Tag Archives: 7million

Which would make you feel richer?

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Last week I asked my readers what would make them feel richer: more income? Or, more net worth?

This was prompted by a Twitter Trail (my term for a thread on Twitter) that started with this:

@NoDebtPlan articulates the classic fallacy: income makes you feel richer because it can be turned into net worth.

But, that is illusory: if your net worth is invested wisely, it’s pretty hard to lose all of it.

On the other hand, ask the millions of people who are ‘down-sized’, get injured, relocated, become under-skilled, out-voted and so on just how easy it is to lose your entire income … and, as soon as your income stops, you begin to feel very poor indeed 🙁

Of course, what’s the use of net worth if not to create income?

So, while it is certainly true that income can create net worth … that’s the beginning of the chain, not the end.

The whole point of net worth is to (a) live in / drive in / enjoy and (b) to create an alternate (passive) source of income so that you can eventually stop work, should you so choose (or be forced into).

Now I’m not talking from some book that I read: I created my $7 million in 7 years simply by exchanging income (from my business) into assets (income-producing real-estate and stocks) … and, you should do the same:


Remember that Rule of 75% … without it you, too, will always be a slave to earning an income 😉

The meaning of success …

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If you’re a new reader, you’ll pretty quickly find out that I only write when I think that I have something useful to say …

So, the best thing to do is scan this post and if it’s interesting, subscribe by e-mail / RSS and I’ll pop a quick e-mail into your in-box if the urge to write does strike.

Today, I am inspired by a post written by moneycrush about success:

“Big goals take time, which means it can be especially hard to stick to them when they require both time and sacrifice.”

Here, moneycrush equates success with “reaching your goals”. giving an example of getting your house paid off.

So, this got me thinking about the nature of success:

On the surface, I am successful.

Certainly my friends and family talk to me – and, of me – in those terms.

Now, they don’t necessarily know my net worth (after all, that’s why I write here under a nom de plume), but they do know that I sold three businesses in three countries … so, they can connect the dots.

They don’t realize that, by their measure of success = money, I was already ‘successful’ well before  before I sold my businesses, and well before those businesses even made any serious money.

Because I was quietly doing what I advise my readers to do: take your income and use it to buy income-producing assets instead of spending it. What my family and friends don’t realize is that’s how I made I made $7 million in 7 years, starting with $30k in debt.

In any event, I still don’t consider myself successful.

That doesn’t mean that I’m one of those guys who chases ever bigger and bigger financial wins …

It just means that I measure success differently:

To me, success is when I am living my Life’s Purpose. And, money is just one of the enablers.

In 1998, I discovered my Life’s Purpose; it was simply to “always be traveling mentally, physically, and spiritually”.

Now, that means nothing to you … so, let me translate that into some practical incarnations of that Purpose:

– Travel … a lot. This takes time and money.

And, comfortably. For me, this means about $50k a year of business class travel. I’m about to experiment with a roll-up mattress on the business class ‘lie flat’ seats; if that doesn’t work, I’ll need to ‘upgrade’ to first class because lack of sleep on the long-haul flights from/to Australia kills me.

– Personal Finance & Public speaking … twin passions of mine. I hope to be able to combine these, one day. The money I might earn is irrelevant.

I rarely get to indulge in public speaking these days; the hidden cost of no longer being attached to the corporate world. But, I discovered this passion about 30 years ago, yet have spoken publicly less and less as time has gone on. This blog, as well as being a passion in its own right, is one step towards resurrecting myself as a public speaker. My book (out soon!) is the second.

– Venture Capital … this goes with the ‘traveling mentally’ bit.

I must admit I was worried. Stories about VC’s investing in 10 businesses in order to (hope) that one may succeed scared me, with typical (VC-like) bricks and mortar investments requiring upwards of $250k each. Fortunately, the internet came along and I’m happily working on my little angel investing fund, which allocates $25k+ per investment. If 10 fail, well, it shouldn’t hurt much more than my pride. Fortunately, success rates are closer to 30%, so I’m told (hope!). In either case, but don’t tell my partners this, I’m only in it for the stimulation and … fun!

– the touchy/feely spiritual stuff. I’m not exactly the next great guru, but this doesn’t cost any money – or much time – and feels … well … nice.

