How to easily quadruple your results!

Too much talk about Numbers, Dates and Compound Growth Rates can make your head spin!

But, Scott makes an interesting observation:

What I learned from this post and using the Annual Effective Rate calculator: http://www.investopedia.com/calculator/AnnualEffectiveRate.aspx

is that if I keep up my focus, work and investing for another 5 years past my 10 year date, I can drop my required compound growth rate by 3%(from 40% down to 37%), however, quadruple my number accomplished from 4 million to 16 million, and i’ll still be in my 40’s.

Incredible what taking a little more time can do for you!

What Scott says is absolutely true, but also consider:

How much does delaying your Date by 1, 3 or 5 years (say) REDUCE your compound growth rate if you KEEP your Number?

Also, what does reducing your compound growth rate do for you in terms of changing the way that you need to think about building up your nest egg?

Does it mean that you no longer need to start a business, or invest in real-estate? Will keeping your money in Index Funds via your 401k do the trick?

So, rethink your Number and Date – but NOT at the expense of your Life’s Purpose …

… then, when you do get to your Date, DO allow the momentum of the activities that got you there to carry you on just a little bit further … you could double your Number, just like that!

Don’t believe me? It’s exactly what I did in the two years following my own 7 million 7 year journey

Special Announcement!

I have been working on a project … call it a labor of love (when you find out what it is, you’ll decide that if this is my idea of ‘love’, I need psychiatric treatment) … and, I want you to participate!

Let me take you back to where this project had it’s genesis:

In 1998, I was struggling financially and directionally … I had my two break-even businesses, a lovely wife and two babies, but no money and no major prospects: it would take a miracle to get the businesses above break-even.

Then I came across the concept of the Number.

A simple idea: your Number is the amount of money that you need to have set aside (by whatever Date you happen to decide upon) so that you can be financially free to [insert goal of choice: retire; play golf professionally; write a book; volunteer abroad; move into the old-people's home or Florida, which pretty much amounts to the same thing; etc.].

At the same time, I found my Life’s Purpose: to be constantly traveling mentally, physically, and spiritually …

… which means nothing to you, but meant everything to me (which is all that counts, right?).

Understanding my ‘life after work’ dream (in my case, it meant discovering my Life’s Purpose) told me that I needed $5 Million within 5 years. A major wake-up call considering that, at the time, I was $30,000 in debt!

If you’ve read my $7 Million Dollar Journey you will know that, because I found my Number, I made it.

I decided that I had to give back, by helping others to understand, find, and achieve their Numbers, as well …

… so, to help you figure out your own Number (and, Life’s Purpose … if you so desire) I have created a new web-site.

I have also created a unique home for you on the Internet, a place where you can Share Your Number with like-minded people … hopefully, you will connect with others who can help you on your way, and you may even be instrumental in helping them!

Take a look at these sites, then join up and Share Your Number … it’s easy, fun, and could be very, very rewarding for those who actively participate.

As readers of this blog, and ‘charter members’, your membership will always be free. And, tell your friends, they can be charter members, too

The only ‘catch’ is that I have not officially launched this site, yet, so you will be the ‘beta testers’ … try it out and let me know what you think using the form, below (just type then ‘submit’):

Numbers, Numbers, and more Numbers!

I’m leaving this post running until Sunday to allow time for more comments … to read the really detailed comments that have been left already (they are like ‘mini-posts), just scroll down to the bottom (once you click on the title/link so that you can see them) … and, please feel free to throw your two-cents in as well!

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If you have been following this blog for some time – and, if you have also been following the exploits of our 7 Millionaires … In Training! – you will see that I have an obsession with ‘helping’ you to understand your Number.

This is because simply understanding my Life’s Purpose, then quantifying that ‘purpose’ into a Number, had such a big impact on my life …

… I truly believe that I would not be sitting here, writing this very post today, had it not been for that simple act.

It’s a process that should only take a couple of hours – more, if you get the urge to dive deep into what your first cut throws at you.

What’s wrong with having no Number?

Nothing, if you like to fly blind; it’s like embarking on a journey with no destination: any road will get you there … which is OK for some, but not me.

My ‘no destination’ journey took me to a lot of work, two so-so businesses (together, they just managed to break even … and this is after YEARS of operation), and $30k in debt.

