Clever video by the Dave Ramsey ‘marketing machine’ … really shows you the anti-power of financing a car. Watch it and you may never finance another car again!
A free car?!
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Category Archives: Starting Out
House or Home? 7 Case Studies …
The real advantage of my 7 Millionaires …. In Training! ‘grand experiment’ for the rest of us is that it provides some great ‘real life’ case studies of the topics that we talk about on this site.
For example, we talk a lot about your house, as – for most people – it’s your largest single purchase …. assuming that you don’t intend to actually get rich and go off and buy yourself some REAL investments 😉
Here is where each of the 7MITs are at with their current housing; if any of these case studies interest you, click on the link to read their full post and be sure to scroll down and read all the comments:
Scott talks about both his current home (he has kept his previous home as a rental) and compares his current dual income to the 25% Income Rule – although, there is a question about his wife’s income to be answered.
Ryan isn’t sure whether he bought the ‘bargain’ home that he thought he was getting; should he pay down the mortgage to compensate? Read the post – and the comments – then let us know (either here or there) what you think?
Jeff is a Navy Pilot, so it should come as no surprise that he: (a) moves a lot, and (b) gets some housing assistance. Jeff is seeking to capitalize on his unique situation by flipping his current home … why don’t you add your comments to those that are already on his post?
Mark has a home that he wants to keep as a rental. Is he making the right move … and, is he using the right metrics to help him make the right decision? Also, in the comments, we examine whether Jeff’s (yep, back to the Navy Pilot) house is a home or an investment.
Josh is the ‘free accommodation at home’ guy … sigh! I (slightly) remember those days. But, does Josh have a housing decision to make (he has been give the task of managing his grannie’s flat)? Read his post (and the comments … feel free to add one of your own) and YOU decide!
Lee asks the critical question: house or home? We also have (read my comment) a totally new version of the Old Age Pension to offer Lee …
Diane lays an interesting ‘life situation’ on us: when do Life Partners combine assets and liabilities and when don’t they? Also, if finances are separated, how do you calculate where you are REALLY at financially? It can (and should) be done, but how? Diane has taken the same ‘live at home with parents’ path as Josh (for now) … what advice can you add?
If you are still deciding how much house YOU can afford – and, want to learn more about the 25% Income Rule and the 20% Equity Rule – start with this post, and work backwards through the links.
Antidote for workaholics …
I couldn’t think of a more appropriate way to cap of a weekend devoted to the all-too-important work/life balance than with this 33 second homage to workaholics …
… watch it, then get back to work! 😛
How not to be a dull boy …
When I worked I was dull and when I retired I became insufferable … it’s official!
But, there is a way out: it’s called the Work/Life Balance and we all want it, but none of us really have any idea how to get it 🙂
Which brings me back to a conversation I had with a friend of mine after showing him our new house a few nights ago (extensive renovations will be underway, soon):
My friend, a doctor – an internist, family doctor, or general practitioner as he would variously be called depending on which country you are in – confided that he originally wanted to become a surgeon.
But, he stopped his studies – after many years of trying, failing, then retrying to make the ‘cut’ when his wife suggested that he draw a pie chart of how he was spending his time.
Here’s his chart:
Typical working student; most of his day taken up with work, then study with very little left for sleep and virtually no R&R (rest and recreation: that’s where ‘family’ comes in) …
… she then asked him to draw a similar chart of how he would LIKE his typical day to look, and this is what he drew:
It doesn’t take a genius – or a budding surgeon – to realize that what he really wanted was a BALANCED LIFE: work, sleep, family.
My friend almost immediately gave up his surgery aspirations with absolutely NO REGRETS and now runs a successful suburban practice that gives him a life where he can help people, his family, and himself in almost equal quantities.
This leads me to think: why do we live the first pie chart, if not to get to the second? Perhaps, money is not really the object, after all …
… or, maybe you need to live the first for a defined period (your Date) in order to achieve a preset amount (your Number) so that you can live the life you really need (your Life’s Purpose)?
Now I better go and take some of my own advice … 😉 [AJC: Really, I just added this sentence: I have to go for a walk to the letterbox with my wife … whoo hoo!]
