Before you can find the answer …

Yes. Before you can find the right answer, you need to know the right question.

So it is with personal finance: most pf bloggers will answer a whole variety of questions:

- How can I become debt free?

- How can I pay off my credit cards?

- How can I save for retirement?

- How can I be more frugal?

BUT, these are not the questions that you need to be asking … at least, not at first.

No, there are only TWO questions that you need to ask. The first is in two parts, and it simply asks:

a) How much money do I need to support the life that I truly want to live? And, b) when do I want to begin?

I have a hypothesis about the typical answer to these questions, but the truth is that for every human being on this planet there is a different answer:

For some, it may be that they are happy doing what they are doing today, and are happy to keep doing it until they drop. For, them personal finance begins with maintaining their current lifestyle (which probably revolves around maintaining their employment) and staying healthy.

It probably also means learning all the lessons about personal finance that the blogosphere has to share: living below your means, eliminating debt, cutting up your credit cards, paying off your home, setting aside an emergency fund …

My second question – which I’ll come to in a moment – is moot for these lucky, satisfied, job-secure, working-class few.

But, my hypothesis is that most people are not satisfied with their current lifestyle … that you are not satisfied with your current lifestyle … that you:

- Want more time with your family,

- Want to indulge your hobbies and interests,

- Want to travel more,

- Want to be more relaxed and healthier,

… and, the list goes on.

And, I’ll wager that the limiting factor for you, right now, is money.

But, I’ll also bet that with a little thinking, you could come up with a salary that if a rich uncle were to pay it to you, would allow you to stop working full-time (or, altogether) and fund your ideal lifestyle.

I’ll also take a stab that ‘salary’ would bear little resemblance to your current salary.

But, if you can take an educated guess at what that ‘salary’ would need to be, I can tell you what your Number is (the answer to the first half of my first question) simply by telling you to multiply that amount by 20.

Let’s now assume that you have no rich uncle and have to amass this amount yourself …

How long will you give yourself to reach your goal so that you can begin to live the life you really want to live before you are too old to enjoy it?

I gave myself just 5 years to reach my Number of $5 million; in the end, I made $7 million in 7 years, starting $30k in debt.

[AJC: keep in mind that the longer you allow to reach your Number, the larger it will need to be because of the effects of inflation. For example, whatever Number you come up with today, you will need to add 50% if you aim to reach it in 10 years, and you will need to double it if you are prepared to wait 20 years ... just to keep up with inflation.]

Which brings us to the second most important question in personal finance:

How am I going to get there?

For example, in order for me to reach a $5 million target in 5 years from a virtual standing start:

- I had to learn how to invest (I had no investments and no idea HOW to invest or WHAT to invest in)

- I had to turn my business around (it was breaking even, at best)

- I (more importantly, my family) had to sacrifice our existing life: we had to move overseas, my wife gave up her career, my children their friends, we all gave up our families for the 5 years we were away from home.

But, we all agreed that it would be worth it, because we had already answered the first question (both parts).

How about you?

How to change your life!

I’m reviewing the final draft (actually, the pre-publication draft) of my new book.

But, I’m not happy with the current intro: it talks about the Roadmap To Riches, but that’s not really what this book is about. My next one, certainly, but not this one.

I just added an epilogue based on this post (almost word for word), and I want to do something similar for the introduction.

You see, I feel that while the subject of personal finance – a.k.a. money – is supposed to be entirely rational …

… it’s actually totally the opposite.

I believe that all discussions of money are entirely rooted in emotion, then our point of view is justified rationally.

The reason for this is that our lives and our money have become so intertwined that it’s hard … nay, impossible … to separate one from the other.

Don’t believe me?

Well, do you think you’re totally rational on the subject of money? Do you think that your life comes first, and money is only a tool?

Then let’s test that, right here, right now: you have 24 hours in an ‘average working day’, how do you spend it?

If you are anything like the average US worker, you spend an ‘average work day’ (that’s around 2/3 of the average year) sleeping, eating, and maintaining your house and your family.

You spend the bulk of what’s left (8.7 hours: the largest chunk of your day) earning money. Leaving a sliver of ‘life’ for you.

Now, think about how much of that tiny slice of life you then spend thinking, worrying, arguing, balancing and maintaining your money?

And, you’ll do this through the entire 40+ years of your working life

I rest my case.

