Hypothetical Mike … and, Beyond!

The story so far:

Hypothetical Mike (the hero of our story) has super income-earning powers (ranging between $250k and $350k p.a.) … his powers also extend to corporate high flying, not to mention having a super-strong handshake 😛

His mission: to amass $10 million within 14 years.

But, like every superhero, he has a weakness: he keeps too much of his current $1.7 million networth in cash … $1.3 million of it to be precise.

Cash is kryptonite to financial superheroes like Hypothetical Mike!

Does HypeMike – as he is known in superhero and rapper circles – need to fly higher and higher in order to fulfil his mission? Or, can he simply destroy that stash of kryptonite and let the natural laws of investing wisely take over?

In an unusual twist, we let the readers decide the outcome of this story …

For example, here is what Steve said:

What are Hypothetical Mike’s Talents and hobbies? Based on what he likes to do in his spare time. I might recommend starting a business, that could bring in an income and later be sold for a nice return. This could help him reach that goal quite well. It would be less like running a business cause it would be something he enjoys anyway.

If HypeMike were a mere mortal, I would agree with Steve: you and I should ramp up our Making Money 201 activities in an attempt to accelerate our income … 

… but, HypeMike already has his MM201 ‘money tree’ (i.e. his relatively high-paying job); coupled with his $1.7 million starting bank and his 14 year timeframe, he need leap no tall buildings to reach his Number.

A relatively mere 13.5% compound growth rate will do the job … PROVIDED that HypeMike doesn’t lose his main ‘super power’ i.e. his ability to keep earning superhero-like salaries.

Hypothetical Mike shouldn’t do ANYTHING to jeopardize his job, hence his income stream (e.g. moonlighting might be against company rules, or might distract him, tire him out, etc., etc.).

On the other hand, a number of readers commented that HypeMike’s money – merely sitting in cash – is his real problem. For example, Brad said:

If you are successful at running this business (you said you turned it profitable) then you should be in a position to negotiate larger and larger bonuses or equity ownership. Seems like THAT is what you are talented in. Don’t feel like you need to start investing in real estate or small biz because that is how OTHER people might have gotten rich.

I do agree that you should keep some cash positions if that makes you feel secure, but also to keep the bulk of your invest-able assets in at least an S&P500 index fund.

In my [AJC: emminently unqualified] opinion, Brad is 100% correct.

Hypothetical Mike should take a close look at Brad’s advice and follow it!

[Disclaimer: Brad is likely just as unqualified as I am to offer personal financial advice … always seek professional advice!].

Risk is in the eye of the beholder …

Our Philip Brewer Confest is almost over, and it’s time to thank him for his articles and inspiration for a series of posts exploring the concepts of safe withdrawal rates [AJC: which has more to do with financial planning than family planning 😉 ], however I did want to wind up by exploring one of his comments:

I think your step 1 is the most important: Decide what you want to do with your life.

I wanted to write fiction. That doesn’t take much money, but it does require time (and high-quality time at that). So, for me, getting free of a regular job as soon as possible was a much higher priority than accumulating a vast amount of wealth.

For me, too, the turning point for my financial life – indeed my whole life – came in Step 1: finding my Life’s Purpose then using that to calculate my Number. For me, though, it happened to turn up a Large Number / Soon Date … that may not be the case for everybody.

Just remember that Time = Money and if you are desperate to achieve that financial freedom (e.g. in Phil’s case, so that he can write that book) you may need a lot of both …

… IF so, then I have a hypothesis [AJC: tested on a subject of one i.e. me] that goes like this:

When you find your Life’s Purpose, you will most likely find that you will come up with a Large Number / Soon Date [AJC: remember, this is just my hypothesis albeit, now, supported by a little research] and you will not stop until you get it

… your priorities (including your financial priorities) will drastically change.

 But, what about Philip’s thoughts about risk?

I would like to suggest, though, that your ideas on which assets are secure and which aren’t could use some fine tuning.

