How much should you take out of your business?

This is one of the most difficult questions if you are a business owner and, like most business owners, it is your primary source of income.

You might say, of course it’s your primary source of income .. that’s why I’m in business! But, that is the fallacy that we will be exploring in upcoming posts.

For now, let me tell you about a conversation that I had with a friend over dinner last night:

My friend said that he had a friend who owned a payday lending business – sounds a bit unsavoury to me, but generates mountains of cash for him.

My friend’s point was that this guy would admit that he’s not very smart, but has a very simple system for dealing with the $3 mill. that his business spins off every year:

1. He gives $1 mill. to Uncle Sam

2. He invests $1 mill. (my friend didn’t ask where or how)

3. He spends $1 mill.

Simple!

But, it’s also wrong …

What would happen if the business had to close down tomorrow (e.g. change in government regulation)?

Unless this guy had managed to save $20 mill. to $40 mill. he wouldn’t be able to keep up a $1 mill. lifestyle (common wisdom says that you should only withdraw 4% from your portfolio every year … I say about half that) …

I believe that it is 10 times HARDER to go backwards in your life (in the event of a financial disaster like if this guy’s business had to close down) than taking a slower run-up in lifestyle in the first place.

This is what I did:

I always drew a minimal salary and tried to live at the median level of the circles that I moved in (for me, this was upper-middle-class college educated professionals).

When my businesses started throwing off more money than that, I invested EVERY penny of the rest, in my case mainly into: (a) reinvesting in the business to expand it, and (b) opening new businesses (3 more), and (c) passive real estate investments.

As I built up equity in (c) – I ignored the ‘value’ of any business until I sold it – I used my ‘divide by 20 – 40 rule’ to decide how much I could spend each year.

Maybe my friend’s friend should have given $1 mill. to Uncle Sam, spent $250k a year to start off with, and invested the rest?

Maybe, after a few years, if financial disaster struck it wouldn’t matter any more what happens to his business …

I’m about to find out if you can make money online … Part 2

The story so far: in my last post I mentioned that I was trying to see if it’s possible to make money with these internet based ‘business opportunities’ (just try googling ‘online business opportunity’ to see how many are out there).

I randomly came across Ty (yeah, the half-naked guy in my last post); he only wants $3k from me to join an MLM travel marketing thing.

Now, here’s the problem: he wants me to sign up NOW and ONLY on the basis of making money … he never mentions how good/bad the product is!

So, this is how I look at any business opportunity that comes my way (and, I have seen plenty of good ones and bad ones):

FIRST: do I like the product?

My view, and one shared by anybody with an ounce of integrity, is that you simply can’t sell something that (a) you don’t use yourself and (b) wouldn’t recommend to a friend.

Fortunately, this particular product is something I COULD use … I travel a lot, and easily spend $2k – $4k a week on just the accommodation portion, so this product has the CHANCE to say me a lot.

Secondly, I looked around on the net for good or bad feedback on the company … I couldn’t find anything either way, which is probably a good thing. I even checked Ripoff Report and the Better Business Bureau … nothing! Is this a good or bad thing? I don’t know … 

So, I also checked the travel sites like Trip Advisor and Epinion and that’s where I started to see the ‘aha’ issues with this ‘opportunity’ …

… this company, and many others like it seem to source their rentals from the big resort and timeshare exchanges.

Whilst many of these are free, this company charges $3k for a ‘platinum membership’ which gives you access to their database AND the rights to sell memberships to other people.

So that brings me to the SECOND part of the decision making process: how can I sell something to somebody else for $3k that they can at least similar for free (or close to) elsewhere?

I can’t … and I won’t; oh well, sorry Ty … can’t help you.

… and, I’m no closer to finding out if it’s possible to make money online!

Never buy a new car … really.

[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=Pev892H_dCs[/pro-player]

A quick tip for you …

… never buy new, this is more true for cars and even more true the higher the price of the car.

For example, the sticker price on my car, was $120k, but I looked around (actually, I just did a quick google search or two) and found the exact make/model/year (2007) that I wanted at a specialist dealer.

I found a car, in my own city no less, that was just 6 months old with only 1,700 miles on the clock in perfect condition for less than $90k … $30k buys a lot of enchiladas in anybody’s book!