Steve Miller's vote is in!
Well, Steve Miller (and his band) has voted!
How about you? Have you cast your vote yet?
Deal or No Deal … YOU DECIDE
Click here to vote!
BTW: Thanks to one of our readers (Mike Hunt) for pointing me to this Steve Miller song … it really is appropriate …
… but, appropriately right or wrong? YOU decide!)
Deal or No Deal – Part 3 – Reader Poll
Late last year, I asked you (a number of times … just like Howie Mandel) …
…. Deal or No Deal?!
What would you have done [AJC: if you haven’t yet ‘cast your vote’, please go back to this post and drop a comment]?
We know that Ms Tomorrow Rodriguez (sounds like a character out of a James Bond movie) said “No Deal!” to the miserly Banker’s’ offer that only paid out 1-in-3 for a 50/50 chance …
… Vote 1 for the ‘math kings’!
But, look at the situation that she’s faced with right now (in the photo above):
4 suitcases left: 3 of them contain ONE MILLION DOLLARS and 1 contains only $300!!
Ms Rodriguez – with the odds clearly stacked in her favor – has two choices:
1. Take the Banker’s Offer of $677,000
OR
2. Say “No Deal” and select just one more suitcase (then she will be presented with another offer)
Deal or No Deal?
Let’s examine the options:
1. Take the $677k and run!
OK, the banker has offered $677,000 but there are 4 suitcases left of which three contain $1 Million and one is a (virtual) blank.
That smells like a 75% chance of $1 Million to me … ‘worth’ $750,000 (any maths whizzes out there to counter this?) … seems to me that the Banker is short-changing Tomorrow Rodriguez by $73,000 buckaroos!
2. Select just one more suitcase and see what happens next (after all, she can’t lose on the next turn)
Well, here is the problem … unlike any of the lead-up turns, this time there is only ONE non-million case left; so, there are actually two possible outcomes here:
i) Tomorrow selects the one suitcase containing the blank (i.e. $300) which means that she automatically wins (there are only 3 suitcases left … since each would then have to contain $1 Mill. she can’t lose)
OR
ii) Three times more likely, Tomorrow selects one of the three suitcases that contain $1 Million and the chance of winning on the next round drops from 75% to 67% (3 suitcases left: 2 contain $1 Million and 1 contains $300 only)
The significance?
From this round on, the Banker Deals can only get worse, because the next round after this one would leave just 2 suitcases (assuming that she hadn’t won by then) … or, a 50/50 chance (and, we’ve already seen how much the Banker will rip her off on that)
In fact, Tomorrow is effectively paying for each ‘roll of the dice’ from here on in … whether she realizes it or not …
So, if she turns down $677,000, Tomorrow is really saying: “$1 Million or Bust … I’m going all the way, Baby!” … because she will surely turn down the later, much lower offers (been there, done that!) as well.
So, Ms Rodriguez really has just two practical alternatives:
1. A guaranteed $677,000 if she walks away right now
OR
2. A 75% chance of winning $1 Million AND a 25% chance of walking away virtually empty-handed
Deal or No Deal?
Just like last time, make a vote & drop your vote into the comment section below (I’d love to hear your reasons) … next week, we’ll check out what our readers had to say … it should be interesting!
In the meantime, do you want to know what Ms Rodriguez chose? Do you agree?
Merry Chrismas?!
Why am I posting a really nice Christmas video on January 25th?!!
Well, it’s simply to make a point …
… it doesn’t matter how late you start, but how well you execute that counts.
Just ask Ray Kroc (McDonalds), ‘Colonel’ Sanders (KFC), my father (who started a business at the age of 60), and (hopefully, soon) our very own Lee Martin …. old is the new young 🙂
Instant Net Worth Fix?
What is the relationship between your income and your Net Worth? Does paying down a mortgage increase your Net Worth … these are the comments made by Diane to a reader who said that they had income that was going into CD’s, but still had a mortgage:
[If] you are paying down your mortgage some – rather than just interest … then your net worth may be going up [?]
