How to change your life!

I’m reviewing the final draft (actually, the pre-publication draft) of my new book.

But, I’m not happy with the current intro: it talks about the Roadmap To Riches, but that’s not really what this book is about. My next one, certainly, but not this one.

I just added an epilogue based on this post (almost word for word), and I want to do something similar for the introduction.

You see, I feel that while the subject of personal finance – a.k.a. money – is supposed to be entirely rational …

… it’s actually totally the opposite.

I believe that all discussions of money are entirely rooted in emotion, then our point of view is justified rationally.

The reason for this is that our lives and our money have become so intertwined that it’s hard … nay, impossible … to separate one from the other.

Don’t believe me?

Well, do you think you’re totally rational on the subject of money? Do you think that your life comes first, and money is only a tool?

Then let’s test that, right here, right now: you have 24 hours in an ‘average working day’, how do you spend it?

If you are anything like the average US worker, you spend an ‘average work day’ (that’s around 2/3 of the average year) sleeping, eating, and maintaining your house and your family.

You spend the bulk of what’s left (8.7 hours: the largest chunk of your day) earning money. Leaving a sliver of ‘life’ for you.

Now, think about how much of that tiny slice of life you then spend thinking, worrying, arguing, balancing and maintaining your money?

And, you’ll do this through the entire 40+ years of your working life

I rest my case.

So, the angle that I want to take with my book’s intro is this:

If you were to script your life, would you choose:

- Study hard so that you can get a great job, and

- Work hard at the job – eking out the occasional high point (landing a big account, making the boss happy, bringing a new product to market, etc.) – just to earn money, and

- Spend what you have to just to support your family, saving the bulk of what’s left over just so you can retire at 60+ to do … what?

OR, would you script for yourself something like:

- Travel the world, and

- Live large on the world’s stage, and

- Give back to others,

… and, so on?

The restriction on the latter probably being money and time (and, if you had the money, you could create the time, right?).

My point?

Doesn’t it seem as though we live our lives according to money’s script …

… rather than putting money in it’s proper place, which is simply as a tool to support our Life’s Script?

What do you think? Am I on the right track?

A brilliant 94 y.o. investor?

Edward Zajac is an amazing man: at 94 he is still alive, sprightly (or so it would appear from his photo), and actively investing his own $2.5 million share portfolio …

… and, is still sharp enough to describe himself as an opportunist.

Wealthy Matters shares Ed’s financial success with his readers (you should read the whole article to learn more about Ed’s ‘EZ’ investing system):

Stick with stocks, says investor Edward Zajac. He should know. The 94-year-old has been trading for 72 years and said he’s made about $2.5 million.

So, should we all aspire – strictly from an investing standpoint (after all, who doesn’t want live to 94 and still be so ‘with it’) – to be like Ed?

Absolutely!

According to my calculations, Ed (assuming he started on or around the average salary for college educated technicians “installing computer systems” of $1,900 in 1939) would had to save 50% of his salary until he retired young (at the age of 51) and receive Warren Buffett level stock investing returns (21% compounded) for the entire period!

What I can’t model, because the numbers simply fall short, is how Ed managed to draw enough salary to “travel the US in a recreational vehicle with his wife” after he retired in 1968, yet still manage to double his portfolio again in the 42 years since he retired.

Good on you, Ed, we have a lot to learn from you

real rich, real simple, redux

This is a redux of a 2009 post, but it’s about time that I gave my newer readers a heads-up as to what we’re all about … if I had to point somebody to just one of my posts to get them started this would be the one; putting in all of the links nearly killed me

______________________

I get a lot of questions, comments, and e-mails in general from new readers, and this one – from Chad – is reasonably typical of what I might see:

I’m turning 27; just got a job making 50k/yr.; on the market for my 1st condo to live in (and hopefully rent out a room); have 1 student loan at < 3% fixed interest. My goal is $7 million in 13 years.

1. I have very little to no knowledge of finance/investing. Do you recommend any resources to get me up to speed so I can understand what you write about?