So, the angle that I want to take with my book’s intro is this:

If you were to script your life, would you choose:

- Study hard so that you can get a great job, and

- Work hard at the job – eking out the occasional high point (landing a big account, making the boss happy, bringing a new product to market, etc.) – just to earn money, and

- Spend what you have to just to support your family, saving the bulk of what’s left over just so you can retire at 60+ to do … what?

OR, would you script for yourself something like:

- Travel the world, and

- Live large on the world’s stage, and

- Give back to others,

… and, so on?

The restriction on the latter probably being money and time (and, if you had the money, you could create the time, right?).

My point?

Doesn’t it seem as though we live our lives according to money’s script …

… rather than putting money in it’s proper place, which is simply as a tool to support our Life’s Script?

What do you think? Am I on the right track?

My circle, my prison.

1998 capped a long period in my life when I was imprisoned by a circle.

I suspect this is the same for most. What separates me from the others – and, I suspect you, too – is that I broke out.

The ‘circle’ was my life and the things that I was trying to deal with:

- Keeping myself sane in an increasingly mad world

- Keeping my family safe, fed, and healthy

- Trying to earn a decent living to pay the bills and keep a roof over our heads.

This type of existence is inherently inwardly focused … we focus on ourselves, our immediate family, our friends, and our work colleagues (probably in that order) and little else.

The reason why it’s a prison – well, a financial reason (there are others beyond this scope of a humble personal finance blog) – is that our ‘investments’ are similarly inwardly focused; aside from what little we manage to save in our bank accounts and 401k’s, our so-called investments center around the things that make our inner-circle lives a little better.

We invest in our health (as much as we can – or feel motivated to do), our education (often because our parents tell us that “it’s an investment in our future”), our home (because that’s what our parents did) and, of course, our cars & possessions (because that’s what our friends and colleagues do), and so on.

Why do we invest?

So that when our income stops we can try and continue living within our circle and simply maintain what we have?

But, when I broke out of that circle my life began to change!

My First Big Realization was that my life wasn’t about my money … so why was I spending so much of my life – that precious, finite resource – attempting to earn money?

When, in 1998, I found my Life’s Purpose, which included what was in the circle (family, health, and so on) but also a lot more than I had ever felt desirable or even possible, I was forced to look outside the circle … way out.

Interestingly, and logically, I also realized that the investments that I had been making for my circle-bound future would no longer be adequate for a far less bounded life.

Not only did my thinking have to move beyond the circle, but so did my finances. And, if my finances wouldn’t be adequate for the life that I really wanted to lead, then neither would my investments!

So, in 1998, my investment strategy also shifted … and, shifted dramatically.

[AJC: if you want to understand a little more about this process, then check out this free site:  http://site.shareyournumber.com/]

No longer would I try and upgrade my home and my car.

No longer would I try and upgrade my lifestyle in an attempt to keep up with the Jones’ (and, I had plenty of those to try and keep up with!) …

… I would simply begin to apply every spare penny to investing outside of the circle: in true investments that I could not eat, live in, drive, or share over a beer.

Now that those investments have born fruit, finally freeing me up to live my Life’s Purpose, I realize that living outside of the circle has actually also helped me live within.

The difference is that my inner circle is no longer my prison but my sanctuary.

The sooner that you identify what is in your circle and what – if anything – outside of the circle truly drives you, the sooner you will be motivated to seriously start making money and investing.

Then this blog will suddenly become very interesting to you

The Fisherman Fallacy

Ashton Fourie  proposes a fallacy:

I think it really doesn’t matter how you define retirement. What matters is what you are doing, and whether it is what you love doing.

Am I retired? Well, I don’t really care. I can’t see that I would want to be doing any less of what I’m doing now when I’m 70, or 80, or 120 (which is how old I want to become to finish all the work I still want to do)

It doesn’t feel like a fallacy: the idea to make money doing what you love doing has to be ‘right’, right?

To find out, let’s revisit the famous parable of the Fisherman and The Investment Banker:

In case you don’t remember the story [full parable + commentary here], it’s about a fisherman who meets a big time Wall Street investment banking-type who asks what he does.

The fisherman says that he fishes for just a few hours each day then spends the rest of his time with his family and playing cards with his friends.

The Investment Banker then goes into an analysis of how the fisherman could work hard for a few years to build up a big fish-wholesaling business so that he can finally retire and … do what?

