The pyschology of saving …

Thanks to Ill Liquidity for sharing this video – and, many others – on our sister site: Share Your Number … it’s interesting to see This Clever Guy talk about the psychology of Paying Yourself First, and the Envelope System.

What do you think of these Making Money 101 techniques? Do you have any others to share?

Rent Wealthy?

It’s only a couple of weeks since I told you about a new way to measure wealth, and here is an article on a respected blog telling you how to go about renting ’stuff’ that you might need, so that you can appear wealthy!

Now it might surprise you, unless you’ve read my original post, that I think the best ‘bang for buck’ way to be wealthy is to be Rent Wealthy …

… this is where, instead of owning that villa in France, you rent it. Instead of owning that luxury yacht, you charter it (with crew and caviar, of course. After all, you are wealthy!). And, instead of owning that expensive personal jet, you call up Warren Buffett’s company, Net Jets, and charter one (no maintenance or holding costs, either!).

And, the Get Rich Slowly article says that you can now:

… rent designer bags, sunglasses, and jewelry. Yep, companies like Avelle, Bling Yourself, and Wear Today, Gone Tomorrow will rent merchandise by the likes of Chanel, Hermès, Louis Vuitton, Prada, Chloé, Herve Leger, and more. For a monthly fee, you can carry the “it” bag.

One site, for example, will rent a vintage Birkin bag for $600 per week. The cost to buy a vintage Birkin is about $17,000 (I’ll give you a moment to stop choking…mmkay, better now?). A Coach bag that retails for $350 can be rented for about $30 a week, or $20 per week if you keep it for a month.

As the author points out, you can actually own the Coach bag in 4-and-a-half months, so renting would seem pretty stupid when you can just save up for one or two nice handbags and use those throughout the next year or so.

But that’s not the point: renting, financing, or even buying this sort of consumer item with cash is likely to be sudden death for your personal financial well-being (remember The 5% Rule for your personal possessions, including your car?!) …

… unless, of course, you are already rich!

And, that’s where I disagree with the author: I am not comparing the cost of purchasing the $350 Coach bag against renting it … I’m comparing owning, say, 12 of them (after all, what rich person can get by on just two changes of purse in a year? Ask Paris Hilton … ) against renting 12 to 24 of them – one or two per month!

And, you don’t have to worry about them taking up space in your closet - collecting dust – after you have already been seen in public with them …

Clearly, renting is a ‘no brainer’

That’s why I like being Rent Wealthy; I can have pretty much whatever I want [AJC: within reason, and remembering my 10-1-1-1-1 spending thresholds to make sure it's something I really want or need] without any albatrosses around my neck.

Once you reach your Number, and if you are rich enough, try being Rent Wealthy for a while … I think you’ll like it

Be rich? Or, appear rich?

Trent at A Simple Dollar poses an equally simple question: Do You Want to Appear Rich? Or Do You Want to Be Rich?

Now, if this were a frugal-living blog, I think you know what my answer would be, but – like Trent – I have some personal experience of living beyond your means to keep up with appearances:  I grew up in a house where my family clearly lived beyond its means.

But, my father confided our true financial position to me – and, only to me – so, I became financially self-sufficient at a very young age. Others saw this as me having a strong sense of responsibility; however, if they knew my dark financial secret, they would see it as merely as the early manifestation of a strong survival instinct.

Whatever the fiscal lessons that I learned at a young age, they have clearly been to my long-term financial benefit …

Having said that, by nature, I like the good things in life … being rich suits me

However, even before I made $7 million in 7 years, I knew how to appear rich by being clever with the money that I had.

For example, when my friends were buying new Australian or Japanese cars (hence riding the depreciation roller-coaster to the tune of 15% to 30% per year), I bought a ten year old 911 Porsche.

Not only did I have a ton of fun racing it – and, rolling it on and off tow trucks whenever it had mechanical problems – I made money when I sold it.

Clearly, buying used is one way to appear rich (and, enjoying some of the fruits of your labor now) without actually holding yourself back from becoming rich by overspending.

Another way is to avoid the fiscal habits of either the Debt Wealthy or the Buy Wealthy: don’t buy or borrow-to-buy ’stuff’ i.e. depreciating assets like cars, boats, and vacation homes.

If you must have some of these things, then take a leaf out of the book of the Rent Wealthy: rent whenever you can afford to, otherwise go without.

For example, it’s been said that you can charter a boat that is one size larger than you could afford to buy five times a year for about the cost of owning that smaller dinghy that you were about to buy. Similar logic applies to vacation homes, etc.

Use this rule of thumb (i.e. at least 5 weekends a year – every year – of use) to help you decide when you should buy or rent … assuming that you could afford to buy according to the 5% rule

The time of your life?