2. Where does my situation put me in terms of Making Money 101 and 201, i.e. where do I go from here?

I appreciate ANY direction you can give me as I do not want to be stuck behind a computer in a cube for the next 30-40 years.

While I love reading these sorts of e-mails (AJC: I really do!], I have a hard time responding because I can’t / don’t give direct personal advice … but,

I can suggest that Chad think about:

1. Exactly HOW important that $7 million in 13 years is to him, and

2. Assuming it’s VERY important (critical even), how he is going to get there.

You see, my advice might change according to his Number – more importantly to his Required Annual Compound Growth Rate:

a) If low – say, no more than 10% to 15% – then I would point Chad to the various ‘frugal’ blogs (my personal favorite is Get Rich Slowly) and ‘starter books’ like The Richest Man In Babylon, or the more modern equivalent: Automatic Millionaire by David Bach, or anything by Dave Ramsey or Suze Orman.

Each would probably suggest something along the lines of:

- Keep your job; times are tough!

- Save as much of your salary as you can (max your 401k’s, then your IRA’s)

- Pay down ALL debt, following a Debt Avalanche or Debt Snowball, whichever is your favorite

- Invest any ‘spare change’ (after all debts are paid off and the requisite ‘emergency fund’ has been built up) into a low cost Index Fund

… and, wait until your government-directed – or, employer-forced if you are retrenched and become unhireable – ‘retirement’. This is where that fully paid off home and a lot of candles and canned food stockpiled will really pay off … you won’t be able to afford real food

a) If high – say, more than 10% to 15% (and, I would venture that $7 million in just 13 years would well and truly put Chad in the 50+% required annual compound growth rate category!) – then I would instead point Chad to books like Rich Dad, Poor Dad and The E-Myth Revisited and then towards this blog and its 7 Millionaires … In Training! ‘sister blog’ and suggest that he starts working his way through the back issues (well, posts).

After reading/digesting properly, he should be able to come up with his own plan … something along the lines of:

- Keep your job, but get into active stock and/or real-estate investing – better yet, start a side-business; because times are really tough(!):

i) A mildly successful part-time business might provide additional income to help you weather the financial storm and supercharge your savings, investment, and debt repayment plans

ii) A more successful part-time business might provide a built-in ‘emergency fund’, tiding you over should you lose your job and/or unexpected expenses crop up

iii) An even more successful part-time business that can be started and/or survive during a recession may prove to become wildly successful once the clouds of the recession begin to lift, maybe even carrying you directly to your Number [AJC: do not pass Go, but do collect $200 million ]

- Control your spending, and save as much of your salary as you can to build a war chest for starting / running your business

- Pay down ALL expensive debt, following the method laid out in the Cash Cascade, but keep your mortgage (lock in to current low rates) subject to the 20% Rule and the 25% Income Rule and seriously think about keeping your other cheap debt loans.

- Invest any ‘spare change’ from your job and business (after all expensive debts are paid off and the requisite ‘business startup fund’ has been built up) into quality ‘recession-priced’ stocks and/or true cashflow positive real-estate.

… and, wait until you have reached your Number (through sale of business and/or conservative valuation of your equity in your investment assets).

That’s it

It’s impossible to pay for good advice …

This is not just a provocation … I think it’s true.

It may not be true in some technical professions: think of a doctor or an accountant … you pay for advice and you expect it to be good (after all, she’s got a PHD right?).

Even then, how do you know it’s good advice?

After all, in most cases, you’re hardly expert enough to judge

Should you be worried?

Not  unduly. After all, those articles about the accountant who diddled his clients books is something that you only ever read about. It never happens to you. Right?

What about the guy in the picture to the left? Would you go to him for advice on a healthy lifestyle?

The picture is of a statue, but it bears an uncanny resemblance to a doctor-friend of mine, whose picture I can’t show for obvious reasons; he’s actually a top vascular physician and surgeon.

So, best case, quality of advice is difficult to determine.

But, it’s downright impossible to pay for good, personalized financial (or business) advice!