Spend the rest of his time with his family and playing cards with his friends!

What this story proposes is that you simply enjoy your life now, and don’t worry about the money.

Well, that’s all well and good until you find that you can no longer fish …

Living from the fruits (actually, fish) of your own labor – or, selling your labor and/or time as Ashton does – are very dangerous ways to live. You may love what you do for now, but one day you may (a) no longer love what you do and/or (b) be ABLE to do what you love to do.

What does a concert pianist with arthritis do?

I enjoyed working for a Fortune 100 company, but after 6 years I’d had enough.

I enjoyed starting my business from scratch, but after a few years I couldn’t wait to sell out.

I’m sure that I’d love fishing, consulting, public speaking, venture capitalizing, whatever …

…. but, after a few years, I’d want to do something else instead.

Unfortunately, my Life’s Purpose is all about traveling physically, mentally, spiritually. It’s ‘unfortunate’ because the life that I have chosen for myself takes a lot of time and money

But, reaching my Number has made living it possible

Happiness = $75,000 a year!

It’s not too late to enter my free contest: in just 3 more days, I am giving away $700 cash to one lucky reader (drawn at random) as part of my $700 in 7 Days No Strings Attached promotion. It’s free to enter simply by clicking here.

Remember, the more entries you earn the more chance you have to win! You can check out the current leaders here!

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Finally, there is a study that equates money to happiness!

The Wall Street Journal reports a study by “the Princeton economist Angus Deaton and famed psychologist Daniel Kahneman”, which states:

As people earn more money, their day-to-day happiness rises. Until you hit $75,000. After that, it is just more stuff, with no gain in happiness.

Let’s assume you want to retire in 20 years on the equivalent of $75k p.a. – after adjusting for inflation (roughly double your required income every 20 years) and applying the Rule of 20 (equates to a 5% p.a. drawdown on your money), this means:

Your Optimal Happiness Number = $3,000,000

None of my readers are chasing less – otherwise, why would you be reading a blog called How To Make $7 Million In 7 Years (?) – but, the point of the study has been taken by the press and the pf blogging community to mean that it’s pointless to chase more than $3 million … seemingly making my uniquely positioned blog redundant by half

Well, it’s quite interesting because there’s a second part to the study that the media and most other bloggers are conveniently ignoring:

That doesn’t mean wealthy and ultrawealthy are equally happy. More money does boost people’s life assessment, all the way up the income ladder. People who earned $160,000 a year, for instance, reported more overall satisfaction than people earning $120,000, and so on.

“Giving people more income beyond 75K is not going to do much for their daily mood … but it is going to make them feel they have a better life,” Mr. Deaton told the Associated Press.

I don’t know about you, but I like to be happy ($75k p.a. happy) and have a better life ($250k p.a. better life)!

How about you?

Enough is enough!

Early Retirement Extreme wants to slay the ‘enough’ dragon; while, for many, ‘enough’ refers to their income and/or spending, in ERE’s case it refers to his investment net worth:

In terms of the invested assets dragon, I have several. I want to have a $500k net-worth. Once I hit that, I want $750k; then I want $1M. It’s been like that all along. It might just be my biggest source of stress— not being able to rapidly save money, which, rationally, I’m not going to spend anyway. It’s pretty stupid, I know.

And, before you think that “when I’m rich, then I’ll have enough” remember that when people who you and I think are rich (i.e. with net assets in the $5 million to $25 million range) are asked how much they will need before they consider themselves rich, they tend to say: “about double”.

That is, they tend to think that they need about twice their current net worth in order to feel comfortably rich!?

The solution is to prepare your definition of ‘rich’ … in advance!

… and, that should be to have enough money to live your Life’s Purpose. We call that number your Number.

When you get there, STOP because that is – for you – truly ENOUGH.

On the other hand, my ‘dragon’ isn’t income, investment assets, spending, etc., it’s my entrepreneurial gene … I see opportunity in everything and want to invest in it.

Right now, I’m working on my real-estate development projects, partnering with a young entrepreneur in his first bricks-and-mortar venture, and have any number of browser windows open with new technologies that I want to pursue.

Enough!

While it’s all fun, and mentally challenging, and fits totally within my Life’s Purpose, it all still takes money … so, in some ways, it’s no different to any of the other forms of ‘enough dragons’ out there.

So, how do I deal with my ‘enough dragon’?

