The Formula For Wealth!

Posted on April 15, 2010 by Adrian

Oops, I made a couple of mistakes, and one of the millionaire ‘success factors’ that I believe in is to admit your mistakes, make restitution as best you can, and then move on.

My first mistake was taking a hot chilli from one of the tradesmen working on my house; I told him it was fine, but a minute or so later (when I was already in my car on the way home) it really hit and I was suffering for another 10 or 20 minutes. I decided that appropriate Restitution for this one was simply the embarrasment of ‘coming clean’, so I had to go back and tell him I’m not a real man, after all 😉

My second mistake was making a promise to the 7million7years who applied (and, were accepted) for my new 70 Millionaires … In Training! program that resulted in me (a) reducing the number of Foundation Members to 40 (was meant to be all 70) and (b) charging them $1 a year (it was meant to be totally free for life). We agreed that appropriate restitution was to donate $5 to a worthy charity for each Foundation Member ($5 x $40); I decided to do it for all 70 charter members (Foundation Members, plus full paying Premium Members) hence the receipt, above.

You gotta admit your mistakes and keep your promises …

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The 7million7year approach is not to measure wealth by the amount of money that we have, or some arbitrary sum that we might wish to have, or even some really complicated ‘secret formula’, but to measure wealth by this simple formula:

Where RequiredAnnualIncome = f { LifePurpose }

[AJC: which simply means that your Required Annual Income is some Function of Your Life’s Purpose i.e. they are -or, at least, should be – totally related!]

You are wealthy, in 7million7year terms, when:

“Wealth Factor” Wealth < 1

Or, you can just go by Ill Liquidity’s formula:

Let E be earn and S be spending. If E E QED. The latter part of the statement is redundant. What about “if you can finance it you can own it?”

I finance therefore I can? 😛

The Golden Faucet

Posted on April 14, 2010 by Adrian

Ordinary folk don’t plan their finances during their working life, so what chance do they have in retirement?

None.

But, that doesn’t apply to us smart folk who read personal finance blogs …

… WE plan our retirement according to either Poor Man methods, or Rich Man methods known only to a few i.e. The Rich!

By the end of this post, you will know the difference; whether you choose to believe me and what you choose to do with this information is entirely up to you 😉

So, here goes:

Conventional Personal Finance wisdom – clearly ascribed to by the majority of my readers – says that you pick a so-called ‘Safe Withdrawal Rate’ …

…. that is, the percentage of your retirement Nest Egg that you can withdraw to live off each year that you feel will be small enough that your money will last as long as you do.

A sensible objective, wouldn’t you think?

You can pick any % between 2% and 7% (even up to 10%, if you believe all of those Get Rich Quick books) and find some expert or study that supports your choice.

You then have a choice to

a) make that % a fixed amount of your initial retirement portfolio (e.g. let’s say that you retire with $1,000,000 and choose 4%, giving you an initial retirement salary of $40k p.a.), then increase that salary by c.p.i each year regardless of how your portfolio rises or falls [AJC: it’s called the “close your eyes and hang on tight” approach to retirement living], or

b) choose your preferred ‘safe’ withdrawal % and let that rise and fall according to the rise and fall of your your portfolio’s value … so, if you happen to retire a year before the next stock market crash, you could be withdrawing 4% of $1 mill. in one year, then 4% of $500k the next year [AJC: no problem, as long as you can stifle the urge to jump off a ledge when your income halves, as well]

Optimists will choose a withdrawal rate in the 5% to 7% range and pessimists will choose a withdrawal rate in the 3% to 5% range …

… Rich people will do neither!

Why?

Well, before you retire (i.e. now, while you are still working) you could draw a curve of your likely salary moves between now and retirement and you could pick a living standard that corresponds to that curve, using actuarial tables to basically create an inflation indexed annuity for yourself throughout your working life.

But you don’t.

Instead, you live according to your means – and, adjust as necessary – and, build up various safety nets (via cash reserves and insurances) as you deem prudent and necessary.

Why would you do any different after you retire?