A simple example: if you want to grow a successful business, can you pay a consultant to tell you how?

Of course not! If they knew the ‘secret’ to building a truly successful business, they would be busy doing it for themselves.

The best you’ll get is some clown offering cheap advice

Let’s try personal finance: people ask me how to select a good financial advisor:

The first thing that I ask them is how much money they want (and, by when)?

The answer is usually $7m7y (or, some other large Number / soon Date).

The next thing that I ask is how much of their own money their chosen advisor has made following the same recommendations that he is giving to them?!

I made $7million in 7 years, but it’s impossible for you to pay me for advice; I give it away … because I want to.

Still not sure?

OK, let’s say you want to invest in stocks.

Who do you want to pay for advice: (a) somebody who’s read about investing in stocks, or (b) somebody who’s made a lot of money investing in stocks?

If (b), why are they taking paltry fees from you?

Oh I see … they aren’t just taking fees from you, they have a managed fund. They’re not really taking money for advice, rather earning a fee for running the business of managing a huge bucket of money (including your tiny drop).

Even so, let me ask you another question:

Who do you want to pay to manage your money: (a) somebody who’s made a lot of money investing in stocks?, or (b) somebody who’s made the most money investing in stocks?

If (b), then who’s made the most money investing in stocks?

Obviously, it’s Warren Buffett (with George Soros a good second … but, if you said John Bogle you fail because he made money through his business of selling his low cost index funds to the masses, not from investing his own money in them).

So, if you want to invest in stocks, you can’t buy the right advice, because nobody’s selling … and, if you want to invest in some kind of fund you can’t pay for the best advice available …

… but, you can tap into that advice for ‘free’ just by buying Berkshire Hathaway stocks.

If I wasn’t going to manage my own money – listening to plenty of ‘advice’ but, ultimately taking my own counsel – that’s what I would do!

Early retirement … the depressing truth?

Pinyo‘ s Twitter account pointed me to a great essay by Philip Greenspun about early retirement.

In it, Philip breaks some myths about early retirement, particularly the one where people think that they will do everything in retirement, but end up “waking up at 9:30 am, surfing the Web, sorting out the cable TV bill, watching DVDs, talking about going to the gym, eating Doritos, and maybe accomplishing one of their stated goals.”

Having said that, it’s pretty much my ideal of the early retirement

But, it was actually this paragraph that caught me, as it’s something that I had experienced but just below the level of conscious thought – maybe it’s something you will one day experience, too:

Tattoo Your Net Worth on Your Forehead … otherwise folks will greatly overestimate your wealth. If someone at a party asks you what you do and you answer “retired”, if you appear to be under the age of 50, almost always they will greatly overestimate your wealth.

The magazine Elite Traveler, depicts the lifestyle to which Americans aspire. A watch costs $30,000, a survey of hotel accommodations in Mexico or New Orleans shows suites ranging in price from $3,000 to $20,000, getting from point A to point B costs $5,000 per hour in a private jet, partying for a week involves chartering a yacht for $200,000.  When you say “I’m retired” the other person at the party hears “Even without working anymore, I can afford to live the Elite Traveler lifestyle.”

I have retired with a few million (the title of my blog underestimates my wealth), yet I cannot live the “Elite Traveler lifestyle”, at least not in good fiscal conscience.

I usually travel business class, but sometimes fly coach (I always fly coach domestically); I could afford a Ferrari but drive a BMW (OK, I’m not exactly slumming it: it’s a current model M3 convertible); we travel overseas twice a year (this year we’re ‘saving money’ and only traveling o/s once); and, I live in what can only be described as a mansion (with a ‘spare’ one in Chicago).

But, I certainly don’t consider myself in the Elite Traveler league.

What I did notice – retrospectively, after reading Philip’s essay – is that my friends do make comments indirectly about my wealth (“oh, you don’t have to worry about that” when talking about spending $x on $y), kind of assuming that I’m Oprah.