Yet, as soon as I realized my destination and found out how much it could ‘cost’ me to get there, it was like suddently letting off the parking brake: things almost magically started to fly.

Don’t get me wrong, there was even more hard work and major risks and decisions to undertake (not many people move country to pursue their dreams AND keep their businesses in the ‘old country’ going).

So, if having no Number is ‘bad’ what’s wrong with picking a number out of thin air?

Again, nothing, but have a look at what our 7MITs came up with after a couple of revisions … and, compare that to their starting Number – their first ‘guess’:

Let’s ask them: what changed and why? Why did your Number go up/down or (in only a couple of cases) stay the same? And, why is this exercise better than just picking a Number and going with it?

And, let me ask you … if you have a Number in mind, how did you come up with it? And, why?

Finding your lifestyle break-even point …

7 Millionaires … In Training! has been featured in iReport; you can check it out by visiting: http://www.ireport.com/docs/DOC-145792 and, this article has been mentioned in this weeks Carnival of Personal Finance!

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I wrote a post a while ago that explained why most doctors aren’t rich … the point wasn’t to appeal to all the medico’s in our audience; it was to demonstrate that income does not equal wealth.

Jeff, a navy pilot who I would happily trade a month or so of my life with (Maserati for Hornet for a month? Fair trade, if you ask me) commented:

Your analysis failed to consider Scott’s ability to incrementally contribute money from his income over the 10 year period. I just thought it was odd that you left it out, since the mantra of this blog (at least in the beginning–money 101 and early 201 stages) is to save as much of your income and invest it. Why wouldn’t Scott be able to follow this advice? …and more importantly, how would incremental contributions affect Scott’s ability to reach his goals?

Also, I bet the doctor making $700k per year in your example isn’t having a hard time investing $150k/year after tax. Why couldn’t a professional making $350k+/per invest $150k/year after tax (assuming they were following your money 101 steps)?

As I mentioned to Jeff at the time, my point wasn’t really meant to be mathematical … it was based upon my (and, Scott’s – who is the doctor mentioned in the original post) ‘real life’ experiences/observations …

… let me explain using four hypothetical doctors as examples:

‘Good Doctor‘ saves a good proportion of his ridiculously high income (what would you guess: 20%? 30%? More? Less?); lives within his means; etc. but will still most likely ‘only’ get to the $2M – $4M range +/- a few mill. if he is reasonably passively investing. That’s just experience talking …

‘Bad Doctor‘ spends more than he earns … there’s no limit to what some people can spend …  just refer to the Millionaire Next Door example from my previous post, if you don’t believe it’s possible to earn $700k a year and still be ‘broke’!

‘Typical Doctor‘ doesn’t wake up to the difference b/w good/bad doctor until he reads a few books and blogs … typically too late to really become ‘good doctor’ … he can’t save, say, $150k immediately – if ever – because he has ‘commitments’, but he sees the light and builds up to his own saving maximum over time … it’s this ‘lost time’ that is his undoing, so he ends up somewhere less than ‘good doctor’, say, $1M – $3M.

‘Business Man Doctor‘ sees the light and realizes that income/savings alone won’t get him to where he wants to go. He reads my post, and the rest is history

Now, here is the issue:

In all of our four examples, the doctor is doing well – just like the two doctors in Dr. Stanley and Danko’s book – earning $700k p.a. … the problem is, if they are spending all of it to live on now (one of those two doctors was certainly doing that!) how are they going to keep it up in ‘retirement’?

Let’s check the math: $700k salary x 2 [for 20 years inflation @ 4%] x 20 [for min. size of passive nest egg] to ‘replace’ $700k spending power …

… that’s just shy of $30 Mill. in 20 years by my math!

So, there lies the real problem for any doctor / professional; how do they replace their income in retirement?

The mechanism is obvious – they need to channel part of their income into passive investments, and allow time for those investments to grow large enough to replace 70% – 125% of their final income depending on how much their spending will go up (most likely) or down (golf / travel, anyone?) in retirement.

There are only two ways that I know to achieve this:

1. Find their Replacement Income’s Break-Even Point: That is, as their salary increases over the years, how much do they allow their spending to go up in order to control their final spendable salary so that their nest egg neatly replaces it?