I’ve been spending the last few days reacquainting myself with Millionaire Mommy’s excellent blog, but I do see some differences in perspective – even though we are both millionaires …

…. but, I suspect that the differences come from degree: she describes herself as a ’self made millionaire’ … and me a ’self made multi-millionaire’.

IF this is the case, then I suspect that my point of view and that of, say, Felix Dennis (who is worth hundreds of millions) will equally vary from time to time. Which leads me to my first Rule of Advice:

Only seek financial advice from those who have made at least 10 times what you have already achieved, doing exactly what it is that you are attempting to do.

A long winded-way of saying: only listen to somebody who’s already been-there-done-that …

…. but, more than that: when you get to, say, $3 million or $4 million of your own, you should probably stop reading this blog, as my ideas and your may become self-reinforcing – hence self-limiting.

At that point, it will be time to move on and find some new mentors (maybe even Felix Dennis, himself?!).

The flip-side is that if you are still working towards your first million (say, $100k or networth or less) you probably should be reading Millionaire Mommy’s blog as well as (dare I say, instead of?!) mine; to help you decide which is right for you, let me give an example from a recent Millionaire Mommy post:

Today, I’m sharing a trick that can completely revolutionize your spending habits by changing the way you see the cost of the goodies that merchants want to sell to you.

Here’s the trick: Translate the number of dollars you see printed on a price tag into the number of hours the purchase will require you to work for it. By doing so, you’ll make well-informed decisions regarding what you’re willing to pay for with your irreplaceable life energy.

You should read her post thoroughly to understand it properly – and it’s another excellent “hold back your spending” technique to go along with others such as the Power of 10-1-1-1-1.

But, I wouldn’t use it …

… now.

I may have – if I knew of it – before … but, not now.

You see, when I was concentrating mainly on MM101 (getting my financial house in order), this time value of money approach would make perfect sense, but now that I am transitioning from focusing mainly on MM201 (income and wealth acceleration) and MM301 (protecting my wealth) I think the idea doesn’t make great sense:

I ‘pay myself’ a notional salary of $250,000 a year – this is really a budget for now, as we get our financial house in order after a transition from business to retirement and from the USA to Australia – and have few, if any, ‘business expenses’.

But, for the sake of the calculator, I said that I worked about 20 hours a week on ‘work’ (business/investment projects), and probably spend another 5 hours a week in social activities related to this ‘work’.

Given all of that, the calculator says that my time is worth about $105 an hour … poppycock!

The test is: would I take a job, consulting activity, etc. that paid me $105 per hour? Of course not!

Would I spend time on an activity that could produce me $105 per hour passively? Probably … but, then I wouldn’t be working 20 hours a week to get it, so the calculator doesn’t work.

In other words: I ‘work’ 20 hours a week for (a) fun and (b) a potential future payback in the millions. So the calculator doesn’t work.

Secondly, if I work 40 hours (i.e. 2 weeks), I can afford $4k worth of goodies …. even I don’t buy $4k worth of consumer cr*p every 2 weeks, and on this calculation, I only have to ‘work’ for 30 weeks to buy a Ferrari … cool! Yet, right now, I don’t think I can really afford one

Thirdly, and this is for everybody, the calculator only takes into account work-related expenses; it should really also take into account your living expenses, as well … in other words how many hours of work WILL you have to put into saving up enough to pay for that thing that you are considering buying?

If none of this makes sense, here’s some more white noise for you

I hate budgeting … so, I've only ever tracked my expenses once!

That’s why I was so  excited a number of years ago (very early on in my Financial Re-birthing Process] to come across John Burley’s ‘No Budget Budget’.

For those who don’t know him, John Burley is a financial spruiker (originally, on the subject of ‘wraps’ for real-estate … something that I have never tried myself, so something that I can’t really comment on); after hearing him speak, I tracked down one of his courses that covered basic financial improvement “in 31 Days” …

… I don’t think I ever got past Day 1 or Day 2, but I’m really glad that I tried his ‘no budget budget’. It’s the ONLY personal budget that I have ever tried (and, don’t even get me started on the subject of business budgeting!).

Basically, the process consists of writing down every single dime that you spend (cash, check, credit) for a month. That’s it!

When I was cleaning out the house for ‘our big move’ recently, I found the actual budget that I had put together … it spans all of 3 pages (part of page 1 is scanned and reproduced here); a small ‘price’ to pay for financial freedom

Here’s how it works:

1. Grab a blank sheet of paper and a pen (actually, a little pocket notepad and pencil is ideal … but I kept a folded sheet of paper in my pocket and my wife kept a little notebook and pencil in her purse and every night she would tear the page out that she used and give it to me to add to my sheet).