I told Diane that it doesn’t work that way 
Where Diane is right that putting money into CD’s while you hold a mortgage is probably a sub-optimal financial decision, it’s NOT because your Net Worth would change … paying down your mortgage does NOT change your Net Worth – it just reduces both your CASH (on hand) and MORTGAGE balance columns in your NWiQ profile …
… your total of Assets – Liabilities (hence, your Net Worth) remains the same!
Diane took me to task:
I assume [that you would be] applying income to [your] net worth and that is NOT reflected in the assets/debt columns of the networth calculations – it’s future cash for the most part (those who have incomes ;)) — or did I miss how else the income is reflected other than as a header above (along with our education)???
These are very good ‘technical’ questions, that I can explain (for those who are business/finance minded) as follows:
Income/expenses is/are a bit like a business’ P&L (Profit and Loss Statement), and your Net Worth is like a Balance Sheet … the former is a ‘work in progress’ and the latter is a ‘snapshot’ at a specific point in time.
Both cash and loans sit on the Balance Sheet … or, in our case, on our statement of Net Worth. Simply moving amounts around does not change either. Your Balance Sheet only changes if you make or lose money, grow or reduce assets (as long as you are not turning them into cash or some other balance sheet item).
Similarly for your Net Worth: decreasing a positive bank balance (on one side of your Net Worth statement) in order to similarly decrease a negative house balance (a.k.a. a mortgage) on the other side hasn’t changed anything – except where you keep various components of your Net Worth.
On the other hand, earning more profits (reflected in a businesses P&L) is similar to earning a salary or other income for a person (income) provided that you don’t spend it all (expenses) …
… they all help to increase your Net Worth (or improve the value of the business, as reflected in an improved Balance Sheet).
BUT, it doesn’t matter if you ‘store’ that extra income in a bank account (i.e. the CASH column of your NWiQ profile) or in your mortgage (effectively reducing it) … your Net Worth goes up by the amount of income that you saved since you last calculated your Net Worth.
As Scott says:
As long as you are living in your home, it is a liability and costing you money if anything.
That is, unless you are prepared to tap into that home’s equity and use that money to invest.
Yes, it’s what you ’save’ from your income (i.e. after expenses) that goes into improving your Net Worth regardless of whether you use it to build up your bank balace, pay down debt, or – as Scott suggests – buy a new asset.
The allure of diversification …
There is a certain appeal to diversification, particularly when seen as a risk-minimization strategy.
Rick sums this ‘certain something’ up nicely in this recommended twist to how he would set up his own Perpetual Money Machine:
Nothing in life is without risk- but you can minimize risks by diversifying- use multiple types of wealth capacitors some properties, some stocks, even some bonds. You can further diversify with a mixture of commercial and residential properties, properties in different locations, etc.
Similarly you can diversify stocks through buying small cap, large cap, mid cap, and foreign stocks.
If you diversify you can be fairly sure that one bad event doesn’t ruin everything. Of course if the sun goes supernova all bets are off but barring that you should do fine.
And, this is certainly appealing …
… don’t forget that I have been well diversified in almost every area that Rick mentions: multiple businesses; multiple RE investments in different classes (residential; commercial; single condos / houses; multifamily; retail; office; etc.); stocks (but, no mutual funds of any kind … and, I intend to keep it that way!) … but, I don’t recommend it!
Why?
I see two problems with this:
1. You spread yourself pretty thinly – you risk becoming a Jack of All Investments But Master of None … this lack of specialized expertise (which you can, of course, try and ‘buy in’) and focus can actually INCREASE your investment risk, hence DECREASE your investment returns, and
2. You automatically consign your returns to the mean/average – not all of your investments can perform as well as your best investment …. if you are comfortable with this ‘best’ investment (or, at least one of your ‘above average’ ones) surely you would put more effort into doing more of those?
The usually arguments FOR diversification then say things like “well, look at the sub-prime and what that’s done to [Investment Class A], therefore you should also do [Investment Class B]” …
… but, they conveniently forget that [Investment Class B] tanked 5 years ago, and will probably tank even worse 5 years hence, whilst [Investment Class A] recovers.
If you diversify you run the risk of averaging your returns down.