Let’s see:

Perhaps if they live off just half their salary ($350k) they may be able to get to somewhere in the near vicinity of $15M assuming that they allow themselves 20 years to get there (i.e. if $30 Mill. in 20 years was required, in our earlier example, to ‘replace’ the future value of $700k today, then $15M might do the same for $350K?)

How do we get that $15 Mill.? Well let’s see what happens if we save the other half of their salary:

$350k – 35% tax X 8% (say, after tax return of their ‘passive investments’). By my reckoning, if they increase these $350k (less tax) contributions by 4% to keep up with inflation each year, they may just get to $15M in 20 years. Success!

Naturally, this works for anybody on any salary … except the lower your required salary, the more that the ‘tools of the poor’ (401k; employer match; etc.) kick in to replace your final salary at perhaps less than a 50% of total income savings rate.

2. Find their Lifestyle’s Break-Even Point: The problem with the above example, of course, is that our ‘good doctor’ has to suffer with living off only half the income that he earns … now that he’s ‘retired’ he’s having to make do with playing at the local Public Golf Course while his professional friends are at the Country Club … poor sod.

To a greater or lesser extent this is the choice that conventional Personal Finance wisdom asks you to make: live large now and live poor later, or sacrifice lifestyle today to go for a longer period of being able to live the same lesser lifestyle in retirement (while your less-financially-astute friends simply take their chances).

But, this totally misses the point: what if the 50% Lifestyle simply ain’t good enough … are you going to take ‘second best’ (albeit for as long as you live) lying down?

If your answer is YES; then go back and revisit 1. with your own numbers and there you have your financial plan!

If your answer is NO; then you have come to the right place …  but, saving/investing alone is probably not going to do the trick

Passion before money …

I’m about to find out if you can make money online: click here to read the latest installment in my new online money-making adventure!

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I talk a lot on this site (and, on http://7m7y.com) about money being there to serve your Life …

… yet, we slave our lives away to the pursuit of money. Go figure!

So, when working out your Number – that ‘magic number’ that tells you if/when/how you will retire – it is my contention that you first need to start by understanding your Life’s Purpose.

It’s nice to see that somebody on the finance community agrees with me: George Kinder, author of The Seven Stages of Money Maturity!

In fact, George is a financial planner who is one of the early pioneers / practitioners of a form of financial planning called ‘Life Planning’ … where your financial plan is designed to support the life you want, not necessarily the life that you have.

I have provided some exercises to help you understand your Life’s Purpose, hence your Number; similarly, George Kinder poses three questions that he considers important in achieving a similar result (you may have seen these on Oprah):

1. “Assume you’ve got all the money you need – enough for the rest of your life. Maybe you’re not as rich as Warren Buffet, but you never have to worry about money for any reason. The question is, what would you do with it? How would you live? Feel free to let your imagination roam. What would you do with it all? Think for a moment, then write down the answer … ”

2. “You go to the doctor. The doctor discovers you have a rare illness. He says you’re going to feel perfectly fine for the rest of your life. But, he says the illness will prove fatal. The sorry outcome will occur sometime within five and ten years. It will be sudden. The question is, now that you know that your life will be over in five years, how would you live it? What would you do?”

3. “This question will sound a bit like the previous question, but it’s different: It starts the same way. You go to the doctor. You’re feeling perfectly healthy. And again the doctor says you have a serious illness. But then the doctor says, ‘You only have 24 hours to live.’ So, what did you miss? Who did you not get to be? What did you not get to do?”

Of all these questions, obviously the last is the key … and it is the purpose of the Rear Deck Speech – designed to make you think past ‘things’ and to the more deep/meaningful aspects of your ideal life.

These questions, however, will help you if you’ve been struggling with the Finding Your Life’s Purpose exercises that I provided …

Your Number

Nowadays, somebody only need to write “The” and “Number” next to each other and we automatically know what it means: the amount that you need in your nest-egg so that you can finally throw off those corporate shackles and ‘retire’ …

… well, do anything other than ‘work’ for your daily crust.

The only problem is that nobody tells you how to find The Number!

I should know, I read books on the subject and they all focus on rubbish like: “multiply 75% of your pre-retirement’ salary by 13″.

Which has some obvious problems:

1. How do I know what my pre-retirement salary will be?

2. What if I spend more/less in retirement than when I was working?

3. How will I know my money will last?

The reality is that – for most people – there is (and should be) a total disconnect between how you make your fortune and how you spend it!

