Tag Archives: 7million

Start a new business or work 100 hours per week?

Posted on by
5

The title of this post is a little misleading, as my astute readers would know that your business will also ‘cost’ you 60 to 100+ hours a week, even as it matures.

But, Con has a real ‘business v job’ dilemma:

I’m kinda stuck in a dilemma as to what I should do after graduation in June this year.

I did my undergrad for 3 years, worked for a year and went back to school for another 2 years to get my masters.

I recently got a job at an investment bank making around A$100k after taxes. However, I will be working 100 hour weeks.

I really enjoyed my time when I was a kid going through highschool because I used to sell stuff online and amassed a small fortune about $30k out of that. I don’t think any 17 year old kid had that much money back then. However, I stopped selling stuff because of other commitments and ‘uni life’.

After so many years of formal education, I think that too much education is a hinderance to entrepreneurship. I have about $50k in capital right now, and I am thinking of starting something small.

But on the other hand, if my business doesn’t work, I will be sacrificing a ‘good’ career opportunity + time wasted. I am 23 this year, and my peers have already 2 years of work experience ahead of me.

Unfortunately, I can not give Con – or, anybody for that matter – direct personal advice, but I can tell you about my 16 y.o. son who has a very parallel life and aspirations:

– My son is still in high school and started off selling eBay stuff online and now has ‘graduated’ to a fully-functioning web-site that earns him about $100 a week … I’m sure it will make him a lot more if he knew how to promote it online.

– My son wants to be an investment banker but is not happy about the typical 100 hr work-week and, neither should Con be happy with that set of working conditions … for long!

Since I can’t give Con personal advice, what I would tell my son is:

1. Continue on the educational path that seems to make the most sense / offer the most opportunities (if he asked me if investment banking – and the double law/commerce degree required – was a good choice, I would say “it’s up to you, but I think it’s fine!”)

2. Continue to build his businesses part-time … with luck, his business (or, any future business he decides to start) will replace the time/revenue from a part-time job. Hey, nobody gets to study without working at least part-time, right?

3. At some stage he may need to make the hard decision: continue studying or continue to grow the businesses, but that’s unlikely.

Which ultimately might lead him to exactly where it sounds like Con is today:

My advice – if my son chooses to ask for it – would be to work at least 2 years at the required 100+ hours / week, then make the ‘corporate life v business ownership’ decision; he should walk away with some excellent corporate/professional experience and he should have some serious debt paid off and some big $$$ behind him … in the meantime, I would strongly advice my son not to spend a dime unnecessarily.

For anybody still going through college or starting their first job or business, I say:

Keep living like a penniless college kid, mooching off family and friends like any ‘normal’ college kid does, while you’re busy investing 99% of what you earn.

Then you’ll have the capital (and/or no debts) to do whatever it is that you like!

Make money while you sleep?

Posted on by
1

Making money while you sleep … isn’t that everybody’s dream?

Erica, my favorite small-biz-whiz, shares her success with a business that makes her money not just when she’s sleeping, but also while she’s away:

You don’t need to stay home to work. Whoosh Traffic had its 1st $1000 day, hit $10K in total revenue, & became profitable while I was gone!

But, there’s a problem, the kind of business that lets you make money while you’re asleep / away is also the type of business that tends to produce small numbers. Take a look at Erica’s results: $1k a day in sales, $10k total revenue.

Now, we know that this isn’t Erica’s only income stream – and, even this one is new and growing – but, I’m sure that Erica will be the first one to tell you that there’s a (low) ceiling to the income that a business can grow that can truly “make money while you sleep”.

In fact, I wager that in aggregate, Erica’s “make money while you sleep” businesses actually keep her pretty busy … and, she has plans to be even busier.

You see, I am willing to bet London to a brick (whatever THAT may mean) that Erica has a Number [i.e. the amount of money that you need in order to begin life after work a.k.a. retirement] that is pretty big, but most “make money while you sleep” businesses won’t be enough to help her get there:

a) The income they produce may not be enough to build up the Number on their own, and

b) They have no – or insufficient – resale value.

Of course, there’s a third alternative: if the business makes money while you sleep, and that income is enough to pay the bills, why do you even need to reach your Number?