Poor people who retire put their money in a bucket and a little trickles in (interest, dividends, capital appreciation) and a lot gushes out (inflation, taxes, expenses, disasters).

You have a bad year or three, overspend a little, a couple of health issues, and you’re screwed [AJC: it even happens to retired sports stars, movie stars, and musicians. Ever heard of MC Hammer?].

But it doesn’t happen to smart Rich people, because they don’t drink from a bucket … they drink from a golden faucet:

They create – then live from – an income, both before retirement and after!

Think about our energy crisis past, present and future … all resolvable (we hope!) by switching to an abundant source of clean, green, renewable energy.

Now, think about all of your spending crisis past, present and future … all resolvable (you hope!) by living within your means a.k.a. creating an abundant source of renewable income!

That income can come from a family business that you retire from but retain “passive” part-ownership of; from venture capital activities; from real-estate investments; and, so on … in fact, from any investment that produces a reliable income stream that tends to grow at least in line with inflation.

Here is how I planned it:

1. I used the Rule of 20 strictly for planning purposes [AJC: this sounds like a 5% withdrawal rate, but who said that I’m actually going to withdraw the 5% each year?!]

2. I started creating a Perpetual Money Machine: something that will produce income that I can live off; in my case, it was RE bought with (or, for which I already have built up) plenty of equity or cash to ensure a healthy positive cash flow.

3. To cover ‘bad years’ and other contingencies, I retain at least 25% of the income stream until I have built up enough for TWO YEARS of living expenses and then I reinvest whatever is left over (i.e. buy another property every few years).

So, what if something goes wrong as it did for me when the GFC hit leaving me with too much house, another house I can’t get rid of, and $2.5 million of unavoidable stock losses [AJC: part payment for my business came in UK stock … yuk!], resulting in not enough income?

You go back to MM201 and start again (hence, my commercial property development activities) …

… after all, history has shown that your first fortune is by far the hardest 🙂

I’m diversified …

Posted on April 12, 2010 by Adrian

Applications for the new $7 Million 7 Year Wealth System Guided Learning Experience are now closed. Thanks to all of those who applied … and, congratulations to those 30 who made it!

I’m not going to encourage my other readers to join, as I can’t see the point of paying $97/year for something that you could have got for free (well, for $1 a year). Anyhow, no advertising allowed on this blog … and, that even applies to me!

Instead, I hope that you will keep reading this blog, and that it will inspire and help you to make millions the good, ol’ fashioned way 🙂

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Yes, I am well and truly diversified …

… and, it sucks!

Here are my current holdings, roughly:

$5.0 million – House in Australia

$1.5 million – House in USA (soon to be a rental)

$2.5 million – Cash in Bank/s

$1.0 Stock in UK (actually, 70% has just been converted to cash)

$1.0 million – Equity in 5 condos

$1.0 million – Equity in two development sites (could be up to $3 million – $6 million once permits are issued)

$1.0 million – Value of business (I still have a finance company running on ‘auto-pilot’)

… aside from the fact that I’ve over-invested in my Aussie house [AJC: see this post for the problem and how I intend to fix it], you can see why I am not happy:

– Too much in cash,

– Too much overseas, in chunks too small to be meaningful

– Too many ‘small’ chunks of $1 million

Ideally, I would like to bring some of those small chunks together, merge them with my cash (like so many drops of mercury) and do something useful with them …

…. by ‘useful’, I mean plonk as much as the bank requires into my two development projects, then use the proceeds to buy as many investment properties in the $1 million to $3 million price range that I can find, as long as the net result is free cashflow of $500k+ p.a.

Nowhere here do you see me saying:

– 30% in cash,

– 30% in real-estate,

– 30% in stocks

– 10% in venture capital

Mine will look more like:

– 80% – 90% real-estate (albeit, over a number of properties, rather than just one big’un),

– 5% – 10% cash for contingencies (up to approx. 2 year’s living expenses or $500k to $1 million, whichever is the lesser)

– 5% – 10% for ‘fun projects’ (e.g. venture capital investments).

Why so much in RE?