In other words, just because you earn $x before you retire, it doesn’t mean that you will spend 75% of $x to 125% of $x (as most financial authors assume) in retirement.

So, I came with my own method – and, it worked for me!

Here’s how:

1. Complete a simple spreadsheet of your major (non-investment) personal purchases, income, and living expenses now and over the next 1, 5, 10, and 20 years. Don’t forget to apply the Inflation Adjustment Factors!

2. To help I have listed the typical expenditures of a $100,000 a year lifestyle, a $250,000 a year lifestyle, and a $550,000 a year lifestyle. These should provide some reference points to calculate your own future living expenses.

3. Use the spreadsheet to calculate Your Number and Your Date.

That’s it!

… and, I’m betting that it won’t even resemble your expected final salary – in fact, I’m betting that the number is so damn big’n'scary that you won’t even get there just on any typical salary – even with your 401k maxed

It's the gradient of the curve …

Making millions is serious business …

… don’t worry, here’s a short-cut where you can jump straight in 

Now, back to today’s post ….

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That’s right, it’s not the size of the mountain … but, the gradient of the curve that will get you!

Given enough track, any train can climb any mountain. The track just can’t be steep … hence lots of track … hence lots of meandering around and around to get to the top (if that’s where a train really wants to go) … hence lots of time.

The train can get you there, it just can’t do it very quick!

Similarly with your Number … the size of the number doesn’t phase me, nor should it phase you …

You want a million dollars?

Easy, buy a $100 unit in a low-cost Index Fund and wait …

83 years.

Want a million in today’s buying power? Then, you’ll need to wait another 38 years.

Want $5 Million in today’s buying power? Just wait 21 years more!

You see, it’s not the size of the mountain that will kill you, but the gradient (steepness) of the sides that you need to climb.

That’s why we also need to know the Date that we want to achieve the Number:

Enter your starting Net Worth, your ending Number, and the number of years in between into a simple on-line calculator, and it should tell you the Average Compound Growth Rate required to go from the bottom (you current Net Worth) to the top (your Number).

The Average Compound Growth Rate is a measure of how ‘steep’ a financial mountain you need to climb … and, that should tell you whether you need a train, a fast car, or a helicopter to get you to the very top in time.

According to Michael Masterson in his book Seven Years To Seven Figures:

Required Compound              Investments

Growth Rate                             Required

4%                                                  CD’s

8%                                           Index Funds

15%                                              Stocks

30%                            Real-Estate together with Stocks

45%              Real-Estate together with Stocks and Small Businesses

50%+                           Start Your Own Business

So, how big is your mountain? More importantly, how steep the gradient?

And, are you prepared to try a new mode of transport, if that’s what is required?

If not, you’ll either need to find a smaller mountain (deflate your expected lifestyle) or simply give yourself some (a lot?) more time!

To focus or not to focus, that is the question …

Put all of your eggs in one wealth-building basket or not?

That is the question posed by Bill, who says:

I guess you are trying to espouse that one must FOCUS on ONE thing which creates the abundance of ACTIVE income and then leverage further to create PASSIVE incomes via real estates…

And, he would be correct – except that it doesn’t need to be real-estate for either creating or maintaining wealth: it can be whatever turns YOU on.

Because you will only make money where your passion lies … not where anybody else’s lies.

As to my views on focusing on just one thing to create wealth, I am also ambivalent to that – although, I would highly recommend a single wealth building focus to most people.

Generally, to build wealth, do exactly as Bill suggests: “FOCUS on ONE thing which creates the abundance of ACTIVE income” … that way you give a positive variance the greatest chance to kick your wealth into high gear.

Look at it this way; if you split your time and money evenly between two activities:

- one with a solid entrepreneurial 35% compound growth rate

- the other with a slightly-above-market 15% compound growth rate

Then for every $100,000 you ‘invest’ over 20 years, you have the following outcomes:

All @ 35%        Split 15% / 35%      All @ 15%
$29,946,192    $15,684,684           $1,423,177

Significant or not? Try it at 50% v 15% …

Well?