Simply because no business lasts for ever … and, do you want to bet your financial future in the face of ever-changing technology and market conditions that you will continue to find replacements?

My businesses made money while I slept or went away – on some days. But, whenever my cell-phone rang – wherever and whenever I was in the world – I HAD to answer it because the buck ultimately stopped with me … banks and ceo’s demanded it!

But, the advantages were:

1. The businesses eventually produced enough cash to fund both my ever-growing lifestyle AND my long-term retirement investment strategy i.e. I could buy enough investments that I reached my Number by my Date, without needing to sell my businesses,

2. Even if I hadn’t already invested externally, I could (and did) sell my businesses for more than enough to reach my Number before technology and/or market conditions could change to my detriment.

Two paths to reach my Number: invest and/or sell [AJC: I did both and advise you to do the same … never rely on being able to sell your business]

Price: restless sleep!

So, is there a place for ‘Erica Style’ businesses?

Absolutely:

– You could build up a portfolio of those businesses; in doing so, you are making building these types of business your business! What?! That’s exactly what Erica is doing: she puts in 110% effort to build these types of businesses and to teach you how to do the same. I bet that she doesn’t have a ‘kick back on the sofa and let the business make money while I sleep’ attitude at all!

– More simply: you can build one or two of these types of businesses while you are sitting around at college, writing your blog, or working your ‘day job’, and use the EXTRA income that this business generates to fuel your investment strategy – or, build up the seed capital for that ‘real business’ …

… the one that WILL keep you up at night, until you sell 😉

Copying the magician …

Posted on by
3

Have you seen those acts where the magician calls a volunteer up from the floor, hands them a rope then says to “do exactly as I do”.

The magician walks the volunteer, step by step, through the process of knotting his rope, while the volunteer tries to copy him exactly.

Of course, at the end, the magician’s rope is neatly knotted and the volunteer has rope all over the place and looks a little foolish.

You see, the magician has some extra steps that the volunteer doesn’t pick up, or performs in mirror image, so the trick is doomed to failure for him.

Of course, it’s all good-natured fun …

… but, it’s not so much fun when it happens in real life 🙁

For example, in my last post, I outlined some steps that retirees can take to create a “zero withdrawal rate” strategy for their retirement to virtually guarantee that their money will last as long as they do:

Now, 0% does not mean withdrawal nothing, but it does mean having a sustainable, self-regenerating supply of income; this is not as hard to achieve as you might think.

For example, you can create an ongoing stream of income from:

1. Inflation protected annuities (albeit expensive)

2. TIPS (albeit a low return)

3. 100% owned real-estate (albeit, needs management)

4. Dividend stocks (my least preferred as they are sometimes a sub-par investment that tends to rise-fall with the markets).

Remember, when you retire, you want not only ZERO chance that your money runs out, but you don’t even want to get anywhere near to zero by a wide margin.

A great feat … if you can pull it off.

But, you have to copy my strategies exactly … and, to do that you need to use your powers of observation to do exactly as I do. No deviation.

So, let’s take a ‘volunteer’ from the audience, Evan, who commented:

My goal is to have a little bit of all those buckets…right now I am trying to build the dividend portfolio.

Right strategy, but it seems that Evan missed the magician’s “secret step”:

You only implement these steps AFTER you have retired (at least, after you have reached Your Number).

Your goal should be to:

1. Have a large enough nest-egg (i.e. Your Number) to provide enough to retire with, and

2. To then ensure that it (i) keeps up with inflation and (ii) never runs out.

These strategies (dividend stocks, TIPS, 100%-owned real-estate, etc.) only work for Step 2.

They typically don’t provide enough return (including growth of capital and income) to build up the nest-egg that you need, in the first place!

So, if you implement them too early, your nest-egg will be too small to begin with …

Instead, you need to find a class of investment where both your capital and your income grow (at least) with inflation.