[AJC: It doesn’t have to be RE; how I invest my money is not how you should invest yours … but, the principle of NON-diversification is what’s important, here. And, I should clarify that, too: for you, non-diversification could be 95% in TIPS; 80% in AN index fund; 90% in just 4 or 5 stocks … in other words: it means, avoiding spreading across asset classes]

I can’t find the online reference, but Warren Buffett was asked at the 2008 Berkshire Hathaway AGM (which I attended, so I am paraphrasing exactly what I heard, here) how much of his net worth he would place into one position (Berkshire Hathaway doesn’t count, because it’s really a conglomerate).

Warren said that his biggest problem right now is that his investment war chest is so large that he is forced to buy many investments, however, he did point out that he was very happy in days long gone, when his investment in AMEX comprised nearly 60% of his net worth.

Charlie Munger (Warren’s long-time business partner) said that he would be equally happy to have close to 100% of his net worth in just one outstanding investment.

BTW: Charlie is a real ‘character’; short on words … long on wisdom!

Having sat on both sides, I can tell you that – right now – I am NOT happy being so ‘diversified’ … it annoys me, and I feel hamstrung in that I can’t bring my full financial weight to bear on any project.

But, each to their own … it’s just that certain rich peoples’ “own” = non-diversification 🙂

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Adrian J Cartwood is on FaceBook … come and be friends!

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One of the best tips for small business owners …

Posted on April 11, 2010 by Adrian

One of the very best wealth-building secrets for business owners has nothing to do with improving your business … and, everything to do with turning that spare cashflow into appreciating assets:

Just like buying your first home is a 7million7years key wealth building strategy, so is owning your own property for small business owners, just as the guy in this video recommends … I can’t vouch for his financing strategies as I don’t know enough (but perhaps some of our readers do?) …

… but, simply buying my own office generated in excess of $1 million extra net worth for me in just 5 years.

I bought an office block for $1.27 million; I then completely rehabbed it (including new offices, workstations, phone system, and computer equipment) for another $500k, which I leased over 5 years (with a $1 balloon/final payment).

The mortgage interest and the lease payments were 100% tax deductible from my business income (actually, I charged myself a high commercial rent as the property was in a different company name).

I sold the building for nearly $2.5 million just 5 years later!

A manifest error?

Posted on April 8, 2010 by Adrian

Last days for ‘pre-applications’ to become one of my 70 Millionaires … In Training!

I am offering the first 70 – and, 70 only – of qualified readers free lifetime access to all of the Premium Content on the site.

First, though, you’ll complete a short application form, so that I can see whether you will be a contributor to the program, or just a freeloader 😉

Better hurry, free is a pretty good incentive and I reckon you’ll be fighting for your place …

Click here to find out more …

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In an interesting experiment in the ‘dark arts’ of using visualization and other techniques a la The Secret, Steve Pavlina challenged his readers to attempt to ‘manifest’ $1,000,000 each:

This experiment is based on the intention-manifestation model of reality, where the goal is to generate $1 million of additional wealth for each person who chooses to participate.If you wish to participate, all you need to do is to decide to put forth the following intention:

In an easy and relaxed manner, in a healthy and positive way, in its own perfect time, for the highest good of all, I intend $1,000,000 to come into my life and into the lives of everyone who holds this intention.

The experiment claims $5.5 million that participants would not have received in ordinary earnings, and Steve Pavlina achieved over $100k in 18 months all on his own.

But – and, this is a big BUT – Steve did set the bar at $1 million dollar each, but NONE of the participants achieved that target.

More importantly, as the graph shows, our readers (most of whom, presumably, did not use creative visualization, chants, or the suchlike) actually achieved a much greater average result!

In fact, as I pointed out in my last post:

In that 18 month period, nearly 1,600 participants [in Steve Pavlina’s Million Dollar Experiment] reported ‘manifesting’ anywhere from $504,873.56 (in just one day; if you choose to believe him) down to just one cent.

The average was closer to $3,500 in less than a year, with the median being just $180.