It’s true that you may not be able to work during your retirement, but most people will be able to earn at least some money if they need to. It’s also true that government pensions can be taken away—but so can anything else.

And don’t forget all the other ways that things can be lost or taken away—declining market can sap your portfolio, a lawsuit can seize your assets, a natural disaster can destroy your house.

My point is not that it’s hopeless, but rather that while racking up assets may increase your standard of living, at a certain point it no longer increases your security. (A flood can destroy a house worth $1 million as completely as it can destroy a house worth $100,000.).

At some point—and to my mind the point is well before you have $7 million—you don’t get as much security from adding another million to your portfolio.

I beg to differ: until I made my $7 million Number, my thoughts were EXACTLY about ” adding another million to my portfolio” … but, that’s only because I calculated that I needed it – not want, not desire, but need – to live my Life’s Purpose.

But, that may not be you; like Phil, you might just need a little extra time to write your book or to support huminitarian projects like backpacking to hotspots like Haiti, so your Number may be $100k, $1 mill., or … ?

And, unlike me, your assessment of your Number may include allowances for earning extra income through part time work, income producing projects, pensions, inheritences, or even handouts.

In that case, I challenge you to substiute your Number where, in my blog, I use the $7m7y illustration … the principles won’t change much.

[AJC: unless, you have a “<$1 million in >20 years”-type Number, in which case this blog is NOT for you 🙂 ]

So, substituting your Number for mine, here is the second part of my hypothesis:

– While you are trying to reach [insert your Number] so that you can achieve your Life’s Purpose, ‘hold back’ concepts such as risk take a backfoot to ‘push forward’ concepts such as REWARD, suddenly opening your eyes to the ‘benefits’ of burning the candle at both ends, starting a business or three, trying to become a stock market and/or real-estate mogul, etc.


– Once you reach [insert your Number], somehow your brain resets such that RISK (i.e. protecting your nest-egg) seems to become much more important than reward (i.e. growing the nest-egg) and all of a sudden CD’s, bond laddering, (dare I say it!?), index funds, 100%-paid-for-by-cash real-estate, etc. becomes much more attractive.

At least, that’s how it happened for me …

This doesn’t mean that risk isn’t important (after all, we spend a lot of time on this blog covering strategies to manage risk), it’s just that in some respects, it’s in the eye of the beholder 🙂

Three feet from gold …

This video summarizes a book hailed as the successor to Napoleon Hill’s classic: Think and Grow Rich. I’m not sure that you can just think your way to $7 million in 7 years … but, having a burning reason why you might need that much / that soon sure seemed to help me.

But, I can’t help feeling: did I think, therefore attract … or did I happen to think and happen to attract? I guess we’ll never know for sure, as we are all an Experiment of One 🙂

Is Mike aiming high enough?

Mike is a divisional CEO for JP Morgan (runs a whole country for them!), and he earns $250,000 in a bad year and $350,000 in a good year. He’s running fast and aiming high.

But, is Mike aiming high enough?

If you weren’t following the comments on this post, then you were missing out on more than 50% of the benefit of that post … I think that also holds true for most of my posts; our readers rock!

Anyhow, Mike said:

I’m 36 and have already got up to the savings level of someone who is 50 or 55… question is when do I want to take it easy and stop working for a while- or at least working make myself rich instead of JP Morgan, who owns the company I’m running!

Aspiring to the savings level of someone who is 50 or 55 is no great shakes; it’s where Mike goes from here that will dictate his future, so I asked Mike a few questions:

Disclaimer: We know next to NOTHING about Mike’s true situation, so nothing here constitutes financial advice* … it’s best if you – and, Mike – treat this as a hypothetical, merely illustrating how to apply 7m7y ‘rules’ to somebody on an income rather than working their own business/investments. On with the questions …

1. What’s your Number?

2. What’s your Date?

3. Why?

4. What’s your Current Net Worth?

It may be that Mike’s presumably super-high salary (after all, he is running JP Morgan in his neck of the woods!) combined with an aggressive savings / investment strategy will do the trick …

Mike’s response:

Salary isn’t super high – only $260K USD a year (base salary & guaranteed bonus) – max variable bonus on top of this is another $100K so it’s comfortable but not huge.