In other words, if you can choose your investments wisely your best hedge against risk are a combination of:
a. Time: make sure you can hold the damn thing for 10 to 30 years … if you have a short investment horizon, no amount of diversification will protect you.
b. Higher Returns: if you can hold long enough, every investment worth its salt will recover – and, then some; and, isn’t a ton of cashflow a great ‘insurance’ against risk?
Of course, if you can’t choose your investments wisely, then a ‘regression to the mean’ becomes a GOOD thing … just don’t expect to get rich if you can’t develop any special expertise 🙂
Nope, Rick, my Perpetual Money Machine – which asks me to generate my active income one way (e.g. my job or business), and then create passive income in another way (e.g. stocks or real-estate) gives me all the diversification that I need!
The New Money Pyramid
Let’s see … what are your health objectives?:
– Lose weight?
– Get fit?
– Be healthy?
– Live long?
– Look ‘buff’
– and, the list goes on …
You see, if you want to work on your ‘physical well-being‘ you have to define what that means …
… for you.
It will be different for everybody: for my wife it means eating strangely and exercising a lot. For me, it means, being totally sedentary, eating reasonably little/basic (except when I go out) and relying on good family ‘longevity genes’ (on my Mother’s side … hopefully, not my Father’s side of the family!) to keep me alive.
Yet, the government has managed to come up with (and, recently updated) a Food Pyramid that neatly sets out a plan for eating and staying healthy. Each ‘slice’ of the pyramid represents the relative proportion of each different food group that everybody should eat, every day.
But, the government soon found that this is enough to stop people from getting obesity-related sicknesses (cancer; cholesterol-related heart disease, etc.), but really wasn’t enough to make people, well, healthy.
So, they were forced to come up with this new version of the Food Pyramid …
What’s new about this, latest version of the pyramid is the stick figure climbing the stairs on the left hand side, like some Inca priest about to climb the pyramid at Machu Picchu for his monthly sacrifice of the young virgin (naturally, by ripping her still-beating heart right out of her chest … but, I digress).
This signifies that you can eat the right foods all you like, but won’t achieve true health unless you also exercise your body, in moderation.
One size does indeed fit all … at the most basic level.
Similarly with your ‘financial well-being‘ – while still a long way off being the Unified Theory of Personal Finance – we can at least lay out a basic Money Pyramid that will serve one and all reasonably well … enough to at least get you started; the bonus being that it might win me some friends back from the mainstream Personal Finance blogosphere.
Take another look at the Pyramid at the top of the post, and we can imagine the various segments as being common financial wisdom like:
1. Save 15%+ of your gross income
2. Pay down (and avoid all future) ‘consumer debt’
3. Increase your rate of savings by also allocating to your savings plan at least 50% of all future pay increases and ‘found money’ (inheritances; IRS refund checks; loose change from your pockets; money saved from quitting [insert vice of choice]; etc.
4. Buy instead of renting [AJC: which Financial Pyramid are you reading?!]
5. Invest for the long-term
6. You can fill in the other slices from your choice of any/all: live frugally; diversify; create an emergency fund; and so on …
And, this is certainly the Money Pyramid being promoted by most Personal Finance writers (other than the “Make Millions with No Money Down” and other ‘financial crackpot systems’, that I liken to the totally unbalanced “No [insert unhealthy sacrifice of choice: carbs; proteins; calories; glucose; food; etc.] Diet” diets).
The problem is, it might stop you from being poor (the financial equivalent, to not being obese) but will it be enough to make you Financially Healthy … a.k.a. Wealthy (however you choose to measure that)?
Probably not, which is why I have created the New Money Pyramid simply by adding the man climbing the stairs on the side:
This signifies that you can save money all you like, but won’t achieve true wealth unless you also exercise your money, in moderation.
How do you exercise your money?
Simple: you move it around! You aim high … setting a goal that has meaning to you, then:
– You invest at greater velocity (higher return),
– You leverage (the financial equivalent to exercising with weights),
… but only to the extent that your ‘heart’ (actually, your guts) can handle – start slow, get help, build up the velocity and the leverage as you get over a period of time – and, check with your ‘doctor’ before trying this at home 😉