2. EVERY DAY FOR EXACTLY ONE MONTH [AJC: you don't have to start on the first day of the month; any day - like TODAY - will do] I wrote on that sheet of paper:

- The Date (each day I started a new section on the piece of paper … when you try this, you should be able to fit a week or so on each sheet)

- What we bought (e.g. lunch; drink; bread; newspaper) … we did this for every single purchase!

- Who bought it (A for me; S for my wife; I guess we would also need to add Ad and Ta for our children if we were starting this No Budget Budget now)

- How much it cost (inc. taxes etc)

- How we paid …. we used a simple system eg Cash, Visa, Check

That’s it; one month …

Also, we added a new ‘last day’ of the month, so that we could write in 1/12 of any annual expenses (eg insurance) whether paid for in that month or not.

You can see that we did this in Australia 9 years ago [AJC: the date 1st Feb, 2000 is written as 1.2.00 in Australia]

You can also see that we were mainly a ‘cash society’ back then as only the haircut (mine) was paid by Visa [AJC: at $28 back then, I must have had WAY more hair than I do now] …

So, we simply kept a log of all of our spending for each day, in exactly the same way that we did for Feb 1 for the whole month … of course, Feb is a dumb month to choose, because it’s the shortest.

I can’t find the summary page, but I recall it being something like $1,000 a month that we were spending then.

That tells you what you’re spending … now, compare that to what you’re earning (after tax):

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

Charles Dickens, David Copperfield, 1849
English novelist (1812 – 1870)

This worked for us, and we never bothered doing it again; didn’t see the need … now, tell me about your experiences with Budgets (or No Budgets)

The Power of 10-10-10

Suzy Welch, in her new book of the same name, calls 10-10-10 “a life-transforming idea” …

… I don’t know about ‘life-transforming’ but, it’s definitely a simple-yet-powerful decision-making process.

Suzy says:

I call it 10-10-10.

Here’s how it works. Every time I find myself in a situation where there appears to be no solution that will make everyone happy, I ask myself three questions:

What are the consequences of my decision in 10 minutes?

In 10 months?

And in 10 years?

The answers usually tell me what I need to know not only to make the most reasoned move but to explain my choice to the family members, friends, or coworkers who will feel its impact.

I can definitely see how these questions could apply to personal finance: before you make your next major financial decision, take some time out to ask yourself how that decision to [insert financial decision of choice: buy, sell, finance, change, etc.] could affect your life in 10 minutes / 10 months / 10 years.

Chances are that you will change your mind

Tomorrow, I’ll show you an even more powerful idea that will go hand-in-hand with 10-10-10 to “totally transform” your personal spending habits …

No such thing as a free lunch …

This concept has come up three times recently, so it deserves a post of its own!

First Time

My son asked me why he can’t buy a car (when he’s old enough) on finance, and I explained it to him…

… he then asked me the million dollar question:

What about if there is a 0% finance deal on the car? Can I finance it then?

And, my answer was:

There’s no such thing as a free lunch.

Second Time

Ryan was posting about his car and Josh commented:

I would suggest buying used until you have cash to buy a new…BMW, you have no maintenance bill for 4 years, 50,000 miles.

And, my answer was:

There’s no such thing as a free lunch.

Third Time

I wrote a post about a hypothetical real-estate deal, with the key feature of a rental return guarantee. Rick said:

The description sounds like a good deal to me for a low risk- a guaranteed 7.5% return + possibility of great appreciation. It really sounds too good to be true.

And, it is (too good to be true); you see:

There’s no such thing as a free lunch.

… really, there isn’t. Somewhere along the line you are paying.

Let’s take the last case first: guarantees are usually not worth the paper they’re written on. Especially when they are “thrown in” to make a “great deal” sound even better. In the real-estate deal the ‘guarantee’ could actually cost you money, if the developers/promoters have to borrow money against the future value of the project to make a current payment to you.

In most  new projects where, say, a 2 year rental guarantee is offered, the value of the guarantee is built into the price that the property is offered to you at … might explain some of the very dramatic rises and falls in RE values in Florida, for example.

Similarly with the second example of the ‘free servicing’, which is – of course – built into the price of the car. Naturally, if you simply MUST have a brand-new BMW then you will get the ‘free’ servicing with it. On the other hand, if you can buy a used BMW just after the ‘free servicing warranty period’ has expired, you will be buying at the best possible price point, because (in a normal market) you should expect a sudden drop in the value of the car … this sudden drop represents the real, current value of the ‘free servicing’.

If you understand this concept, then so-called 0% down deals should become obvious … YOU are actually paying for all of the interest, at commercial rates, up front!