So, for me success is more about what I do than what I have.

But, I am just starting to live my Life’s Purpose: I’m beginning to travel more; but, I am just starting my venture capital activities and my book isn’t out yet (hence, the speaking offers haven’t exactly flooded in) … so, I am working on my ‘success’ but am clearly not there, yet.

Now, I suggest that you find out what REALLY matters to you and go about becoming ‘successful’ too 🙂

The myth of paying yourself first …

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One of the first books that I ever read on the subject of personal finance was The Richest Man In Babylon … if you haven’t read it, get it and read it.

It is a wonderful primer on the basics of personal finance.

The part that stood out for me – since repopularized by David Bach in his hugely popular Automatic Millionaire series – is the notion of paying yourself first.

The story goes: if you would only pay yourself first [insert popular pay yourself first amount here: 10% of your gross; 15% of your net; up to the employer match; one hour of salary a day; etc.] you will be well on your way to financial success.

Except that it’s a crock …

If you pay yourself first, you’ll be slightly better off than the Jones’, but that’s about it.

Does that mean that you shouldn’t bother to pay yourself first i.e. save a portion of your income?

Of course you should, but not:

(a) where the popular financial press tells you to,

(b) in the amount that the popular financial press tells you to, and

(b) for the purposes that the popular financial press tells you to!

Before we examine how they got it so wrong, let’s take a look at why it doesn’t work; we’ll start with the typical ‘pay yourself first’ amount of 10% of your gross salary:

Let’s say that you start with a $50,000 annual household income, and you want to maintain your current standard of living in retirement … which is in approx. 20 years.

[AJC: why anybody would want to work for 20 years just to maintain their current standard of living is beyond me?! But, let’s go with it, just for the sake of proving a point ;)]

Firstly, you can assume CPI salary increases between now and your retirement date, so in 20 years your salary will approximately double to $100,000. Of course, since they’re only CPI increases, you haven’t really earned a pay rise as all as your gas, bread, milk and so on have also doubled in that time.

At a 4% so-called ‘safe’ withdrawal rate (to allow for average investment returns less the effects of taxes and ongoing inflation, etc.), you will need an approx. $2.5 million after tax lump sum in 20 years to generate $100k for life [AJC: assumption, assumption assumption … but, we’ll go with this, too].

Note: you can get by with less, if you trust that Social Security will be around in 20 years, but I wouldn’t bet on it … and, neither should you.

In order to generate $2.5 million in 20 years you will need to pay yourself first … drum roll please …. 75% of your gross income, starting now and continuing for the next 20 years.

This assumes a 9% after tax return on your investments; 8% undershoots by a couple of hundred grand and 10% overshoots by about the same.

So, what does David Bach’s 1 hour of salary a day (or 12.5% of your gross) actually do for you?

It gives you about $15,000 a year to live off (a little less than $8k a year in today’s dollars) making you a real Automatic Thousandaire 🙂

Next time, I’ll answer the where in for questions …

Applying the Formula for Wealth – Part II

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The first part of the $7million7year Formula For Wealth is pretty simple, therefore so is its application:

Where (W)ealth is a function of (C)apital and (T)ime

It’s pretty useful for teaching your children to save part of their allowance; other than that, you need more help than I can give you if you still don’t know that you should be investing at least some of your money (i.e. capital) 😉

But, what about a more difficult questions? Like deciding whether or not you should pay off your mortgage early?

Dave Ramsey would suggest that you pay off your mortgage NOW and INVEST (presumably, once those funds are no longer required in order to pay off your mortgage) LATER.

According to the base formula, you are still putting your money into an asset (hence, creating Capital), and allowing that to sit for a long time, which has to be a good thing, right?

Of course it’s better than spending the money – perhaps literally eating your capital (fine dining, anyone?) …

… but, is it optimal from a wealth-building perspective? For that, you need to turn to the third part of the formula – the X-Factor:

The two sub-sections of this part of the equation simply suggest that (Re)ward is offset by (Ri)sk; you have to rely on other studies (or common sense) to realize that Risk and Reward are related: as you increase Reward, so – to a greater/lesser degree, depending where you are on the Risk/Reward curve – so do you increase Risk.

In other words, Risk is a dampener for Reward – otherwise, we’d be traveling to work by jumping out of planes and playing the options market, as a matter of course!