My number is abour 10 million – would like to hit it in the next 14 years or sooner.

Current net worth is 1.7M USD with $1.3 M in very liquid assets (cash…) Residence is fully owned and monthly burn rate is pretty low.

Given that Mike’s Prime Financial Objective should be to reach his Number by his Date, his financial strategy should be the one that he is most comfortable with that seems most likely to achieve that target …

… IMHO, he (or anybody) should only choose a more ‘active’ (read: risky) strategy if it’s a by-product of the strategy that he truly resonates with …. for example, I would start a business even if plonking my money in CD’s would have been enough – that’s just me [AJC: but, it wouldn’t have been all of my money – or even a lot – going into starting that business].

What does this mean for Mike … I mean, Hypothetical Mike? 😉

Well, let’s go through the steps:

STEP 1 – What is Your Number / Date?

Mike’s Number is $10 Million and his date is circa 2023.

STEP 2 – What is your Required Annual compound Growth Rate?

Starting with his $1.7 million Net Worth [AJC: reading between the lines, Mike’s paid off house may not even ‘break’ the 20% Rule – and if it does, not by much, so I don’t see a problem here] our faithful online calculator shows me that Mike ‘only’ needs a 13.5% Required Annual Compound Growth Rate on his Net Worth.

[Tip: If you haven’t used this calculator before, it’s simple: Mike’s ‘ending value’ is his $10 million Number; his ‘starting value’ is his current $1.7 million Net Worth – although, I would be tempted to subtract cars/furniture and any other personal ‘stuff’ that can’t be easily turned into cash and/or loses value … house is probably OK to include here – and, ‘the number of periods’ is just his 14 year Date

STEP 3 – Select your Growth Engine

This is where it gets fun … Mike simply needs to take a look at Michael Masterson’s table of ‘money making strategies’ – handily reproduced for you in this post – to see that any number of strategies will be enough to propel him from $1.7 million to $10 million in 14 years: anything from stocks to real-estate to small business.

But, not CD’s … this calculator shows that Mike’s biggest risk is actually the low-risk ‘investment’ option that he has so far chosen: cash …

… if he keeps ‘investing’ in cash, Mike’s Number will be struggling to reach $3 million in 14 years, rather than the $10 million that he needs 🙁

Rather than being the ‘safe haven’ that it appears, keeping his assets overly-liquid is actually stopping Mike from reaching his financial objectives … worse still, it’s forcing Mike to think about chasing more income, when it’s the exact opposite strategy that Mike should be following!

That’s why, I recommend that Hypothetical Mike choose stocks and/or real-estate in whatever mixture of either / both that suits his temperment.

Now, we are talking Value Stocks when we suggest a 15% compound growth rate, and reasonably well-geared (i.e. no more than 25% – 30% starting equity) commercial real-estate – mixed with stocks – when we suggest a 30% compound growth rate.

But, here is the key …

… for Mike, and anybody else whose primary Making Money 201 ‘accelerate your income’ tool has been climbing the corporate totem pole to a position where (a) income is [relatively] high, (b) expenses are reasonably low, so (c) saving rates are high, their net worth will most likely grow even if they merely plonk their money in their 401k and/or Low Cost Index Funds…

You see, Mike will continue feeding his Net Worth with both Investment Returns AND additional salary contributions.

This means that Mike will most likely reach his Number simply sticking his money into low cost index funds:

Mike should follow the advice that Warren Buffett gives to all the Hypothetical Mikes of this world … in fact, it was virtually tailor made for his situation:

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.

Given that Mike’s current salary / job makes reaching his Number a virtual gimme – with such a variety of relatively low impact [AJC: certainly in the context of amassing a $10 million fortune!] Index Fund, Value Stock, and/or Real-Estate investment strategies available to him, what would you advise him when he says:

Right now my best option is to continue to get a successful track record (already turned around the business and changed it from major losses to modest profits) and maybe I can find a better gig.