I can tell you this; looking at these numbers will tell you an awful lot about your likelihood of even launching your ‘financial career’:

1. The Job-for-Lifers will be looking at the 15% returns and saying “well if I can turn $100k into $1 million just by investing it in an index fund what the hell am I wasting my time here for?”

… and, they will be right.

2. The ‘wannabes’ amongst you will look at the difference between the passive-style returns over 20 years of the All-or-Nothing approach and the Spread-My-Risks-A-Little split approach and say “well if I’m not sure of the ‘next big thing’ I should put some of it in to the Big Venture and the rest into something a little safer or another venture just to be sure”

… and, they will be right.

3. The true Millionaires … In Training! amongst you will be looking at one number: the one that matches most closely (or exceeds) their Number … the amount that they simply MUST have in their nest egg. And, they will (usually) be saying “I have to go for gold – the highest possible return in my chosen field …. but, if I give it a good try and it doesn’t seem capable of producing the return that I expect, I will quickly abort mission and try again”.

… and, they will be right.

It depends on how serious you are …

Why bother? Ric Edelman says that you already have it all …

I while ago I wrote a post gauging my own performance against the “Ric Edelman Secrets” …

I’ll leave you to go back and read the post and its comments as I think that they serve to show some of the differences between financial advice for the masses and the types of things that people who want extraordinary levels of wealth (if you’re reading this, that’s probably you!) need to consider.

In case you haven’t yet come across him or his books, Ric Edelman runs one of the country’s largest independent Financial Planning firms, so his firm has interviewed thousands of people looking for financial advice.

Ric says that when he (or one of his staff) asks the question of a new client “what are your financial goals?” the most common answers – by far – in this descending order of importance, are:

1. To buy a house

2. To save for (their kids’) college

3. To save for retirement

Now, here’s where I agree totally with Ric: these are not financial goals … they are inevitable outcomes!

Loosely paraphrasing Ric, here’s why:

1. Your house – you probably already have a house (most people do), and if you don’t, you won’t have to be prodded very much to go out and buy one – look at the sub-prime crisis to see how easy it can be to buy a house!

2. Your childrens’ college – if your children want to go to college, they will … one way or another, they will come up with the money. Sure you can improve on the situation by providing the funds to help them get into the college of their choice, but it’s a qualitative goal, not a ‘make or break’ in most cases.

3. Your retirement – you will retire … one day! Maybe not at the time, and in the manner that you would like to – but, you will retire (or die trying). It’s as simple as that!

So, why bother doing any financial planning when you already have – or will have – it all?!

Simple: it’s because these people haven’t yet developed a sense of their Life’s Purpose … to me that is the only goal worth aiming for … but, we have already discussed that subject, at length.

The lament of the middle-class millionaire ….

I must confess that I understand EXACTLY what this ‘poor woman’ is saying …

http://www.cnbc.com/id/15840232?video=768292103

Ryan (who is one of the Final 15 in my 7 Millionaires … In Training! ‘grand experiment’) sent the link to me saying:

About 6 months ago I did a similar exercise to determine how much I would need to “retire” and live the kind of life I wanted to (travel, philanthropy, golf, bigger house,activities, etc.). Although it seemed like a stretch to even write down, I settled on $10 million in 10 years. After watching a show on cnbc, in particular this clip, http://www.cnbc.com/id/15840232?video=768292103 , I think it’s time to revise my estimate!!! And to think that a couple of years ago I thought if you had a million dollars you could do anything you wanted.

The exercise that Ryan is referring to is the culmination of a series of posts on http://7m7y.com designed for one purpose and one purpose only: to help you find your Number.

This video – I believe – helps explain why I think that your Number should be couched in terms of required living expenses rather than some nebulous lump sum (such as $1 million; $5 million; $10 million; etc.) … although I also show you how to calculate the ‘lump sum’ that you will need.

But, Ryan doesn’t need more than $10 Million (a.k.a. $500,000 per year … indexed for inflation) to live a life that simply involves “travel, philanthropy, golf, bigger house,activities, etc.”; he just needs to realize that on $500k per year:

1. He will not be able to afford ownership (fractional or full) of multiple houses, jets, yachts and the like (although one used Ferrari isn’t out of the question), and

2. He will NOT be rich … rather ‘comfortably off’ – at least, according to Felix Dennis the rather quirky (and exceedingly rich) British/American magazine publisher.

… it’s a tough life