Here’s an example using real-estate:

a) BEFORE retirement, build up a large real-estate portfolio with 20% down, and refinancing at regular intervals to build up a large portfolio over time. Reinvest all excess profits into buying more real-estate. Use a mixture of residential and commercial to provide higher growth. Add value by building, rehabbing, etc. etc.

b) AFTER retirement (or, as retirement approaches) sell down your portfolio (particularly the lower-return residential component) until you have sufficient cash to pay out the prime commercial properties in your portfolio. Your aim is to own the best rental properties 100%, with a buffer for vacancies, repairs and maintenance, etc.

c) WHEN you get too old or ill to manage the portfolio (even with the help of qualified Realtors and property managers), sell out (or, leave instructions to your attorneys to sell out) and purchase TIPS (or bonds, if TIPS aren’t available).

Three radically different investment approaches … one for each critical stage of your life.

The ‘No Lease’ car lease …

Posted on by
3

The wrong way to buy a car is to lease it:

You’re financing a depreciating asset: so, as the car goes DOWN in value over time, your investment in it is going UP, payment by payment.

Dumb, huh?

The frugal way is to buy a used vehicle and run it into the ground.

But, what if you like and can afford to buy a ‘certain quality of car’?

Well, I would never buy a new one, and I would usually buy one of a lesser standard than I can afford, because cars do depreciate and are simply NOT an investment (even when you think they are).

Now, this is a blog for aspiring MULTI-millionaires, so I am going to spare you the usual reasons for buying used rather than new [hint: something to do with depreciation vs future resale value curves], because you can actually afford to buy new!

No, what I have to share works on the assumption that you can afford to buy a new car, but you do have budgetary contraints: i.e. a Number that has to fund your required standard of living for life. You can’t afford (literally) to have your money run out before you do!

If you’re either too rich or too poor for that to apply then this post [AJC: actually, my whole blog] does not apply to you …

But, this post DOES apply if you have a new car budget, be it a new $250,000 Ferrari 458 Italia [yum] or a new $11,000 Chevrolet Aveo [yuk]:

No, the problem is that IF your mindset is to buy a new vehicle, then how do you feed your desires in 3 to 5 years when your ‘new’ car becomes just another ‘used’ car?

However you justified the ‘new car’ purchase – new car smell, new car warranty, new car reliability, new car status – in just 3 to 5 years, the ‘gloss’ will have well and truly worn off, and you will be in exactly the same position as you are in today:

You will want ANOTHER new car!

And, you will want another one – similar to the first one (or better!) every 3 to 5 years thereafter, until you are too old to care about cars anymore … and, take it from me, you will be pretty old when THAT happens 🙂

That’s why, when I ask people to calculate their Number, I ask them to come up with their required annual spending plan (and, multiply by 20), then add in any one-off costs: usually just houses plus your first post-retirement vehicle purchases (what’s your chances of your spouse settling for less than you?).

But, for non-annual repeat purchases (the annual ones should already be in the budget … get it?), I simply ask them to calculate a lease / finance rate for the occasional purchases they are interested in (e.g. cars, around the world trips) as though they were going to finance those purchases, and build that cost into their required annual spending plan (basically, their expected retirement living budget).

This will include your replacement vehicles … the ones that you will need to buy after the first 3 to 5 years in retirement.

How to calculate the correct amount?

It’s actually quite simple:

1. Choose the car from today’s model lists that seems to be likely to suit your purposes from a new car pricing web-site.

Right now, I drive a BMW M3, my next car is likely to be no less expensive. But, I actually want more, so I will build in the cost of a Ferrari 458 Italia (that should pretty much cover me for any other car I decide to ‘graduate’ to as I get older, e.g. top-of-the-line Mercedes). If I didn’t aspire to more in the future then I would use the current list price of a 2011 BMW M3 as my ‘base’.

2. Find the current price of a 5 year old Ferrari F430 (because the 458 Italia wasn’t around 5 years ago) from a used car pricing web-site.

3. Subtract 2. from 1.

4. Find an online auto leasing calculator and use 3. (i.e. the amount over the trade-in of your current auto that you will need to come up with every 3 to 5 years) plus the age of the vehicle that you selected in 2. (i.e. how often you expect to want to changeover cars) plus select an interest rate that is likely to reflect long-term averages for investment returns on your remaining money (6% – 8% is plenty)

5. The calculator should then spit out the monthly amount that you need to add to your required annual spending plan

Now, why should you choose “an interest rate that is likely to reflect long-term averages for investment returns on your remaining money” rather than the expected cost of FINANCING such vehicles?