What advice would you give to Mike?

I know what I would say 😉

* [Insert: ‘Not qualified financial advisor; not financial advice; seek qualified advice before investing; take two Tylenol and call me in the morning; yadayadayada’ disclaimer message of choice]

What is your Number?

Well, it certainly took me a long time to ask the question (see Reader Poll: What Is Your Number?) and, it took me almost as long to answer it.


I’d like to say it was because I was forensically and actuarialy analyzing the results … I’d like to say it was, but that wouldn’t be the truth, which is much more mundane: it was mainly because I forgot all about it after our ridiculously long Australian summer holiday season (Aussie summer = USA winter) 🙂

So without further ado, here are the results:

Now, the first thing that you may notice is that the answers aren’t in any sort of obvious order; traineeinvestor was the first to notice:

The order … is not sequential. I fully expect to be awake all night trying to figure out whether this is really a cover from some experiment in behavioral finance.

Actually, the reason is equally mundane: I was trying to copy the following poll from GenerationX Finance, but when you compare them, you’ll find out that I even got that wrong (!?!):

I presume that GenX ‘randomized’ the ranges to make his readers think through all the options before merely selecting the first one that looked OK; at least, that’s what I would have done had I not tried to copy him 😉

But, to help us analyze the results, I have graphed them side -by-side and in logical order:

OK, that tells me that we are on the right track:

– either I am attracting the ‘right’ audience for this blog (which is nice), or

– my readers have altered their perceptions of “how much is enough” based upon some of my preachings (which would be really nice).

Given that GenX’ers are born in the 60’s and 70’s (I was born in the – late! – 50’s … scary, huh?), I can understand why some may be aiming for only $1 mill. to $3 mill., but to my mind, it’s still too low; and for Gen Y and so on, inflation will decimate your living standard by the time you reach ‘standard’ retirement age, so you have no choice but to aim higher.

But given that so many of our readers have lofty targets – and, I just may be responsible at least in small part for at least a few – let me ask you, what would you like to see from this blog in 2010 that you haven’t seen (enough of) yet?

Is money my motivation?

Ryan, as a new reader to this blog, also asks:

Now that you’ve “made it” financially, has it changed your motivation?  Was money your original motivation or was it simply your desire to create things and watch them grow?

I say, “as a new reader” because any of my regular readers – or, those who have simply followed my $7 million journey – will already have drummed into them:

Your Life isn’t about your Money … your money is merely there to support Your Life!

This is a 180 degree turnabout for how we usually live our lives … generally, solely in pursuit of money: whether just to get by, or to pursue riches.

That is, until we reach some mythical point when we can stop work and RETIRE.

Then what? For many of us, nothing!

Which is why my motivation to become rich was driven by finding my Life’s Purpose [AJC: which is to be constantly traveling physically, mentally, spiritually].

Making the money has been the key to start making this happen, and without money it would be far more difficult to live the kind of ‘traveler’s life’ that I want [AJC: after all you need (a) lots of free time to travel … and, free time means spending money rather than earning it, and (b) travel costs – a LOT of – money].

In other words, making the money was never my motivation – it was merely the means to the end – and, I actually considered my life to be a bit ‘on hold’ until I made the required amount of money … of course, making that sort of money is far from boring (if not necessarily fulfilling in its own right), and I hope that your journey to 7m7y will be every bit as exhilarating as mine 😉

Poll: What Is Your Number?

What Is Your Number

View Results

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I’m not sure why I have never asked this question directly before, but I would dearly love ALL of my readers to take the 20 seconds that it would take to let us all know what Number you are aiming for (i.e. how much you need in order to stop work and finally live your life)?

Of course, no such poll would mean anything without also knowing when you want to finally stop work … so, please take another 12 seconds to make your selection below:

What Is Your Date

View Results

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… and, as always, the more comments that we get below, the more we’ll have to talk about when the results are published 🙂

Find your true Life’s Purpose?

