For example, I told you that, like Albert Einstein, I’ve been working on a ‘unified theory’ [AJC: I’m rather proud of this post, so go ahead and pull it out of the 7m7y archives by clicking on this link: The Big Papa lives in the 11th Dimension!].
Unlike Albert Einstein, though, I am (a little more) kempt; (very slightly) less absent-minded; (a lot) less than genius (even a little more ‘less’ each year); and, have no Germanic accent, although my parents spoke the language fluently (but, never allowed me to learn it … it was their ‘secret language’).
On the positive side, unlike Albert Einstein who reportedly went to his grave with his secret, I have found the Unified Theory of Finance!
After literally years of searching – and, this blog has been a way for me to publicly articulate my thoughts, and get the feedback that I needed along the way [AJC: so, I will need to remember to thank all of my readers – that’s you! – at my Nobel Prize for Finance acceptance speech] – I finally made this Great Discovery (?!) on the weekend.
In fact, the breakthrough came in two parts:
I’ve boiled what I’ve read myself down to the following equation:
Wealth = Capital + Risk + Time
(To be clear, capital is the money you have right now to make more money with.)
Technically, any one of those factors can do it for you. For example, if you have a massive amount of capital, or if you take massive amounts of risk and beat the odds, or if you have a lot of time to build your wealth, then you can still become wealthy at the expense of the other two factors.
However, there are downsides to all of these individual factors.
Unfortunately, I can’t thank “Mr Krabs” because he didn’t include any links with his moniker. On the other hand, you may quickly spot a few issues:
1. Clearly Wealth isn’t an additive of capital, risk, and time, it’s really a complex function. But, that can be solved by rewriting the equation as W = C * R * T or, even better yet, as:
But, understanding the math is not the point – I’m sure that Mr Krabs’ formula is meant as conceptual, not mathematically rigorous – it’s understanding that you need to balance Capital, Risk, and Time, if you want to become wealthy, that’s important … at least, according to a fictional cartoon character who saves every penny that he can get his claws on
2. The more important point is that this version of the formula forgets Return; and, if we substitute Return (e.g. the 9% or 0.09 return that you supposedly get if you stick your money in the stock market for long enough), you actually have something very similar to the basic formula for compounding (which, at least according to Einstein, is the ‘most powerful force in the universe':
3. Even if I somehow modified Mr Krabs’ simple version (and/or the more complex – but, correct – mathematical representation of compounding) to include both Risk and Return (a.k.a. Reward), the formula IMHO still wouldn’t explain why Warren Buffett is sensationally rich investing in exactly the same stocks that we invest in, yet we manage to lose money (in the short term, in absolute value, and even in the long term, certainly after inflation is taken into account)!?!
Until I can explain that, there is no formula
Still my gut told me that Mr Krabs [AJC: I love using his pen name … I’ll see how many more times I can fit it into this really very serious post!] was on the right track, because his representation did provide the missing simplification that I needed.
But, I kept hitting brick wall after brick wall …
… until last Sunday.
Last Sunday, I took my son and a few friends to play in their weekly teenage tennis competition [AJC: we all got free ‘slurpies’ from a 7-11 Convenience store on the way back home from tennis because it was 7-11 Day: November 7, 2010. Go figure!].
Instead of watching the game, I sat in the car with all my notes – pages and pages of complex math, simple math, all trying to fit Risk, Return, Capital, Time, and so on into a simple, conceptual ‘formula’ … all the while, trying to use it to explain the difference between you, me, and Warren Buffett.
As I said, until I could do that, I had nothing!
It was driving me crazy! So, I did the only sensible thing: I laid back the car seat and dozed off … but, when I woke up half an hour later, I had it:
Really understand this, and you have the key to untold wealth … in any field of endeavor.
I’ll explain the X-Factor (it can be explained!) in an upcoming post …
PS Remember: this ‘formula’ is conceptual and is more correctly (but, still grossly) simplified as:
But, is it the right war? Is it a just war? Or, are we just throwing ourselves, by the millions, into a hail of fire: exploding spending, rampant inflation, the death of social security?
Sure, as we sit in the relative safety of our trenches (at least, that’s what we tell ourselves, until a random mortar shell of job loss or unexpected expenses chooses to lob our way) this is not OUR future … it’s somebody else’s, or it’s too far away, or it just can’t happen …
The sad truth is that legions have jumped the wall before us and have been brutally cut down for lack of an adequate nest-egg; it’s sad to see them go over the dreaded wall of retirement (be it their time, or forced on them early) without an adequate safety net … when they do, it’s as though their grim fate had already been sealed.