Didn’t you read the opening paragraph of this post?!

You’re not financing anything, you are SAVING to replace you current auto (or, the one that you first bought when you reached your Number and stopped working), and you are building in the LOST OPPORTUNITY COST of having your cash tied up in your cars rather than sitting in your investment account working for you, and you are accounting for inflation pushing up the price of your future, future, future replacement vehicles.

What if you make a mistake with you future financial position or the price of your next car?

Well, you simply hang on to the cars that you already own for a while longer … or, ‘down-size’, if you have to …. who says that you HAVE to replace your cars every 3 to 5 years?

Now, you can apply this same strategy before you retire: it’s called saving up for your next car (and, the one after that, and the one after …) rather than financing it 😉

AJC.

PS If you run these numbers again, here’s an even better strategy:

Instead of buying a new car, buy a slightly used – but much better – make and/or model of vehicle. Because I’ve found that cars – just like radiation – have a half-life (but, different for each brand of vehicles) and some depreciate 20% as soon as you drive them off the lot, you may find that you can buy a much better car for the same money albeit 1 to 2 years old. If you choose well, you may find that you are (a) driving a better vehicle and (b) can keep this vehicle for another 4 to 6 years before replacing it (because ‘classic cars’ tend to remain classic long after your shiny new American/Japanese/Korean production-line ‘beauty’ has well and truly gone off the boil). Plug a 6 to 8 year replacement cycle into you calculator v the 4 year one that you chose for new and see what that does for your retirement plans!

The ‘No New Year’s Resolution’ Resolution!

Posted on by
6

I’ve just returned from my longest vacation-from-blogging that I’ve had in the the 3 years since I’ve been writing this blog.

Some of it had to do with poor internet access where I was traveling; it was supposed to be a ‘first world country’ but had ‘third world’ internet access. But, that was also probably a side effect of the second reason that I didn’t post: I was too damn tired/busy from touring.

I made the ‘mistake’ of agreeing to take a two week educational/discovery tour with a busload of other families from my childrens’ school: whilst educational, it was hardly a vacation! On the bus / off the bus … next historical site … on the bus / off the bus … three to four times each day. Crawl into bed each night exhausted, on the bus again by 8am the next day.

And, being a group tour, the hotels were set at the lowest common denominator: around 3 stars, hence the poor internet access.

Now, this probably sounds like fun to my main readership base (sub-30’s singles or young couples / no kids) … the rest of you are nodding in silent agreement: there comes a point where Hilton-hopping is REALLY what you need in a vacation!

Anyhow, we’re back and enjoying Resort Cartwood (i.e. home) with it’s huge landscaped and tiled 5-star surroundings, pool, tennis court, home theater, and so on … who needs a holiday away from home!

We celebrated New Year whilst away … which really means that we did nothing but had a wonderful view of the fireworks from our hotel window.

But, it did get me thinking:

Why make resolutions on New Year?

Does that mean that you wait – on average – 6 months to finally build up the courage to ‘resolve’ to do something that you already know is important for you to start doing / quit doing?

Does that mean that you put off for an average of 6 months that which you ALREADY know you must change?

Does that mean that New Year Resolutions are yet another means of justifying procrastination?

Does that mean that you build up the change to such a crescendo that by the time New Year comes and you – for some reason – fail to succeed in making the change, you’ll be too ashamed to try again (at least until 10-12 months later when the next New Year comes around and you build up the courage to ‘try’ again)?

So, why not have a New Day’s Resolution?

If you have something that you need to change, don’t wait until a New Year to resolve to change it, wait until the next day?

Well, I even have an issue with that!

You see, why delay – even a tiny bit – by RESOLVING to do anything?

Why not just DO? Now!

And, don’t even fool yourself into ‘trying’; do as Yoda says:

Try Not. Do or Do not. There is no try.