I don’t think that I just got lucky …

I have found that the higher in price you go, the more fickle the customer … they buy cars on a whim and churn them quickly when they find out they would have rather had a boring ol’ Merc!

This works at pretty much any price range, too. If you want a more standard car, check out the leasing company sales (maybe at auction) for executive vehicles … a downturn means executive redundancies … redundancies means near-new cars available cheap!

The effect is even more pronounced when you buy imports (except for top line Italian sports cars, and certain Mercedes and BMW’s) because they depreciate by as much as 20% the minute that you drive them out of the showroom!

[Hint: next time don’t even go into the dealer’s showroom to buy that new car, just wait for the ‘other guy’ to drive their’s out, then offer him 85% of what he paid … give the poor sap your card … you just might get a call].

I once had a SAAB and every time I tried to sell it the price dropped more than I could accept: the first time I tried to sell it, I wanted $45,000 for it, but was only offered $35,000. So I waited a year …

Then when I tried to sell it for $35,000 I was only offered $25,000; the next year I got sick of waiting and just sold it for only $15,000!

I would rather have been the guy offering $15,000 than the guy selling.

Happy bargain hunting!

I'm about to find out if you can make money online … can you?

I’ve made my money in real world businesses, real world property, and real world ‘paper assets’ (actually, I think I’ve lost more than I made in speculating the stock market!).

But, I have a theory that the internet is the new ‘wild west gold rush’, where people can lay a stack to some turf and mine for internet gold without outlaying much cash.

It’s only a theory right now, so I am launching two internet businesses (one is being developed right now, and the other is still in the business plan stage) … on paper, they both look good! I’ll let you know in a few months how they turn out …

But, those businesses require development skills, business planning skills, etc.

 What about the ‘average Joe’ who just wants to make some money part time? What about all of those ‘get rich online’ ads that you can find just by googling keywords like ‘money making opportunity’?

Are they GENUINE or are they SCAMS?

Well, I’m about to find out …

Yesterday I randomly searched the net and came up with this ‘opportunity’ (yes, it really is a half-naked guy named ‘Ty’):

Ty

The first thing I was asked to do was pay $50 ‘application fee’ to prove that I am ‘genuinely interested’ and a ‘go getter’ … smells a bit fishy, huh? … so, what did I do?

I paid it!

After a barrage of e-mails and a conference call invitation that I missed, I got a link to the page in the image above. I’m listening to the audio right now … I think they want me to pay $3k to join a multi-level marketing system to sell memberships to some exclusive travel club.

I’m told to “… Embrace the fact that you are surrounded by a team of leaders that care about you and are going to show you exactly how to bring it all together. Your life will turn around and you will succeed!!

What will I do? I don’t know yet … but, I’ll let you know … right now some guy on the audio is telling me “it’s the best thing that I’ve ever done in my life” … do you think the half-naked guy really has something?

Is NOW a good time to buy real estate?

Absolutely!

… it’s pretty much ALWAYS a good time to real-estate estate.

But there are two BEST times to buy real estate:

1. When REAL ESTATE is on sale

This means that prices are weak, or you can buy the property at a real discount (I don’t mean when the developer listed the property at an inflated price then ‘discounted’ it later!), or you can buy it and ‘tweak’ it (renovate it, change its use, or add value some other way).

2. When MONEY is on sale

Historical interest rates hover around 8% (they have been much lower for the past few years … but, remember when they hit 15%?!), but when they drop below 6% money is ON SALE! This means that you can afford a much larger mortgage payment, and rents can even be higher than your mortgage payment.

Usually, property prices and interest rates work in opposite directions:

When money is cheap real estate prices go sky high (remember what happened to property prices in the last few years?).

When money is expensive real estate is usually cheap (at 15% interest rates, who can afford to buy?).

Soon … or, even right now for some real estate in some areas, for perhaps the first time in living memory, BOTH real estate and money is ON SALE!

This is the big double whammy that you can’t afford to miss out on. How to you take advantage of this?

BUY real estate …. but, do your research: some areas are still dropping … look for areas that have bottomed out (or look for emerging markets)  or you feel are close to it.

Now, here’s the secret …

If real-estate still drops a little, it doesn’t matter! Why?

Because, you will:

1. Buy and hold for the long run

2. You will make rental income (that will increase over time, while your mortgage payments stay flat, assuming you fix the rates)

3. You will lock in your finance for AS LONG AS THE BANK WILL LET YOU … because MONEY IS ON SALE and you want to keep buying it at that price for ever if you can!