I did some consulting work for a finance company that underwrote so-called “2 year interest free” loans on furniture sales for large retailers; they made their money because the store paid a fixed amount up front when you signed up to the deal, then the finance company HOPED that you would not be able to make all your payments on time, because the ‘fine print’ on the deal then let them charge you interest at credit card rates (19% p.a. to 29% p.a.) on the entire financed amount for the entire time that you had the “0% loan”.

Here’s the test; always ask:

… and, if I don’t take the [insert: free lunch du jour] how much do I have to pay then??

Then you can decide if the free lunch is something that you can afford!

Put your money into CD's? Not exactly what we meant!

Last days for ‘pre-applications’ to become one of my 7 millionaires … In Training! Click here to find out more …

_______________________________________________________________________________________________

Here’s another in my Money-Video-On-Sundays Series …

This clip from the popular comedy, The Office, is sad but true … how many students are also ‘investing’ their money into CD’s the way that this guy does, rather than saving and paying down debt?

http://www.nbc.com/The_Office/video/#mea=169237

AJC.

PS Take a look at the latest Money Hacks Carnival here ….

Applying the 20% Rule – Part II ( Your Possessions)

In my precursor post called Applying the 20% Rule – Part I ( Your House), I defined the 20% Rule and the 5% Rule as follows:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ’stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

As a reminder, I represented this as a simple formula:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments

I also pointed out in that article how the Current Market Value of Your House will usually go up over time (current market conditions aside) but, the Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Whereas houses generally appreciate … possessions generally depreciate!

Now, as much as I hate to point this out (because the ‘frugal blogging community’ will probably fry me!) you can actually use this interesting financial anomaly to buy more stuff …

… and, according to the $7million7year ‘philosophy’ the process of making money and getting rich should sometimes mean ‘delayed gratification’ but should never have to mean ‘no gratification’!

That means, that when starting out you may have to buy what you need and maybe even buy a house and generally screw yourself up financially (that’s where the ‘frugal blogging community’ comes in handy, because they will show you how to minimize – perhaps eliminate this risk – even better than my basic Making Money 101 Principles can help you).

If you do, by following my Making Money 101 steps and reading (and following) as many of these posts as possible, you will get yourself on the right track and find that:

 1. Your House fits the 20% Rule,

2. Your Meager Possessions fit the 5% Rule,

3. And, you are sensibly Investing the rest!

What now … well, pat yourself on the back and wait … until:

i) You have saved up enough cash to buy whatever it is that you are salivating over – repeat after me: we will never borrow money to by depreciating ’stuff’ again – and,

ii) You have revalued your stuff (eBay and Craig’s List are two excellent sources of ‘current market valuations’ for all sorts of ’stuff’) and found that they have lost so much value since you bought them that they now total less than 5% of your Current Net Worth, and

iii) The (hopefully, now increased) equity in your House still fits into the 20% Rule - and, you have applied everything in Applying The 20% Rule – Part I (Your House) if it doesn’t, and

iv) If you do buy the ‘New Stuff’, the total Current Market Value of your Possessions still fits into 5% of your current (hopefully, by now increased) Net Worth.

…. if you can check all of the above ‘boxes’ … go ahead and buy it, guilt free - you deserve it!

Now, the astute investors out there will have realized that if you increase your Investment Net Worth (i.e. the minimum of 75% of your Notional Net Worth that you keep in income-producing INVESTMENTS) - as you should, by an average of 8% compound a year or better – you will be able to increase the other 25% that is in your home equity and possessions to match!

In other words, you will (if you so choose) be able to match an increase in lifestyle arising from a better financial position …. life doesn’t get any better than that, does it?

Celebrating Spending Week!

For the remainder of this week I want to do something that I believe has never been done in the history of Personal Finance: encourage spending!

Why would I do a ‘heathen’ thing like that:

1. Well spending is good for the economy … it’s how we got things going after WW2 … go ahead be a Patriot!

2. Money has NO PURPOSE until you spend it

3. Money SPENT NOW is worth more than MONEY SPENT later (due to a little thing called Inflation)

4. Learning when/how to spend is AS IMPORTANT as learning how to save … after all, you WILL spend b/w 50% and 90% of your weekly paycheck!

5. If you don’t SPEND when you CAN and SHOULD, society has a word for you: Miser and we don’t want to confuse being SENSIBLE with being STUPID, do we?

But, there is a why and a wherefore that I will be exploring for the rest of this week … enjoy!

And, don’t forget to let me know what you think … we want to be on the cutting-edge of Personal Finance thinking, not the BLEEDING EDGE … your feedback will help us determine where we stand.

AJC.