But, the same cannot be said for (L)everage and (D)rag …

Leverage is the ‘big secret’ of building wealth: increase leverage and you MULTIPLY your wealth.

Using other people’s money is one way to increase leverage … but, by paying off your home mortgage, you are DECREASING leverage!

According to the formula, that’s bad 😉

Interestingly, Peer to Peer lending also fails the leverage test.

You see, peer to peer lending, mortgage ‘wraps’, and other products where you are financing other people, reduces your Capital and increases their Leverage … the polar opposite of what you should be doing!

So, why do banks lend money, potentially reducing their leverage?

Simple!

They’re not lending their money; they are borrowing money as well. They are leveraged to the full extent allowed by their law and their board of directors.

Which brings us back to risk:

As the banks proved before the financial crisis, applying too much leverage can be bad for your financial health.

What about risk and your home mortgage?

The argument often cited for paying down your home mortgage is one of decreasing risk. Yet, if you intend to live in the house for some extended period of time how is your risk increased / decreased by paying down debt?

How have you applied leverage to improve your wealth?

 

Anatomy Of A Startup – Part VI

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If you’re a Dave Ramsey Fan, welcome!

But, you probably won’t stick around … no Baby Steps here, just Giant Leaps in (mainly) personal finance and (sometimes) business from a genuine mult-millionaire (that would be me!) who went from $30,000 in debt to $7 million in the bank, in just 7 years … no BS 🙂

We don’t pay off our mortgages early, here. We don’t debt snowball. And, we don’t save until we bleed (but, we do practice delayed gratification).

We DO find our Life’s Purpose, use that find our Number, and do any one of a hundred things to get there, If you do choose to stick around (unlikely, I know) … enjoy! And, feel free to drop me a line to tell me what you think [ajc AT 7million7years DOT com] …

_____________

We’ve done a little bit of FaceBook advertising while we are waiting for the ‘better’ landing page to appear, with mixed results.

What is clear, is that advertising is a great way to test your New Product Idea, but a very expensive way to acquire customers; which is OK, as right now, we are testing various strategies.

One of the things that we learned is that keywording on your more established competitors names is A GOOD THING … for us 😉

One of the other things that we have learned is that the key technical feature of our site may be a lower takeup than we expected, which is why the ‘pivot’ was invented:

Basically, a pivot is a fancy New Age Term for “doing less of what doesn’t seem to work, and doing more of what does”. Also known as: common-sense.

So, right now, we have a nice, new design idea that could be disruptive in its own right.

We will launch with this …

But, that means that I have to change the Executive Summary:

Click to download the  Executive Overview <<<<==== CLICK HERE

The Executive Overview is the two or three page document that outlines what your business is all about:

– What problem you are solving,

– How you are solving it,

– What your ‘secret sauce’ is,

– Who your competitors are,

– Your business plan (how you intend to make money),

– Your marketing plan (how you intend to acquire customers)

– Your implementation plan.

This document – with various sections added or removed can be given to partners, key staff, investors, and bankers.

Oh, and don’t forget that it begins with your USP.

PS Obviously, the documents that I am sharing are NOT for my current venture. Sorry. 😉

Brick Wall Retirement

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[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=MdmbkeJe6zo[/pro-player]

Late last year we had some discussion about so-called “safe withdrawal rates” i.e. what is the ‘magic percentage’ that you can withdraw from your bank account (or other investments) each year, once you are retired, so that you don’t risk running out of money?

Jacob from Early Retirement Extreme said:

It’s fairly well-established (by the original Monte Carlo paper) that the 4% rule is only good for 30 years. Also it only pertains to a broad market total return portfolio. For shorter periods I’ve seen people quoting up to 7%. For longer periods, 3% or less seems to be in order.

He also suggested for a “more extensive discussions see Bob Clyatt’s book”, which we started discussing last week.

