amount that landed in your lap. 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)

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you suddenly come across:

[HINT: For the money that you do want to spend, still apply The Power Of 10-1-1-1-1, but reward yourself with a little from each box e.g. spend $10 today; $100 tomorrow; and, so on (in total) up to your spending limit from the table above.]

If you find yourself toward the high end of this table (e.g spending $1,000 or more), spend it on something – or, some things – that you will remember for a long time.

Oh, and if you’re not a professional athlete … well, you can still follow a playbook as simple as this one, can’t you?

Life’s tough at $250k a year …

I was chatting to a friend last night and was amazed at his reaction to what I had to say.

The conversation went something like this:

Me: Did you see that article about the guy who can’t live on $350k a year?

Him: What guy?

Me: Oh, some guy written up in the Wall Street Journal the other day.

Him: I didn’t see the article. What about him?

Me: He’s a lawyer or law professor or something who earns $350k a year and can’t make ends meet.

Him: Yeah, I know people like that. Remember Elton John nearly went broke?

Me: Yeah [laughs]. But, that’s not what I’m talking about. He says he can’t even afford to own a house because he lives in New York … in Queens or Brooklyn or somewhere like that … and between his taxes … I think he pays nearly half in taxes … and his rent, he is really struggling.

Him: Poor him [laughs]

Me: [laughs]. Yeah I guess it seems funny. But, I actually know where he’s coming from. I own my house and my cars outright. OK, I have two kids in private school, so that’s expensive. But, we struggle to stick to our $250k a year spending budget.

Now, here’s the weird part: my friend didn’t seem surprised at all …

… like NOT being able to live on $250k a year (before taxes) when you have NO mortgage, NO car payments – in fact, NO debt at all – is nothing unusual.

I made $7 million in 7 years so, for me, spending ‘only’ $250k a year is probably being frugal.

What’s his excuse?

And, how much annual expenditure are you banking on your Number being able to produce?

Why climb Mt Everest?

Thanks to all of those who entered my SECOND $700 in 7 Days Giveaway; you still have a couple of hours to sneak in and submit your entry for what looks like a better than 1 in 30 chance to win the first prize of $350 in cash … that’s like $10 just for filling in a 2 second form!

If you refer friends, you will be in the running to win the second ($150), third ($50), and fourth prizes of ($50) CASH as well … right now, I’ll be struggling to give all of those prizes away, so that’s a pretty good hint. But, since you’re late to the party, you’ll have to find the entry form yourself. HINT: xxxx 😉
I wasn’t spanked by my readers nearly as much as I expected for sharing my happiness with my mansion purchase (actually, two mansions: one in US and one in Aus), then again the purpose wasn’t to brag but to counter the idea that spending is bad.

In fact, spending is only bad out of context … $7 million in 7 years kind of context … when not spending would be even more absurd.

Anyhow, Josh did pull me up:

What’s the point? Maybe I’m missing something. Maybe it’s because my assets are in the 7-figure range and not the 8-figure range. But why spend $X Million on a home?

I live debt-free in a home that cost $300K. I could have bought a $2M+ home, but it seems so impersonal, pretentious, and secluded. I want people to come over and feel comfortable drinking beer with their feet up on the coffee table, or to let their kiddos run around carefree after coming inside on a rainy day. Even now, some people feel uncomfortable in my house because it is “so nice” for the area in which we live.

Well, why do people climb Mt Everest? What’s the point?

Because (a) it’s there, and (b) they can!

So, I have a very simple rule on spending that has kept me in good stead – through poorer and richer:

I spend money when it doesn’t make sense NOT to!

I became rich because I wanted to travel spiritually (that’s free); mentally (that costs me in time and ‘venture’ capital); and physically (that much traveling costs me a LOT of time/money: hey, I retired at 49 so I WANT to travel Business Class and stay in at least 3/4/5-star hotels).

So I set out to make my $7 million in 7 years to allow me to begin the life that I wanted to live (without needing to work) and was fortunate enough to succeed …

… and, one of the side benefits of that financial success is that I have plenty of cash for cars and houses, and vacations and bling. And, for charitable gifts and deeds 🙂

I write this blog because I wish the same for all of you …


PS a big house doesn’t need to be pretentious; ours is homely and welcoming and people love it because they get to hang with us, play tennis, watch movies, and swim 🙂

Beating the ‘more’ bug!

Do you have the ‘more’ bug?

I certainly do, and I think that most of us do … in fact, I’m so sure of it, because I see hundreds of blogs and books solely aimed at eradicating the disease with drastic remedies such as self-flagellating frugality and anorexic debt diets.

Kind of reminds me of how we used to treat ourselves with blood-letting, hole-in-head-drilling, and leeching – actually, all still legitimate remedies in a tiny minority of real-world cases – because we didn’t know any better.

In those days, a ‘real’ doctor, prescribing a drug that they had discovered would have been seen as a heretic or master of the ‘black arts’ (Louis Pasteur, anybody?).

But, I’m getting ahead of myself … first, here’s how Scott (a doctor, plenty of disposable income, so he’s a prime candidate) describes the symptoms:

I think a big dragon that we all face is that human nature of wanting more. We all seem to do it to some degree or another. We’ll live in a 150k-200k house(which was probably an amazing home to our grandparents standards) and while there, we imagine that million dollar pad. Once we get that, we need a 5 million dollar one, etc..etc..and our number continues to climb with the chronic discontent and needing more.