Well, I built enough ‘fat’ into my Number to allow both the free time and the free cashflow to play with these new ventures: about 10 @ $50k a pop. Unfortunately, just one of my non-property business ventures is already in $100k territory, so I need to tweak by reducing the number of other ventures that I back.

And, as I’ve already said, this is easier said than done

Comfort kills!

Yes, that is genius …

But, what does T Harv Eker mean by ‘comfort zone’? Here’s what he says in his book:

Comfort kills! If your goal in life is to be comfortable, I guarantee two things. First, you will never be rich. Second, you will never be happy. Happiness doesn’t come from living a lukewarm life, always wondering what could have been. Happiness comes as a result of being in our natural state of growth and living up to our fullest potential.

How ‘comfortable’ you want to live is up to you … but, I can help you convert that into a number: the amount of money that you need in the bank so that you can live your desired level of comfort (or, discomfort).

Then, I can help you get there!

You DO need $12 million to retire …

Money Ning says that you don’t need $12 million to retire.

Except on Planet AJC, ‘Ning!

Money Ning says:

Can you imagine spending $11,250 per month every 30 days until you are 70? It would actually be fun for a while, but by the 24th month, I bet you’ll be tired of buying anything. And if you just leave some money left every month? Well, down goes the savings necessary.

These humongous retirement numbers may catch our attention, but they rarely speak the truth about reality. Plus, chasing a number is a never ending game, because there’s always a higher number to go after.

When I was still $30k in debt, and going nowhere fast, I calculated that I needed $5 million to ‘retire rich’:

- That was in 1998 dollars … in 2010 dollars, we’re up at around $7.5 million

- I under-estimated what I needed; and, so will you!

Right now, I ‘burn’ around $250k per year (land taxes, school fees, vacations; house upkeep; etc.) and don’t consider my spending anywhere near ‘Snoop Dog Lavish’, but it’s WAY over Money Ning’s “$11,250 per month” … and, I can’t EVER imagine spending that little per month. Really.

To that annual spend, I add my two houses (to be fair, I’m trying to get rid of the US one), and my two cars (and some associated expenses) … there’s $12 million, and I don’t live in New York!

Of course, that’s not what everybody needs … maybe not even what ANYBODY needs … but, it is (give – not take – a few million) what I decided that I needed.

But, when calculating YOUR ‘number’, don’t go for the money, do as Money Ning suggests:

Chasing a number is a never ending game, because there’s always a higher number to go after. If you want to feel rich, the more appropriate approach is to just make sure money is out of your way, out of your life decisions, and out of the list of things that you worry about.

That’s what I did … it’s hardly my fault if the answer pointed to $5 Million, nor is it my fault that I ended up cashing out for a whole lot more. And, it won’t even be my fault, if you do, too. 

Is greed good?

That is the question posted by Gordon Gekko (Michael Douglas) in the newly released Wall Street movie sequel which, by the way, is abysmal.

One of the pivotal moments in the movie (IMHO) is when the least-sharky of the Wall Street sharks (played incredibly badly by insipid Shia LaBeouf) asks the über-shark (played much better Josh Brolin) what his ‘walk away Number’ is.

Über-Shark answers: “More!”

If you don’t see the problem with this, then you haven’t been reading this blog.

But, my main issue with the movie, aside from the bad acting/characterization/plot-lines is the central premise:

Gordon Gekko has come out of 8 years in jail, with $100 million salted away in some Swiss Bank Account, but held in trust for his since-estranged daughter. Totally believable, so far … except that there are so many tax avoidance issues that no father would put their daughter in that much danger.

But, that’s not my issue with the plot.

The daughter indicates that she knew that there may be SOME money SOMEWHERE for her, but she didn’t care and was planning to give it all away (a plan that she eventually has a chance to execute, but we’ll come to that). Now, nobody in their right minds would give all their money away to charity: a little, some, most … maybe … but, not all!

But, that’s not my issue with the plot.

It’s in the execution of the ‘give away plan’: her fiance, and soon to be father of her child, talks her into ‘donating’ all $100 million to some new company experimenting with a new form of clean energy (lots of fancy diagrams, light beams, serious-but-kindly-and-honest-looking-scientists, high-tech-futuristic-energy-orbs, and so on).