There will be plenty of opportunity here to make mistakes … but, the combination of cheaper property prices, incredibly low interest rates (compared to historical averages) and holding for the long term will correct any small errors in judgment made now.

Open your eyes to the bargains that should start appearing soon (if they haven’t already) and …. buy!

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It’s NEVER going to be enough!

Pick a number: $1 million, $10 million, $50 million.

It’s NEVER going to be enough …

You see, when you get to whatever number you pick in advance as being THE NUMBER you will find that your expenses magically jump up to meet it … or worse, beat it …

Why?

Before you make the number, you are thinking like a [plug in your favorite means to scrape enough money to subsist on: employee, small business owner, plumber/electrician/doctor/lawyer/accountant].

This means that you are dragging in your [plug in your subsistence salary here: $30,000, $50,000, $100,000, $200,000] …

… which just happens to be barely enough to pay your current [plug in your vices here: food, mortgage, car payments, plasma TV payments].

So, getting to [plug in your “I’m really rich’ number in here: $1 million, $10 million, $50 million] really would make a difference … in your mind!

You see, your current lifestyle isn’t your ‘dream lifestyle’, as soon as you improve your Net Worth your dreams also go up!

That means that your $120,000 apartment suddenly becomes $350,000 when you have $1,000,000, then it becomes $1,500,000 when you have $5,000,000 and so on …

Your $5,000 chevy at Just Over Broke becomes a $35,000 Cadillac CTS at $1,000,000, and a $120,000 Maserati Gransport Spyder (oh, yeah!) at $5,000,000.

A better way is to work backwards: decide how much you need to earn each year to finance the life of your dreams (more on this in a later post) and multiply by 20 and that is The Number for you.

The answer will probably scare you into action (it’s the reaction I’m hoping for!) or to death (bummer), but, always keep that Number in mind when deciding what ‘rich’ means to you …

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What about the children?

My son is 13 and seems to be learning valuable lessons about finance – mostly self taught – almost every day of the week.

Here’s what we do: we pay our kids their age in pocket money every month (common wisdom is to pay up to twice their age … if my kids read this post, I’m toast). Our kids then have to split their monthly pocket money into two equal piles: Savings and Spendings.

 Savings is for retirement … period. That should be before age 40 or so, if they follow ‘The Plan’ that starts now …

Spendings is for anything we don’t buy them, including: charity donations (over and above what we give as a family), toys (over and above what they get through the normal course of holidays, birthdays, etc.), and cars.

If my kids are smart (they are), they will save much of their spendings for their first car (they know that we will only contribute a maximum of 50% for their first car, they will need to come up with the rest).

It won’t be for college … we will pay for their education (first degree only) and student loans (that they can pay back) can supplement any shortfall.

More on this later … for now, you can imagine the discussions that we are having with our son about his desire to upgrade his perfectly servicable laptop to a Mac.

 He is have to learn how to make fairly sophisticated financial trade-off decisions at a fairly young age, as well as learning how to use equally sophisticated financial logic to argue back …

 … for example, he has already shown us that just 2 hours of work each night stacking shelves at the local Walgreen’s on minimum wage of $6.50 an hour will buy him an excellent car in just 12 months … now, can I have my Mac, please?

The stock market pessimist

I braved the market storm and bought some stocks on Friday (about $700k in Citibank, Coach, Blackberry); for some reason I got bounced out of  Blackberry (RIMM) this morning … I can’t tell, but maybe I accidentally set my trailing stop at 1% instead of 8%?

I must admit, I’m just playing at the moment (see my earlier post: http://7million7years.com/2008/01/27/when-to-bail-out-of-the-market/ ).

Generally, I admit that I am stock market pessimist … always have been … but not any more … maybe!

This is the point in the post where you say: “hang on … when the market was going UP you were a ‘stock market pessimist’ and now that it’s crashing DOWN you’re suddenly a ‘stock market optimist’? Whattup????!!!!”

Let me explain …

Everybody has ways of making (or losing) money that they are most comfortable with … mine happen to include: businesses, property (residential and commercial, buy and hold), and some other stuff that I will tell you about in upcoming posts.