John Tesh says that it’s important to find your true calling – a.k.a. your true Life’s Purpose – and I agree:

It provides a direction for you to aim for … and, it makes it much easier to decide if a seemingly arbitrary decision (e.g. which of two jobs should I take?) takes you CLOSER to your Life’s Purpose or FURTHER away from it.

If you do decide to find your Life’s Purpose, here’s a free web-site that helps you through the process [AJC: created by yours truly 😉 ]:


But, I must warn you, my only reference point that this works is my own experience i.e. it worked for me!

It worked so well, though, that I really hope that it works for you, too 🙂

How did you answer?

Picture 2

Last week, I asked the question: “does more money give you more security or more confidence?”

The results, from a reasonably representative sample of readers, was overwhemingly in favor of the statement: “more money gives me more security”.

Interestingly, this apparently says something about you …

… you see, most entrepreneurs would say that more money gives them more confidence!

But, why?!

I’m not a psychologist, so I can’t tell you, but I do think it helps to explain why entrepreneurs tend to become ‘serial entrepreneurs’ …. one success emboldens them to go for another.

We all know (by now) that once you reach your Number, you should STOP. Yet, we don’t always do that, do we?

[AJC: if you’ve been reading my recent articles on property development, you’ll know exactly what I mean 😉 ]

Is this an opportunity worth pursuing?

My co-author [of my new book … still in the final stages of development], Debbie, has just written this article for Entrepreneur.com …

… speaking of entrepreneurs, here is a question that you need to ask yourself NOW before it’s too late:

Is this an opportunity worth pursuing?

After all, time is precious … even more precious than money!

Let’s backtrack a little; let’s assume that you have:

1. Chosen Your Number and Your Date, and

2. Calculated your Required Annual Compound Growth Rate, and

3. Selected your Growth Engine.

So, you have – hopefully – selected your Growth Engine (it could be stocks, it could be a business, it could be real-estate investing, etc.) in the hopes – and need – that it will carry you to Your Number by Your Date.

But, what do you think it will mean if you are wrong?!

Let’s say that you are five years down the track and find that you chose the wrong Growth Engine: it can’t produce enough steam …

… now, if you rerun your calculations, you will probably find that your Required Annual Compound Growth Rate has shot into the stratosphere!

In reality, you have probably blown your chances of every reaching your Number … and, certainly delayed getting there by at least 4 or 5 years.

This ALMOST happened to me.

Except, that I was lucky enough to be challenged by Michael Gerber (in his seminal work: The E-Myth Revisited) to ask myself UP-FRONT: is this an opportunity worth pursuing?

So, I created a business model for my small, but slowly growing business … and found:

I had 5 corporate clients at that time … not bad, I thought for 5 years hard work. BUT, my models showed that I would NEED EVERY SINGLE ONE of Australia’s Top 1,000 Corporations as clients WITHIN 5 YEARS in order for my business to generate the $1.5 million after tax annual net profit that I calculated would be required in order to sell my business in just 5 short years for the $5 million that was my then Number.

What was my likely outcome if I hadn’t performed this relatively simple calculation?

Well, if it took me 5 years to get 5 clients, then the next 5 years should lead to … what? … 5 to 20 more such clients? And, I needed 1,000 … in fact, ALL of them!?

Obviously, unachievable on so many levels that my Number was doomed, if I didn’t do one simple thing:

Change my business plan!

In fact, that’s exactly what I did … unfortunately, twice (because the laws in Australia changed, making my first revision unworkable; thankfully, that problem arose … and, was solved .. within 2 years) … which is why it took me 7 years to $7million rather than the 5 years to $5million as I had originally planned … but, it could have been A LOT worse.

Here’s what to do:

Run the numbers now … see if your Growth Engine can get you to Your Number by Your Date … do it on paper now, rather than finding out in ‘real life’ when it’s already too late. If it can get you to Your Number by Your Date … go for it, what are you waiting for?

But, if it can’t …

… change Growth Engines, revise plans, do ANYTHING, until you find a way that can 🙂