As Scott says, it’s not such much a ‘bug’ as a human condition: to always want more.

To get a little metaphysical: if you were the Ultimate Higher Power and you wanted to design an environment with endless conflict (all the way up from a personal level to a global level), you would fill it with little creatures that you ‘program’ to always want ‘more’. And, you would give them the tools (opposable thumbs, a modicum of intelligence, and inventiveness) to ensure that they create an endless stream of upscaled ‘stuff’ to constantly fuel that desire.

What Eternal fun! 😉

Assuming that the ‘more’ bug is curable … or at least manageable … how do you deal with this seemingly insatiable desire for ‘more’?

Well, if it really is a disease or condition, then I’m not sure how easy it is to switch off the ‘more’ switch; maybe a 12 Step Program for Wants (might be a great online/offline business here for any psychologists who have a side interest in personal finance)?

But, if it is real – and, manageable – then another strategy might be to build in gradual spending/lifestyle increases into your budget. Allow the ‘disease’, but control it …

For example, I drive a BMW M3 Convertible (in Australia, this is a USD$200k car, due to low volumes, importation costs, and exorbitant luxury vehicle taxes) but I really WANT a Ferrari ($500k++).

So, I have given myself a target:

Develop and/or cash out (for a certain amount over purchase price) on my development sites and I ‘reward’ myself with the Ferrari (not as simple as that: I will also need a day-to-day car, so figure a $150k Audi S6 or Maserati Quattroporte, in addition to the Ferrari … repeat every 5 to 8 years). I think that some of the Sudden Money strategies that I posted about recently are ideal for managing this.

Another way to deal with this was suggested by Robert Kiyosaki: he said that he, too, wanted a Ferrari. His wife said that he could only buy one if he generated the income to cover it. So, he bought a self-storage business and used the income to fund the payments on the car … I’m OK with this: even though he’s funding the car, rather than paying cash, the capital is in an income-producing asset – one that really should increase in value over time.

And, it’s not a ‘real’ business, in that it won’t need a lot of ‘hands on’ management … of course, it’s not a real passive investment either. Other candidates could be automated / no staff car-washes; ‘coin’ laundries (the new kind that use cards instead of cash); and, some of the absentee-owner franchises.

[AJC: Just be warned, you probably can’t tax-deduct much – if any – of the vehicle payments. Contrary to what the financial spruikers and shysters will tell you, the IRS is not stupid: why do you need a Ferrari to help the self-storage business / car-wash / coin-laundry produce an income?!]

But, now that Scott mentions it, I do have a hankering for an island ;)

There’s something about Todd …

Poor Todd, where I don’t fear to tread, Todd (now) refuses to go:

Everybody hates Todd Henderson.

In case you haven’t heard, he’s the University of Chicago law professor who unwisely blogged about his financial woes in a post headlined “We Are the Super Rich.”

Mr. Henderson and his wife, an oncologist, make more than $250,000 a year, and apparently they’re struggling to get by. If President Barack Obama gets his wicked way, and tax rates rise for those earning more than $250,000 a year, Mr. Henderson says it will mean real sacrifice in his family.

It’s too easy to pelt Mr. Henderson with rotten eggs, as so many have now done. (He yanked the post, but way too late–and on the Internet, one’s blunders never die.)

Never, ever, ever again blog about how hard it is to live on $300,000 or $350,000 a year at a time when one middle-aged man in four can’t find a full-time job, and one in five can’t find any job at all.

Yeah, I understand that Mr Todd was whinging to people much worse off than him.

But, I’m not afraid to speak my mind – when it comes to money – after all, ever heard of “teach a man to fish …”?

She’s an heiress …

Madam X (provocative name) over at My Open Wallet says that she is an heiress:

Remember Great Aunt Minnie? She died peacefully a few weeks ago. I had a chance to see her one last time in May, and spoke to her on the phone a few days before her death … it was even more weird to find a thick envelope in my mail the other night, which turned out to be from Minnie’s lawyer, because I’ll inherit a share of her estate. So now I just have to see what happens once the estate is settled and divided up. I have no idea how much money it will be. I certainly don’t expect much, given I’ll only get one twelfth of her estate.

Receiving money ‘suddenly’, be it from a sad occasion such as this, or from some fortuitous circumstance such as winning a substantial prize in the lottery, can be difficult, because you probably have no plan.

And, because you have no plan, the money can go as quickly as it comes (remember poor-then-rich-then-poor Lou Eisenberg?).

I call this Found Money, and here’s how to deal with it:

If you’re lucky enough to receive such a windfall, you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work – e.g. selling your business – rather than luck).

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you happen to come across:

The idea is that money is for SPENDING and ONLY FOR SPENDING … but, you need to PLAN to spend some now and PLAN to spend some later (a.k.a. saving). That’s exactly what this table is designed to do.

So, if you find $10 in the street, buy yourself a fun magazine, then stick the rest in a jar.

If you happen to inherit $100,000 go ahead and upgrade your car (and/or take a vacation) – totally guilt free – then plan to invest the other $90k very wisely 😉