Fortunately, these happen to be the preferred assets of the Very Rich … just dumb luck and good genes on my part … I suspected but didn’t know for certain that they were the preferred asset classes of the very rich (neither did anybody else) until the book that I told you about in a recent post came out (follow the link just under the chart  and read the book exerpt: http://7million7years.com/2008/01/25/how-much-does-it-take-to-be-rich/ ).

So, I was nervous about stocks in general,  until I came across Phil Town’s excellent book on stock market investing called Rule # 1 ( http://philtown.typepad.com/phil_towns_blog/aboutbook.html ). Get it and read it!

The book told me how guys like Warren Buffet find undervalued stocks … I just followed the methodology to find my own favorite stocks (I’ll write a post specifically on this) and played a bit in the market with them.

I only invested $1 mill into 4 or 5 stocks … promptly losing $100k … but, I had the opportunity to learn Phil’s process and put in my ‘tweaks’ (Note to self: delete ‘tweaks’ … sometimes it’s best to just follow the formula).

Some of this was learning, some of this was not following the system exactly, some of this (a lot) was bad timing … subprime just as I was fiddling.

This is not a post that says that you should be in the market now … but SOON (where ‘soon = 1 month => 1 year, see: http://7million7years.com/2008/01/27/when-to-bail-out-of-the-market/ ) … until YOU are sure, there’s nothing wrong with staying in cash (see Phil’s excellent post on this subject  http://www.philtown.com/phil_towns_blog/2008/01/cash-is-good-un.html ).

As Phil says: “Now, go play!” …

Should you rent or buy?

Should you own or rent? I have seen a lot of rubbish written on this subject … stuff like “renting is just dead money” or “a house is a liability” … so let me set you straight:

 If you are just starting out, up to your eyeballs in debt, unemployed, or you just can’t afford a house right now, it’s simple: you just rent.

If you already own a house, don’t sweat it, keep owning.

 And, if you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key – ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

Now, if you are buying a house with 10% – 20% down, this won’t be until you pay it down a little and the market picks up a little.

But, when you do build up enough equity in your house to borrow against, you’d better be prepared to do it! If not, then you are FAR better off just renting and investing the money you save on mortgage payments every month …

… if you’re not prepared to even do that, stop reading this blog … you will never be much better off than broke.

When to bail out of the market

What to make of this?

The stock market went up and up – then CRASHED – then went up – then CRASHED … where to next?

Back up? Down more? Big Recession / Big Crash … hmmm, I don’t know … but, neither does anybody else.

Here’s what I do know:

Smart shoppers wait for the Thanksgiving Day sales to buy up the bargains … dumb shoppers buy with the crowds just before Christmas when the prices are marked up sky high.

Same with the stock market … we were leading up to a Stock Market Christmas and prices were sky high … they eventually had to drop, so I stayed in cash and waited …

 THAT was the time to bail out of the market … NOW, it’s Thanksgiving Day Sale time on the Stock Market ….  hurry, hurry, hurry … prices marked down 15% – 20% … even better bargains in finance stocks (remember the sub-prime write-offs?).

So, I am dipping my toes in again … maybe the market will go down again, maybe it will go up … I’m banking on it doing a bit of both with just a little of my money, to see what happens … when I am sure the recession is over (Hint: that will be BEFORE the newspapers publish the official reports, which can be months out of date!), I will be buying up those discounted, quality stocks like nobody’s business!

Want to know how to find ‘good quality’ stocks? Try this excellent book: http://philtown.typepad.com/phil_towns_blog/aboutbook.html )

Not convinced? Hear it from a professional at Friday’s post on the Wealth Tycoon Report blog (I don’t necessarily agree with everything these guys say, mainly because they are stock and trading experts, and I’m not, but this is a GREAT post): http://tycoonreport.tycoonresearch.com/articles/858884874/the-secret-to-investing-like-a-professional

 So, will I be dancing in the streets or crying? Well, I hate to cry, so I’ll only invest now what I can afford to lose (I’ll absolutely hate just dipping my toes in: if the market goes up, I’ll kick myself for investing so little … if it goes down, I’ll kick myself for investing anything at all … but, $$$-wise it won’t help or hurt greatly either way).

 Then, when I am SURE (maybe 1 month, maybe 6 months, maybe 2 years), I’ll grit my teeth and wheel in the big buckets of cash … by then, I’ll be educated, real-world tested (for better or worse!), and prepared!

 You should do the same …