Now, what form of young-and-brilliant-but-disillusioned (don’t forget the “brilliant” part) Wall Street type would put $100 million of his own money (well, he’s about to marry the chick, isn’t he?!), which represents about $99 million more than his entire current net worth (and, that’s only because he just received a $1.5 million bonus check), in a collapsing market into ONE INVESTMENT?

None of my readers, I hope!

And, even if he was stupid enough to bet the entire $100 million, would he bet it on a speculative company that had NEVER made a single cent in profit?

That, my friends, is financial suicide. Don’t do it, because greed is NEVER good

Beat 80% of professional fund managers!

I’m disappointed! I thought that 7million7years.com and it’s membership-site ‘cousin’ 7m7y.com were important enough to be hacked … but, they weren’t

Turns out that MANY GoDaddy-hosted WordPress sites have been similarly ‘hacked’ – with users seeing a [false] SECURITY WARNING ALERT!!! message. GoDaddy appears to be working on have fixed the issue, in the meantime, please read on for today’s un-hacked post ….

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Shawn at Watson Inc. outlines a sensible ‘system’ – one that I have spoken about before – that beats “80%-90%” of professional fund managers [my highlights]:

Some may ask what I mean by systematic investing. Peter Lynch (Fidelity), Warren Buffett (Berkshire), and even Dave Ramsey recommend a conservative and simple approach for the typical investor: rather than trying to outsmart the markets, use benchmarks to track the markets instead. For example, the Vanguard Index 500 fund has outperformed two-thirds of all mutual funds on a rather consistent basis (Cash Flow Quadrant, 1999). Usually over 10 years, these types of index funds yield a return exceeding 80-90% of returns of the “professional” mutual fund money managers (Motley Fool, 2007). Interestingly, the average millionaire is this type of investor (The Millionaire Next Door, 1996). Although there is no 100% guarantee, this method does dramatically decrease the risk over time and provides respectable returns. Provided that one starts early enough (i.e. before mid-forties), consistent investing over time can be the key to achieving a great deal of wealth.

Now, who wouldn’t kill for a system like that?

Well, me for one … and, I’m guessing, most of you!

You see, we (7m7y readers) have a very special filter that QUALIFIES us; it’s the title of this blog: “How to make $7 million in 7 years”.

Now, there’s no reason why you CAN’T read this blog if your target is, say, $1 million in 20 years … I can’t physically stop you … but, it’s ill-advised, because most of what I say would just be ‘noise’ to you …

… just confusing ‘chatter’ that sometimes runs totally counter to what you read elsewhere.

What I say here is ‘noise’ if you really do have very modest financial goals, or no real financial goals beyond saving and trying to become debt free.

So, in my “$7 million 7 year” context, I say “so what if I can beat 80%-90% of fund managers?” because the amount that I can make simply won’t be enough to help me reach my Number … certainly not if it’s one of my main financial strategies.

Instead of worrying about the pro’s and how the vast majority are simply butchering the mutual funds that they are supposed to be wisely managing, realize that investing in the ‘market’ (e.g. by investing in a low-cost index fund as sensibly suggested by Shawn) actually LIMITS your returns to that achieved by the market: 8% over 30 years in any market, 12% in ‘average’ times, and 0% (or worse) in recent times.

Try this:

a) Plug your starting Investment Net Worth (i.e. what you could scrape together to invest) into a compound growth rate calculator

b) Also, plug in how much you think you will be able to add each year

c) Include the number of investing years that you would like to have before you finally ‘stop work’ to live off the fruits of your investments

d) Plug in any number from 1% to 12% that YOU think an Index Fund will reasonably return over the number of years that you allowed, above

e) Halve the answer that the calculator gives you to (very roughly) allow for 4% inflation, for every 20 years (or prorate, if less than 20) that you chose, above.

f) Divide your final answer by 20: on a VERY GOOD DAY, that’s roughly (in today’s dollars) what you will have to live off, each year.

If that’s good enough for you, congratulations on two counts:

1. Thanks to Shawn, you’ve just found your Ideal Investment Strategy … and, it’s easy / low risk, to boot! And,

2. You’ve also saved 2 minutes a day, because this blog – for you – is just noise …. [crackle ... and, out!]

But (!), if the answer is NOT good enough for you [AJC: it sure wasn't good enough for me! But, it just might be good enough for you - be TOTALLY honest, this could be the financial 'tipping point' for you] … commiserations: your life just became a whole lot harder!

If so, keep reading … I’ll do what I can to soften the blow