I’m not. And, I still budget …

… kind of: sometimes, I count millions (“oh yeah, the business is worth $1m; the house in Chicago $1m; the house in Australia $5m; the two development lots are worth another couple …” and, so on); I do this when I get nervous about money … when you live in a ridiculously expensive house, with another you can’t get rid of, and don’t really have anything (yet) that brings in an income, even millionaires worry about money. Hopefully, totally unnecessarily … but, they still worry.

I remember the survey conducted a while back by The Spectrem Group who analyze America’s wealthiest families; when asked how much the average millionaire  or multimillionaire thought they would need to feel truly wealthy, they overwhelmingly answered: “about double”.

That’s how I feel … but, don’t feel too badly, I’m sure I can learn to live with it

Would you cash in your 401k to fund your new business venture?

There was a question on Quora that asked something along the lines of “what is the most overlooked factor in starting a business?”.

This applies equally to an online or offline business … and, I was surprised that none of the responses mentioned it:

Risk

.

In order to launch a business, you need to be able to overlook risk.

Even though risk can be managed, if you sat down to think about all the possible things that could go wrong with your proposed business, well, you would never start it.

So, I think you need to be able to overlook risk – and, move well out of your comfort zone (unless you are already into extreme sports and other forms of death wish!) – if you are to think about starting a business that consumes considerable time and/or money (no ‘hobby businesses’ here).

Hopefully, this now paves the way for a sensible discussion around a rather controversial Wisebread article sharing Darwin’s thoughts on How to Start a Business With Your 401(k).

Darwin’s view is that, rather than taking on expensive debt, it may be better to start your business by withdrawing all or part of your 401k using “a little known, but increasingly popular provision in the tax code referred to as the Rollover as Business Startup (ROBS). It allows someone to start up a new business venture with funds from an old 401(k) account without incurring the dreaded early withdrawal penalties meant to deter people from using their 401(k) accounts like piggy banks.”

A sensible – negative – response is offered by one reader:

To avoid going into debt is a pretty bad reason to raid your 401(k). If your business fails you can always declare bankruptcy – bankruptcy can’t touch most 401(k)’s – you’ll still have your retirement savings…roll it over into the business instead, have it fail…and you’ll have nothing.

And, I agree – to a point: your 401(k), although woefully inadequate for its intended purpose (i.e. ensuring your retirement) is useful as an insurance policy when all else in your financial life goes wrong.

Cashing in your insurance policies because you need money is the last thing that you should do!

But, this viewpoint ignores some basic realities:

1. Going into business, for a true entrepreneur (the type that can build a $7m7y business) is a “must do”.

Starting my own business was all I could think of for 4 years (yes, I was slow to act), and risking everything (career, etc.) was simply par for the course. I’m not saying this is ‘right’, just that it’s how an entrepreneur thinks.

2. Raising significant debt finance is almost impossible for a new business.

Sure, you can (and should) tap out your sources of traditional finance: refinancing your house (if you’re not already upside down on your mortgage); max’ing out your credit cards; trying for a personal loan (fat chance once the bank manager finds out what it’s for).

I do not think cost of the debt is an issue (if it’s available TAKE IT because it’s deductible and you’ll pay it off if your business is successful). I do think access to debt is … I think you’ll find it’s just not available; at least, not in the amounts required if your business requires access to substantial capital (e.g. for shop fit-outs, software builds, stock purchases, etc.)

3. Equity Capital can be equally difficult

The first place you should go for funds for your new venture is the 4 F’s: Founders (see above), Family, Friends … and, Fools. These days, Fools are very hard to find (they’ve already had their pockets emptied in the crash!) and Family and Friends are less likely to dig into their pockets than ever before.

So, that may leave your 401(k).

If that’s the only source of funds for your new venture, what will you do?

Anatomy Of A Startup – Part VIII

It seems that most of my readers are happy for me to – at least occasionally - talk about startups.

So, with your blessing, I thought that I would answer the most common [Internet] startup question that I come across:

How do you develop an idea into a startup? I have an idea that I think would be a very good startup but I am new to this industry and trying to figure out how to better develop this idea into a startup.