That’s why I’ve just resolved to never again make another New Year Resolution … at least, not until next year 😉

The 0% ‘safe’ withdrawal rate …

Posted on by
8

What % of your retirement ‘nest egg’ can you safely withdraw each year, to make sure that you money lasts as long as you do?

Many would say that this is a question best answered by highly educated practitioners of the highly specialized field of Retirement Economics, who will give you an answer – or, more likely, a range of answers – accurate to many decimal places.

But, I can give you a single answer …

… one that is accurate to at least 17 decimal places, yet I am not an economist of any kind.

You see, Retirement Economics is an oxymoron.

Why?

First, let me give you an excellent example of what retirement economics is …

In his blog dedicated to pensions, retirement plans, and economics, Wade Pfau provides the following chart:

It superimposes two charts:

– one shows descending survival rates for men, women and couples who retire at age 65.

For example, if you retire at 65, there’s only a roughly 18% chance that at least one of you will live past the age of 95. Reduce that to 90, and there’s a 40% chance that one of you will survive.

– The other is an increasing probability that your money will run out before you do the larger the % you withdraw from your retirement portfolio.

For example, if you only withdraw 3% from your portfolio (if invested in the exact 40%/60% mix of stocks and bonds assumed by Wade) then there’s almost 0% chance that you’ll run out of money by the time you reach 95 (and a small chance thereafter).

But, there’s a 30% chance that you’ll run out of money by age 95 if you increase that ‘safe’ withdrawal rate to just 5%.

You’re supposed to use these ‘retirement economics’ to make decisions like:

“Well it’s very likely that either my wife or I will live to 95 and we don’t want our money to run out, so we’ll invest all of our savings in a 40% stocks / 60% bonds portfolio, and we’ll only withdraw 3% of it each year just to be sure that our money won’t run out.”

That seems like sound economical judgement for the average person …

… BUT, you are not average!

For better or worse, you are … well … you.

Besides the obvious [AJC: who says you want to wait until you’re 65 to retire?!], when YOU are 95 (albeit in the 10th percentile), how happy will you be if your money has either either already run out or there’s a reasonable chance that you will soon be out of money, hence out of care?

I would argue that only a 100% chance of your money outliving you is acceptable.

Even then, only with a LARGE buffer, so you never need to worry about even the possibility of your money running out!

In my opinion:

Only a 0.00000000000000000% withdrawal rate is acceptable.

Now, 0% does not mean withdrawal nothing, but it does mean having a sustainable, self-regenerating supply of income; this is not as hard to achieve as you might think.

For example, you can create an ongoing stream of income from:

1. Inflation protected annuities (albeit expensive)

2. TIPS (albeit a low return)

3. 100% owned real-estate (albeit, needs management)

4. Dividend stocks (my least preferred as they are sometimes a sub-par investment that tends to rise-fall with the markets).

Remember, when you retire, you want not only ZERO chance that your money runs out, but you don’t even want to get anywhere near to zero by a wide margin.

Don’t you?

A very short vacation …

Posted on by
4

I’m still technically on vacation – half way around the globe from my usual abode as I write this – but, I did promise to share the ‘missing piece’ of the Formula for Wealth:

This formula – were it not for the one factor that I added – would fail on two counts:

1. Wealth being a function of Capital and Time is merely another way of confirming the so-called ‘power of compounding’, which is no great shakes as 1,000 others have already sung its praises and hardly justifies me adding my voice, and

2. It doesn’t explain The Bill Gates Effect: why Bill Gates (and, Steve Jobs, and Warren Buffett, and Mark Zuckerburg, and Oprah) is rich and the rest of us (present company excepted) are not.

That’s why I added the key: the X-Factor …

… which, in itself would be totally useless, if I couldn’t explain it so:

For the non-mathematically minded (and, you have to be, because as a strict formula this is nonsense), the first part of the ‘formula’ expresses the classic Risk (Ri) versus Reward (Re) tradeoff.

This is logical: “Bill Gates is richer because he takes bigger risks. I’m risk-averse so I cannot be rich. No problem, back to frugality and 401K’s …”

The good news is that Risk and Reward are related: for every financial activity there is a built-in level of risk. Choose one and you automatically choose the other.