Broke – or ‘just’ financially crippled – and unable (for financial reasons) to live life as they had hoped, they are a sad, sad lot.
You see, the war that they fought wasn’t – isn’t – a just war. It’s not even a war … well, it shouldn’t even be more than a skirmish.
It’s the War Against Debt!
When it comes to that war, I’m strictly a pacifist; isn’t it better to simply avoid BAD debt?
Of course, that doesn’t mean that we can’t … shouldn’t … defend ourselves.
Far from it: if we find that BAD debt has snuck through our defences, let’s keep an eye on it. And, if we find that it’s also EXPENSIVE debt, then let’s whip out the Big Guns and wipe it out. Quickly, surgically …
… but, let’s not commit Debt Genocide.
You see, unlike the well-intentioned, but largely Debt-McArthyist “ALL Debt Is Bad, So Let’s Wipe It Out” rabble out there, let’s first ask The Missing Question:
What will you do after your debt is paid off?
“Well, start investing of course!”
But, does that REALLY happen? Who better to ask than Money Reasons:
This past February 2010, I became totally debt free, but now what!
I thought that there would be a period where I would break even for a while, and then start to plow about $1,000 extra each month into investments! So now that it’s seven months later and how much extra did I save or invest? Not a single cent!
Hang on, the whole purpose of suiting up for battle – for going to war against debt – was so that you could start investing, right? What’s up with that, Money Reasons:
Well it’s been a matter of bad luck with equipment breaking down and needing replaced and spending too much for our past vacation to Hilton Head Island!
But it’s also been a subtle form of LifeStyle Inflation! Thinking back now, I realize that when wants would arise, I would just go ahead and buy it. Yeah, I thought about it a bit, but I knew that I had the cash. Then when your car and lawn mower broke down, I had the cash too…
Money Reasons should have started investing well before all of his debt was paid off … he should have started investing as soon as his expensive debt was paid off and left his cheap debt on a regimen of minimum payments.
The problem with this war is that it’s an unjust war; as TraineeInvestor said: “Debt is a tool. Paying it off is simply choosing not to use the tool.”
If you have to go and fight a war, don’t fight a war against debt …
… go and fight a war for investment
A couple of weeks ago, I shared my thoughts on how – and why – to set up an emergency fund with just $0. For a start, it doesn’t take much cash
I suggested using a HELOC, or tapping your 401k in case of a true emergency. Some of our readers had other suggestions:
– Trainee Investor suggested selling stocks (they can be liquidated pretty quickly), or taking an unsecured overdraft.
– Evan suggested adding the “Cash value portion of a whole life insurance policy to the list. You can have the cash in your account within a day or two”
– Investor junkie says that you can avoid selling your stocks by taking a margin loan [AJC: just beware of the dreaded ‘margin call’ which can force you to sell your stocks – possibly at a loss – if there’s a drop in market price]
And, Yahoo Finance provides their view of the The Best (and Worst) Ways to Raise Fast Cash; check it out. Then let me know if you’ve changed tack with your own emergency fund, or if you still prefer to fund it with cash?
After three years, you may be sick of listening to me – besides, by now, you should be $2 million or $3 million into your own $7 million 7 year journey, so what can I teach you? – so, here is some really important advice from Darwin Deason, a self-made billionaire entrepreneur:
Forbes Magazine: You have $100,000–where do you put it?
Darwin Deason: It depends on age and goals–but if I was young, I’d put all of it in a company that a) I could directly influence or control, and b) that I loved.
If you have your own financial advice, or feel that summarizing somebody else’s ‘personal finance system’ into “just one page” would be fun – and useful – then I have 5 x $100 Apple Gift cards to give away!
Just check out this post to join the action: http://7million7years.com/2010/10/28/just-one-page/
But, hurry … the giveaway finishes on Thursday November 11th (the last day for submissions) and the entries are already starting to come in!
Winners announced Monday, November 15.
Some yahoo breaks the window of a bakery. Did he create employment by causing $250 in repairs, thus giving the window repair man more money to go and spend in a kind of economic ‘mini stimulus package’?