Here’s a summary of my process:

1. Spend 1 to 5 days on Google keyword searching EVERYTHING I can about my idea, possible competitors, available research (if anything), market size and so on. Basically, I want to absorb the available knowledge around my idea. Others may consider this step non-productive and do it in 2 hours.

2. I then formulate my idea into my first real attempt at a Unique Selling Proposition; fill in the blanks: “_(Name)_ is _(keywords)_ just for _(who should look for it)_ who want _(best thing)_. There’s no other _(category)_ like it because _(name)_ has _(what makes my eBiz different)_”

3. The next step is to create a 2 page executive summary of your idea, with one paragraph or so under each of the following headings: 1. problem (being solved) 2. solution (being offered 3. business model (i.e. how you intend to make money 4. sales and marketing (how you intend to get your product to market 5.the competition (come on EVERYBODY has competition!) 6. the team (please say you have a cofounder and that one of you is tech!) 7. financial overview (I don’t necessarily do any financial modeling at this stage, but you can add this para if you like).

The reason why I do this document is that it forces you to summarize all that you think that you know with the benefit of a) honing you elevator pitch (you DO have one, right?!) and b) having something to send people if, by some miracle, some investor or strategic partner falls into your lap. That’s also ONE of the reasons for taking the next step:

4. Create your first powerpoint pitch deck; I base mine on Guy Kawasaki’s Art Of The Start http://blog.guykawasaki.com/2005…
(but, you can go online and find any number to copy; just keep it short).

The second reason for having one of these pitches is so that you have something to show (with little screen mockups that I create with Paint but you can create with Photoshop or one of the myriad prototyping tools out there like bo.lt).

Now that the background stuff is out of the way, I like to waste even more time by creating ‘wire frames’ (a fancy term for sketches) of what the main screens and workflow will look like.

[AJC: the new 'lean startup' movement pioneered by the likes of Steve Blank and Eric Ries will tell you that this step is way premature, and should be done after you have interviewed lots of potential customers to see if they even want what you are thinking of building and - if not - what they would rather you build. I'm slowly coming around to their way of thinking]

5. Then I create a landing page in LaunchRock (there’s NO reason why you shouldn’t make this page as soon as you have your USP / Step 2 … it’s just that I’m a procrastinator. [DISCLAIMER: I am an investor in LaunchRock).

Don’t forget to grab your domain names, and FaceBook and Twitter handles (HINT:fiverr.com is a great resource for getting the necessary ‘likes’ if you are short on friends)

6. Create a short Google Adwords campaign and/or FaceBook advertising campaign and see if you can get anybody to signup to your Landing Page.

7. Talk to and/or survey some real people (potential customers, not your Mom and Dad) about your idea.

8. Go back to 1. until you have Proven Kick Ass Idea With Real And Tested Market Potential.

9. NOW you can stop procrastinating and DO IT.

Reader Poll: Are you a fellow blogger?

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PLEASE feel free to elaborate via the comments (or, via e-mail [ajc AT 7million7years DOT com] should you choose to remain anonymous)

The perfect side business?

My good blogging friend, Kevin, mounts a good case for – naturally – taking on blogging as a side business.

Because I don’t monetize my blog at all, nor do I expend any effort on promoting it or driving traffic to it, I can’t really comment.

But, I can say that for my audience it’s probably not the right type of business for you.

Well, let’s backtrack a little; as I once said: “you can’t save your way to wealth“!

So, the only reason for starting a side business is so that you can build up an investing war-chest to use elsewhere.

[AJC: another perfectly valid reason might be so that you can grow it to one day replace your day job. Another reason might be to gain experience in business. All valid reasons, but not directly in the context of getting you to $7m7y]

If you do that, then you’re essentially beefing up your Pay It Twice strategy, so I have little more to add here.

But, if you do want to reach $7m7y (or some other large number / soon date), then I do have the perfect side-business for you:

If you are a programmer, go find a friend with some online marketing experience (here’s where a blogger can come in real handy!) … if you’re a fellow blogger, go find a great programmer who also likes to burn the midnight oil.