Our response to this challenge ‘produced’ more than an average of $18.5k for each $7m7y participant (!) …

… I don’t know how the Universe really works – or whether there is any Power in Intention – but, can I at least claim the Power of Reading the $7 Million in 7 Years blog as the key to manifesting your own millions? 😉

What the wealthy buy on pay day …

Posted on April 4, 2010 by Adrian

This guy is a network marketing guru; but, don’t let that put you off … this first video [to watch just click on this link] is a first-class explanation of what the rich do that the poor and middle-class do not.

BTW: the first half of the next video that will pop up after this one, is also very good … but, I stopped watching when it started to get into Network Marketing.

Don’t let that stop you if you have an interest in learning more about MLM; as Seinfeld would say: “not that there’s anything wrong with that!” 🙂

April Fish!

Posted on April 1, 2010 by Adrian

It’s that time of year again, when work (ex) friends, school buddies, corporate marketing departments, and bloggers everywhere bring out their best ‘April Fools Day’ pranks.

Oh, what fun!

But, the French call it “poisson d’Avril”, the Dutch call it “Aprilvis”, and the Italians call it “Pesce d’Aprile” all which refers to the very funny prank (!?) of sticking a little fish to somebody’s back and everybody calling out “April Fish!”

Oh, the French have such a good sense of humor 🙁

All of which brings me to the April Fool’s day joke that we play on ourselves … the ‘joke’ is on us when we read important information – or, come acrosss a good idea – and, fail to act on it.

The joke is on us when, by failing to act, we delay (perhaps, fataly so) our Number and are eventually forced to compromise our Life’s Purpose.

So, what ideas you have picked up from this blog – and, tried out for yourself (for better or worse) – in the 2+ years that I have been writing it?

What has worked for you (and, why)? What has not worked for you (and, why not)?

Share yourexperiences here, in the comments, and let’s have a good chuckle together 🙂

The Ultimate Gift – Part II

Posted on March 31, 2010 by Adrian

If Monday’s post didn’t spur you to start early, this one sure should!

First, here is something that will upset you if you are already 55 and figure that you need another 10 years to retirement:

Not bothered?

Well, let’s see if we make the same comparison, starting with a much earlier retirement age:

If you used to think that a lifetime of work was good for you, think again – this chart [AJC: the blue line is the important one] shows:

The longer you work, the shorter you live!

From another article:

Generally, it is found that people retiring early live more, but how long do they live? Or what is the average number of years they live after retirement? Well, now 49-50 is usually not considered to be a retirement age in most countries. However, if a person plans everything well and retires at the age of 50, he is expected to live for at least another 35-36 years, which increases the life span to almost 85-86 years! People retiring in their early 50s, normally live up to their late 70s or early 80s and people retiring at their early 60s, live till their early or mid 70s.

We had a pretty important reason to aim to Get Rich(er) Quick(er) i.e. so that we could have the time and money to finally live our Life’s Purpose …

…. but, if you don’t have a clearly defined purpose, then let me give you just one real clear, real simple reason to get Rich(er) Quick(er):

If you retire before 50, you will live 20 years longer than if you wait for normal retirement age.

No longer is the idea that “business/investing is too stressful … I’ll just wait it out in my nice stress-free post office job” valid …

…. I don’t care whether you intend to retire with $1 million or $10 million, as long as you reach your Number much sooner than you otherwise would.

By reaching my Number at age 49, I not only gave myself the gift of finally having the means to truly live my Life’s Purpose, but I also gave myself the gift of 20 years extra in which to live it …

… this, too, is my gift to you.

Don’t waste it!

The Ultimate Gift – Part I

Posted on March 29, 2010 by Adrian

There are lots of reasons to read this blog but, in this special two part post, I am going to give you the ultimate gift …

… I’m going to add 20 years to your life!

After all, what good is life after work (a.k.a. retirement) if you die soon after?

[AJC: we can thank TraineeInvestor for this link – the inspiration for these posts; yet another reason to keep a close eye on the comments to my posts 😉 ]

Aiming for $1 million?

Posted on March 28, 2010 by Adrian

$1 million? Pleeezze … even Dr Evil knows you need (a LOT) more than that these days 😛

7million7years

How to make 7 million in 7 years …

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