Well, no, as many of my readers were quick to point out …
Hazlitt identifies the missing pieces:
What is missing from the thought experiment of the gathered crowd is the fact that the baker was going to buy a suit with that $250 but he can no longer do that since he is $250 poorer. The suit he was going to buy can no longer come into being since the tailor is not going to get that $250 to make the suit. So in this community, the window repair man and all of the merchants he would spend the money with make out but the tailor and all of the people he would spend his money with lose out. So, was there really any net loss or gain? Other than for the baker, no. Instead of having a window and a suit, he just has a window and is now $250 poorer.
But, “the main reason why no one typically considers the tailor and the merchants he would buy from is that, since the suit never came into being and was not readily visible, it never entered into anyone’s thoughts. The window, however, is quite visible and it does not take much to reason through who would benefit from the broken window.”
This issue of visibility is central to the way that most people manage their finances: the money goes where the need is most visible … now!
PS Before you point it out, I know that the image, above, isn’t the Hazlitt Maneuver … it’s the Heineken Maneuver, of course
Here is a short piece by Henry Hazlitt from his book Economics in One Lesson called “The Broken Window” Maneuver :
A young hoodlum breaks the window of a bakery and the gathered crowd begins to philosophize about whether the hoodlum really harmed anyone at all since he, after all, created employment.
He created employment by having to force the baker to pay the $250 it costs to fix the window to the window repair man. The window repair man will then have an extra $250 to spend with other merchants and those merchants will have more money to spend elsewhere. This line of thinking can continue on forever.
If it weren’t for the broken window then the window repair man would have less money and employment and so would the merchants he would spend the money with and so on.
So, what do you think? Should we stimulate the US (indeed, world) economy, simply by arming our population with rocks and asking them to all go break windows?
Yesterday, I mentioned that Trent Hamm, from a Simple Dollar is giving away a book called Everything You Ever Really Needed to Know About Personal Finance On Just One Page. You can get the eBook – for free – by clicking on that link.
But, what I really like is the first page; which you can download by clicking here => OnePage.
It shows a neat summary of Trent’s thoughts on personal finance in a one page ‘system’. Sure the diagrams are hand-drawn, but everything is clear, succinct, and easy to understand.
But, I don’t agree with everything that Trent says … and, I think that there are other personal finance systems around. It’s just that nobody else has bothered to put them on one page … yet.
That’s why I announced yesterday’s giveaway!
I want to encourage others to put their thoughts on personal finance – whether those thoughts are original, or just neat encapsulations of what has been written elsewhere – into a similar ‘one page system’.
I don’t have any fixed ideas on this, but I imagine that simple diagrams and arrows with a few bullet-points sprinkled in here or there will do the trick … but, I won’t know until I see it.
Now, I have five $100 Apple Gift cards to give away to the 5 people who I think have done the best job, but only if I like what they have done. Call me sole judge, jury, and executioner
But, I really do want to give all five gift cards away … that’s $500 folks … so, hit me with your best shot/s (yes, you can submit as many entries as you like)!
Remember: I’m looking for simplicity & content over appearance. Trent’s page is ‘elegant’ in its simplicity, clarity, and completeness … that’s what I want from you.
Here is a link to the giveaway page, where there are more instructions: $500 Apple Gift Card Giveaway!
Thursday November 11th is the last day for submissions, and I’ll be announcing the winners on Monday, November 15.
You can e-mail your submissions to me at ajc [at] 7million7years [dot] com – or, simply plonk a link to them in the comments of yesterday’s post (or, this one) if you’d rather publish on your own site …
… and, if you already have a blog, why not let your own readers have a one page summary of your personal finance thoughts, and win their undying gratitude … and, maybe get a $100 Apple Gift Card for your troubles?
Trent at a Simple Dollar did something really neat: he put Everything You Ever Really Needed to Know About Personal Finance On Just One Page.
It’s such a great idea, that I want to do the same thing!
But, I’m lazy
So, here’s the deal: put everything that YOU know about personal finance on one page, and you could win a $100 Apple Gift Card.
In fact, I have FIVE of them to give away. But, it’s at my discretion as to who – if anybody – wins these (but, I really do want to give all 5 away).
The ideas could be yours, mine, (not Trent’s because he’s already published his), or anybody else’s (but, link to the source): the presentation (simplicity + completeness + usefulness … not “how pretty it looks”) is what’s important here!