Then go and build your own startup!

If you come up with a cool idea aimed at small businesses or the self-employed, then you can build up a neat revenue stream and end up with something quite salable.

Just like the guy/s at Freckle (an online time accounting tool) who took their site from $1k/mth revenue to $20k/mth in just two years.

Firstly: SaaS (Software as a service, which just means tools that run online without needing to download software) companies typically operate on high gross margins (70% – 90%) and ‘in the cloud’ (which means that they don’t need to run or maintain their own hardware or operating systems) using ‘open source’ software (which usually means they’re free).

This means the owners make good income, with few (if any) fixed overheads, be it full-time or part-time.

Secondly: Unlike blogs, eBay businesses and many other types of online/offline ‘side businesses’, these types of internet businesses can scale; that means the sky’s the limit as to how much income they can generate.

Thirdly: They can be financed (by angel investors and, later, venture capitalists) for expansion.

Lastly: They can be sold … for a lot!

Just ask the guys who are financing Airbnb (started by just three regular guys) or Groupon what they think those businesses are worth

[AJC: actually, these are not examples of SaaS businesses, but they also generate revenue, so there's nothing wrong with going down that path, either, but you really need to be lucky to find the right 'slam dunk' niche]

Now, you may not be as successful as any of these guys …

… but, I submit to you, that you are just as likely to be successful in a true / salable online business as you are in any other kind of part-time business (including blogging) and that it takes just as much work.

So, why wouldn’t you try the one that has a chance of getting you to your – shall we say, audacious – financial goal?

The Pay Yourself Twice Wealth Strategy!

As you have no doubt worked out for yourself paying yourself twice is in itself just a stepping stone to financial success.

Let’s just quickly recap for new readers:

The likes of David Bach (The Automatic Millionaire) like to tell you that you needn’t do much more than ‘pay yourself first’ (i.e. save) 10% – 12.5% of your gross salary in order to live an idyllic life (well, at least retire well) … going so far as to call this “A Powerful One-Step Plan to Live and Finish Rich”.

The reality is that this is actually a dangerous financial strategy to pin your financial future on.

Whilst the idea of saving money is to be commended – in fact, saving is absolutely necessary – the sad reality is that you would need to pay yourself first 75% of your gross income, starting now and continuing for the next 20 years, just to maintain your current standard of living in retirement.

Clearly, my solution – which is to Pay Yourself Twice 15% of your gross salary – does little to bridge the gap.

Of course, it’s what you do with the money that counts:

I assume that your current ‘pay yourself first’ savings are going into some sort of employer sponsored, tax-advanatged retirement plan …

… which we already know cannot possibly be enough to support your current lifestyle in retirement, let alone set you up for that hammock in the Bahamas with free flowing Pina Coladas that you crave

However, I do want you to keep your retirement fund going – and growing – because it is insurance, if all else fails.

But, it’s the “all else’s” that will make the difference between an austere retirement in 20 – 40 years or a certainly more memorable (and, very early) retirement with $7 million in 7 years … or a happy medium, if that’s more your speed.

And, that’s why you need to Pay Yourself Twice:

- Once to maintain this insurance policy, and

- The second time to build your investing war-chest.

If the power of compounding at bank to mutual fund rates of return (i.e. 4% – 10%) is not sufficient, then it stands to reason that you need to start investing at (much) higher compound returns.

This means building up a modest starting capital amount and ‘rolling the dice’ with higher risk / higher reward investments e.g.

A few minutes with a good compound growth rate calculator will (a) confirm how well your current strategy is doing against your desired retirement needs, and (b) tell you how deep into the above table you need to dive to bridge the gap.

It goes without saying – so, I’ll say it anyway (!) – that I hope that you all succeed with your investments, be they in stocks, real-estate and/or businesses. However, if you should fail … well, by continuing to Pay Yourself Twice, it won’t take too long to build up enough starting capital to have another go.

And, it might take one, two, five times before you are successful …

All the while, you have a 20 year backup plan (by also continuing to pay yourself first) just in case