Bob undertakes a reasonably good strawman-analysis of some of the existing thinking on Safe Withdrawal Rates then uses some of his own analysis to come up with three rules:

1. It’s OK to withdraw between 4% and 4.5% of your portfolio each year, but

2. You only need reduce the $ figure of the previous year by 5% to cushion the effects of a down-market, as long as you

3. Follow his recommendations for a highly diversified portfolio of stocks, bonds, bicycles, and sausages.

[AJC: OK, I made up the bicycles and sausages bit ;)]

If you follow these rules, here’s your chances of NOT running out of money, depending on your time horizon:

Now, a few things bother me about this, indeed most discussions on this and other so-called Safe Withdrawal Strategies:

1. Here’s a bunch of people who generally advocate NOT to try and time the stock market, yet, in most cases (including Bob’s strategy, if you take the 5% option) you are trying to TIME the worst possible market of all: how long you expect to live!

2. There’s always a chance that your money will run out before you do – including  in 7 of Bob’s 8 (recommended as ‘safe’ and ‘sustainable’) categories; and, in the one ‘safe’category, you still have to run the gauntlet of a nearly 20% chance of perhaps losing your money for 2 whole decades.

3. Even if you wind down your % to Jacob’s suggested 3% withdrawal strategy, Bob’s numbers [AJC: you’ll have to see the book for this one] still show an almost 15% chance of losing your money in the first decade.

Now, there are other Monte Carlo studies that show that withdrawal rates on 3% to 3.5% are pretty damn ‘safe’ … BUT:

a) Personally, I expect to live forever and expect my money to do the same, and

b) How close to ZERO (but never quite reaching it, according to the statistical analysis of 3% – 3.5% withdrawal rates) do I allow myself to get before I panic?

I can’t help thinking that you need to substitute the words “safe withdrawal %” for “the right length and strength of vines” in the video, above, to really understand what it would mean to suffer a prolonged market downturn in retirement 😉

I’ve said it before, and I’ll say it again: unless you have a perpetual money machine set up, there ain’t no safety in withdrawal rates!

The problem with P2P lending …

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I am not a fan of peer to peer lending, so please forgive me, when Glen Millar of Prosper – one of the leading P2P lending sites – sent me the following e-mail, if I didn’t fall all over myself with excitement:

As a personal finance blogger we thought you might have interest in Prosper (www.prosper.com) and peer-to-peer lending.  You may know that Prosper was the first peer-to-peer lending marketplace in the US.  In 5 years, we have originated over $215 million in loans on our site.

In fact, here’s what I said in my reply:

Oops!
http://7million7years.com/2010/01/13/peer-to-peer-lending-a-7m7y-tool/

My argument in that post was about risk; Glen responded with a link to the following:

The basic argument being that Prosper manages loss/risk better than competing P2P sites through their proprietary rating system which “allows [Prosper] to maintain consistency when giving each listing a score. Prosper Ratings allow you to easily analyze a listing’s level of risk because the rating represents an estimated average annualized loss rate range.”

Which is all well and good until it is YOU that suffers the statistical loss/es (you can get unlucky and lose on a number of your loans); I don’t know about you, but I don’t like any system where I play statistical roulette without at least some measure (OK, illusion) of control.

The only control that you can really apply here is diversification: take out lots of small loans in your risk/reward categories:

In fact, if this risk-rating-system is so good, why doesn’t Prosper simply knock out the competition by adjusting the interest rate earned by the rating-weighted loss-rate and carry the risk themselves?!

But, what’s your for/against reasons?

I would like to hear both from readers who swear by P2P, and those who wouldn’t touch it with a 10 foot pole …

Applying the Formula for Wealth – Part I

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There’s no point in having a formula – no matter how simple it may seem – if you don’t know how to APPLY it.

So it is with the $7million7year Formula For Wealth:

The beautiful thing about a formula like this – and, why I am so excited every time I get to share it with you – is that you don’t need to know anything about personal finance in order to answer the typical personal finance questions that arise … the formula makes the answers obvious.

Let’s take a really simple example, you earn money … so, you’re entitled to spend it right?

Well, what you do with your money is your own concern. But, if part of your plans include building wealth, what should you do?

Maslow’s Hierarchy puts physiological needs (food, water, warmth, etc.) right at the bottom, so you had better take care of all of the basic household expenses first. Then comes safety and security so you also had better take care of those brakes!

But, then come the ‘soft’ areas that cover the gamut of love and self-esteem, all the way to self-actualization and self-sufficiency. Which means that you have to take care of your future physiological needs etc. – but, that probably accounts for your basic spending and your 401k contributions.