All up, this is $500 of my own hard-earned money … that you get to spend on really cool apple gear … so, make this good!
You can post a link in the comments (if you really can’t link to anything, send it to me as an e-mail and/or attachment to ajc [at] 7million7years [dot] com).
Shall we say 14 days?
More details tomorrow!!!
… heck, you can blog, write eBooks, create a course and sell it. Anything!
If you are interested in starting your own online biz, though, I want you to visit Erica’s site … she’s been there done that when it comes to online businesses. She sold just one of her online businesses for $1.1 million and now travels the lecture circuit talking about what she learned about life and business.
But, don’t believe the hype: you can’t “make millions” with the latest online hooey; Erica REALLY pumps her online ‘presence’ – by blogging, writing, speaking, and creating online products left, right and center – yet here are her income figures:
Ignoring one or two big sales; it’s not enough to change the world is it? Now, with Erica’s commitment and energy, she will keep building this ‘business’.
But, this is NOT how Erica made her first million, either.
Here’s what you should know: in the world of online biz, there’s a slow-path and a fast-path … a ‘real’ online business and an online ‘job’. Which one do I want you to try?
Perhaps surprisingly, I want you ALL to try the online ‘job’!
– It’s great experience: it will teach you about marketing, online businesses, writing … and, so on
– It’s also a great source of additional income that you can use to build your investment ‘war chest’ and/or your ‘real’ business startup capital
It will also help you decide if business is for you …
Then, if business is really for you, start a ‘real’ business either online or offline: one with a brand, with customers, with trailing income … one that somebody will want to buy!
Just like Erica:
By the end of 2003, my fledgling web hosting company, Simpli Hosting, was making more than my consulting gigs. The problem was, I was spending 40+ hours a week doing web development, and maybe 5-10 hours a week on hosting. I figured I had nothing to lose. I met with all my consulting clients and arranged transitions. I would be a full-time web hosting company owner in 6 months.
[lots of problems]
Things turned around. Just four months later, on September 7, 2007, I sold my company for $1.1 million to a competitor.
See the path that Erica took?
She started a business part-time … kept her full-time job (well contracts) … eventually took the plunge and went full-time into her business (this is the really hard step!) … battled all the usual BS that business owners have to put up with … and, eventually sold the business to somebody who didn’t want to go through all of that BS again to grow their own business.
That was (part of) my path to $7 million in 7 years, too. Maybe it should be yours?
I love (not!) these “secrets of how a millionaire thinks” types of articles, like this one called 10 Things A Millionaire Won’t Tell You [AJC: actually, this one really is quite interesting] …
… the problem is that they mix the poor millionaires in with the rich ones!
I’m not sure that I can define a ‘rich millionaire’ for you (seems like a tautology, but isn’t), but it’s something GREATER than $7 million, because I don’t ‘feel’ rich yet. Wealthy, yes. Wealthy enough to live my Life’s Purpose without ever needing to work again … just.
Extravagant, no … but, it would seem extravagant to you, wherein lies one of the problems: you may consider house with swimming pool and tennis court extravagant now. You may consider private schooling for your kids extravagant now. You may consider a BMW M3 Convertible and a Lexus Hybrid extravagant now.
But, when you become a ‘millionaire’ you won’t: you’ll expect the house + a second home in the country. You’ll expect the BMW and Lexus on the street + the ‘exotic’ in the garage. And, you will only want the best for your kids (unless you already live in a top public school district … then, watch your land taxes!).
You need to pin this down … now … when you are working on your required annual living expenses. Inflate this by 4% per year until you expect to retire (a.k.a. begin Life After Work). Multiply by 20. Add in your one-time costs (e.g. house/s). There’s your Number.
Which brings me back to my point; as the article says:
Some 10 million households have a net worth above $1 million, excluding home equity, almost double the number in 2002. Moreover, a recent survey by Fidelity found just 8 percent of millionaires think they’re “very” or “extremely” wealthy, while 19 percent don’t feel rich at all.
A millionaire, these days, can ‘safely’ spin off about $30k to $50k a year. That’s it.
If that makes me rich, then I was rich when I was still working my first job in my mid-twenties.
So, what does it take to truly feel rich, these days. Somewhere north of $7 million …
… Fidelity says the ‘magic number’ is about $23 million [AJC: citation needed; can anyone find the original Fidelity source for this?] before fat boy gets thong girl.
I won’t argue with that!