To a greater or lesser extent, you can treat this Risk/Reward Tradeoff as a constant (actually, a curve, but there is a fixed point on the curve for whatever financial investment activity that you undertake).

In other words:

1. You choose the level of Wealth (W) that you want to achieve i.e this is your Number

2. You choose the Time (T) that you have available i.e. this is your Date

3. You have a set amount of Capital (C) that you start with i.e. this is your savings

4. You calculate the required Annual Compound Growth Rate, which tells you what financial activity you need to undertake (e.g. stocks, business, real-estate, etc.)

5. This automatically puts you on a set point of the Risk/Reward curve.

So, by selecting your Number and Date in advance, you have – in effect – taken away all decisions and the Wealth Formula works automatically for you.

You have only two levers to pull that will determine if you succeed – and how well (Bill Gates well, AJC well, work-for-40-years well, or hobo well):

Leverage (L) and Drag (D).

I’ll explain these in the New Year 🙂

Anatomy Of A Startup – Part I

Posted on by
6

Not strictly about personal finance, but building a startup is one (highly risky) way of making $7 million in 7 years!

It also happens to be one of my twin passions (the other, obviously, being personal finance) … and, one of the key components of my Number was a $500k ‘startup fund’.

I realized – before I even made my 7m7y – that I wanted (amongst other things) to become a ‘venture capitalist’, but I was well aware of the 7-2-1 formula, which goes something like this; for every 10 startups that a VC funds:

7 will lose money (probably the VC’s entire investment)

2 will break-even (maybe even returning the VC’s initial investment, but not much more)

1 will make the other 9 ‘failures’ all worth while!

Based on these numbers, to invest in the ‘bricks and mortar’ world would be simply too expensive … especially if the 9 failures came before the 1 success (obviously, the VC doesn’t know which one will be successful or she would never invest in the other 9), but not so the online world.

It’s not a stretch to see that several – or, even 10 – (potential) Facebooks and Twitters could be created with a $500k investment pool and some smart, committed cofounders. If FaceBook was started with $1,800 (or so the movie implied), then $50k should buy a whole lot for one online business … and, $500k should be enough for all 10 that it might require to find that single, wonderful success story.

So, it seems that I am on the way having met with my two cofounders today. Unusually, I didn’t know them before hand …

But, I’m getting away with myself: this isn’t my first recent such startup (obviously, my older B&M businesses were also startups in their day, eventually being sold for tidy sums). In fact, I have two complete, functional Web 2.0 (whatever that may mean!) sites sitting on a shelf, gathering dust.

With both of those, I made the mistake of building Kevin Costner’s Field of Dreams (because, I already had the relationships with the right IT build team) and thought if they build it THEY – the right cofounders – would come. But, they didn’t 🙁

So, this time, I decided to find my cofounders first (marketing and operations) before funding the IT build. Pretty obvious really … not sure why I didn’t see it at the time. I guess it was the case of having too much money burning a hole in my pocket – and, burn it did!

So, this time, I patented the idea (another waste of money, but more to make sure I wasn’t infringing on anybody else’s turf), put up a couple of ‘stealth-mode’ placeholder sites, and set out to find The Team.

I realized that I needed people with experience in the online space; so I cast a search for “social marketer [my city]” (there’s a neat little tool you can use: google) and found a meetup group that happened to have a ‘mail all members’ facility … so, I joined and spammed all the members with a “looking for partners” message.

You don’t get anywhere in life by being conventional 😉

Today, the three cofounders met (me and the two I found by cold-calling for partners) and agreed that we’re moving ahead with my new idea …

Mr Krabs is alive and well!

Posted on by
4

Eugene (Mr) Krabs is the Mr Scrooge of the modern age. Scrooge McDuck was there for a while, but the duck got bumped by the crab. Sorry, duck!

All of these misers got rich, not by being misers (I’m sure it helped … a little!) but, by having a business; Mr Krabs has a hamburger joint. Nice cashflow business that – perfect for providing the funds to invest in all sorts of stuff.

And, I bet he owns the building …

Mr Krabs has one other advantage over his predecessors: he reads personal finance blogs!