Then you have to decide the tough issues: do you have more fun now (spend more now) or hold some back – better yet, invest – so that you can also have some fun later?

That’s a personal choice, but one that finding your Life’s Purpose will make much easier.

Which brings us back to the point where you’ve made the decision to build some wealth (e.g. your Number). And, that’s were the Formula For Wealth comes in really handy:

The formula for wealth merely says that (W)ealth is a function of (C)apital and (T)ime.

So, you need to start building capital – the earlier the better to also increase time – which means you shouldn’t spend that excess cash on going out and having (too much) fun, nor should you buy depreciating assets such as cars, furniture, and accessories (other than to satisfy the Maslow-needs for basic transport, protection and comfort).

And, the formula makes it pretty clear that the more your capital increases over time, the better. So, simply sticking your cash under the mattress probably won’t cut the mustard … you’ll need to start thinking about investments that grow your capital over (sufficient) time e.g. CD’s, bonds, stocks, or real-estate.

Nothing earth-shattering, so far. So, next time, let’s use the second part of the formula to answer one of the most commonly-debated questions in personal finance: should you pay off the mortgage on your home loan early, or just let it ride?

Reader Question: What to do with my patents?

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Since nobody complained, here’s a great question regarding patents from an IMHO genuine and Certified Smart Guy, Erik, who took the trouble to e-mail me with this question regarding patents and how best to commercialize them:

I am writing you because I have ideas, but, do not know how to turn them into a business.

While at my university, I have been busy developing ideas and protecting these ideas with patents. I currently have 3 patent applications and am currently working on 2 more with a patent attorney. These are all through the university, so they do own 50% of rights to the patent, but at the same time, they are shouldering 100% of the costs. At this point in my life, that seems like a pretty good deal to me. Later when I have more money to invest, I can use any profit generated from these patents to own 100% of the rights to my work.

The problem is that I don’t really know how to move from owning a patent to creating a business to enable the idea and generate profit?

Erik  is talking about transitioning from idea to business.

Firstly, I would propose that ideas (and, their patents thereof) belong in the receptacle offered by the device in the carefully selected image, above …

… it’s all about execution. And, as we know; that’s 99% perspiration 😉

Given that, it seems Erik has quite a few paths available, to take Useless Idea # n to Highly Profitable Business # 1 […  and only. Because lighting rarely strikes twice yadayadayada], but I think I can summarize them into just two:

1. Become an idea/licensing machine: churn them out, begin the patent process, licence off … next idea!

http://7million7years.com/2008/09/08/if-its-not-passive-its-active/

http://7million7years.com/2008/09/09/how-to-build-a-perpetual-money-machine/

2. Pick the idea that Erik feels has the most commercial promise, fail fast (which means assess the market quickly by trying to get sales and feedback … even before the product is ready), continue with that idea OR shelve and move onto the next.

http://7million7years.com/2010/04/28/the-no-marketing-plan/

And, this series: http://7million7years.com/2011/03/07/anatomy-of-a-startup-part-v/

Having never done 1., I can’t advise Erik (that may be where you step in?)  …

However, if Erik is contemplating going down the  second path, he should pick the easiest patents, first … preferably something that can be implemented (at least at first) as software … using open-source architectures wherever possible and ‘”off the shelf” programmers (i.e. no PHD’s to develop, unless that’s going to be Erik).

In terms of resources, Erik should follow interesting threads on quora.com … he’ll learn a lot, from experts (unfortunately, he’ll first have to learn how to discern ‘expert’ from ‘wanna be’).

He should also buy a copy of  TechStar Founder, Brad Feld’s excellent book about startups: Do More Faster: TechStars Lessons to Accelerate Your Startup, and Guy Kawasaki’s outstanding book: The Art Of The Start.

Once he has launched and has gained traction (i.e. significant customers and sales; not necessarily profitable sales … yet), Erik can start working on building his back-end ‘business’ … in which case, he should also read Michael Gerber’s business classic – mandatory for established businesses of ANY size: The E-Myth Revisited.

Until then, Erik should focus totally on Product (what do the customers want?) and Sales (will they buy?) …

He can start testing/asking/even selling RIGHT NOW.

Oh, and if Erik has the opportunity to take a job, but start this part-time … he should do so!

That way he’ll be able to afford to fail often 😉