I know this, because “Eugene Krabs” left his secret formula for wealth in a seemingly innocuous comment on Free Money Finance’s blog:

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.

Sensational stuff!

The formula itself needs a little tweaking, but ‘sensational’ nonetheless, for example it’s probably better written as:

Wealth = Capital x Risk x Time

Here’s how to make it work for you; if you are an:

– Ordinary person: do nothing … your wealth will not grow. In fact, it will decline in real terms, as inflation takes its toll. You can offset this, to a greater or lesser extent by cutting costs (including interest costs and living expenses). Whole legions of people swear by this approach.

– Reasonable person: limit your risk, and offset your limited capital by applying Time … lots of it (provided you are happy to work for 40+ years, don’t get sick or lose your job, etc., etc.), and pay yourself first to increase your capital by roughly 10% each year.

– Extraordinary person: you also make a 10% improvement, because that’s reasonable, achievable, sensible … but, you don’t make a 10% improvement in just one area, you do it – as Eugene Krabs suggests – across all three!

Look at what happens if you apply one unit of Capital, one unit of Risk, and one unit of Time: you gain one unit of Wealth.

But, what happens if you increase your:

1. Capital by 10% – let’s say by starting a business on the side and applying at least 50% of it’s net income to your investment capital?

2. Risk by 10% – let’s say by moving from investing in Mutual Funds to individual stocks (if you buy/hold one, you buy/hold the other)?

3. Time by 10% – let’s say you allow yourself 10% more time to get there?

Nobody would be too scared by making a 10% improvement in one are; so, what’s so hard about making it in three areas at the same time? If you do, you end up with 1.1 units of each of: Capital, Risk, and Time: 1.1 x 1.1 x 1.1 = 1.33 …

… your wealth doesn’t increase by just 10%, it increases by 33%.

Of course, you want to REDUCE time, not increase it, so play with a simple annual compound growth rate calculator and see what happens if you:

i) Double your Capital (increase your savings; reinvest 100% of your side business earnings; grow your side-business even more)

ii) Double your Risk (buy/sell your stocks; buy/rehab real-estate; start a ‘real’ business)

iii) Halve your Time

2 x 2 x 0.5 = 2 … how’s a 100% increase in your wealth suit you?

BTW: for the mathematicians out there, this simplistic formula is nonsense; for example, as your wealth increases over time, any ‘spare’ wealth (i.e. that you don’t spend) increases your Capital (thus compounding either/both until your Capital converges to your Wealth … but, never quite meets it), whereas Time is linear (as long as we don’t approach the Speed of Light), and Risk is certainly neither linear nor compounded.

But, that’s not important right now … 😉

Are you still relying on your mother?

Posted on by
4

At what age is it appropriate to take financial responsibility for your own life? Before college? During college? After college?

When is it appropriate to grow up, financially?

To help us explore this issue, here is a question that I received by e-mail from RichKidSmartKid:

I’m 29 presently in my first year of college where I used money from my inheritance that I had invested, sold and used to pay for college. I’m soon going to be broke and wont have an income and will be relying on my mother to help me financially though school.

I want to bounce back from this financial hell and increase my networth. Possibly even made some money by the time I complete univeristy. I was wondering what advice do you have?

Sounds like her name is where RKSK wants to be rather than where she is. It looks like she had money, but now it’s gone, and would like some again!

Look, with $6k cash and going to college, the reality is that she is still probably $6.5k better off than most college kids, so here is my advice:

1. Talk to other college kids and see how they do (or intend to) get by – it’s amazing how much you can learn by listening to what other people have to say – then do the opposite 😉

2. Read this post, it’s probably my best advice for college-age kids:

http://7million7years.com/2008/08/22/start-the-next-facebook/

Now, this doesn’t directly apply to RichKidSmartKid who is 29 – but, only in 1st year (good on her for finally thinking about her education, though) – but I have an issue with college kids calling themselves ‘kids’:

In most countries (other than those in the privileged west), by the time you reach college age you would be an adult, long married, with plentiful hungry children and a crop in the field.

In those countries, RichKidSmartKid would have been considered a self-supporting adult a LONG time ago!

Maybe it’s time to start thinking like one now?