Tag Archives: 7million7years

Pay yourself first or last?

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Adam (a staff writer at Get Rich Slowly) wants you to “challenge yourself” by replacing the the standard ‘pay yourself first’ advice with:

Only pay yourself first if you deserve it.

Now, Adam isn’t suggesting that you stop saving that 10% to 15% of your gross income that the bulk of the personal finance blogosphere recommends …

… what Adam is really asking is:

Should You Stop Funding Retirement to Focus on Debt?

[This] is one of the most heavily debated dilemmas in personal finance. Unlike “spend less than you earn” or “track every penny you spend”, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.

This is a good line of questioning – and I encourage you to read his article – but, unlike Adam, I think there is a “cookie-cutter answer to this question”:

You should always ‘pay yourself first’ …

… but, where you place that money depends on where you earn the greatest after-tax return.

Keeping in mind that a “dollar saved is a dollar earned”, it could be in:

– Your 401k, potentially earning 8% plus the value of any employer matches (in an earlier post, we calculated this as providing another % point or two to your long term return),

– Your debts, potentially saving 10% to 30% interest on high-interest car, credit card, and consumer loans,

– Your real-estate investment strategy, potentially earning 15% to 25% in long-term rental increases and capital appreciation,

– Your seed capital for your new business, potentially earning 50%+ in future profits and windfall gains on the sale of the business,

– etc.

But, is unlikely to be found in paying off low interest student loans (saving 0% to 5%) or mortgages (saving 4% to 6%) or in investing in low interest savings such as bank accounts, bonds, or CD’s (earning 1% – 5%).

Blindly plonking your money into your 401k, or paying off debt, or paying down your mortgage is not the way to get rich(er) quick(er) … 7m7y readers always look at their options in terms of greatest contribution to reaching their Number.

Business for Cash Flow and Real Estate For Wealth

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I don’t know these guys, but I do like what they have to say: “our philosophy on creating and sustaining income without a job: Business for Cash Flow and Real Estate For Wealth” …

… it pretty much sums up how I achieved my $7 million in 7 years; maybe it’s how you’ll also make yours? 🙂

What would you do if you won the 2010 World Series of Poker?

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While you are evaluating whether you can even afford to enter the WSOP this year [Hint: I don’t pay $10k to enter a poker tournament; but I don’t mind playing a few satellites to try and win a seat], consider what last year’s winners COULD have bought with their money: http://www.pokerlistings.com/blog/what-to-buy-with-wsop-main-event-moneyz

Let’s say that you do beat 6485 ‘losers’ to make it to the Final Table of the Main Event (a.k.a. The November Nine), what do I suggest that you do with your winnings?

You finish 9th (pays ~ $1.2 million):

Firstly, you need to console yourself with being in the most embarassing position of having all of your friends, relatives, and hanger’s-on watching you bust out first by buying yourself a gift or two [AJC: I’m not suggesting that you buy the Chopard Super Ice Cube Watch!] …

… my usual Making Money 101 advice for those dealing with large amounts of ‘found money’ is to spend no more than 5% of your windfall [AJC: for this post, I am assuming that (a) you are not a professional poker player, and (b) the amount that you win is life-changing].

Now, before you go spending most/all of that ‘guilt free’ $60k on a car, realize that in a number of years it won’t be as new and exciting as it was when you bought it, and you may not be able to afford to replace it.

Why?

Well, the 5% Rule accounts for ALL of your possessions (incl. furniture, clothes, art, knick-knacks, guitars, consumer electronics, etc., etc.), not just your car … if you spend 5% of your entire net worth on a car now, you may have problems buying ‘other stuff’ later.

 [AJC: Remember, the 5% Rule states that ALL of your possessions other than your house and investments must not account for more than 5% of your entire Net Worth at any point in time. In fact, a good rule of thumb is that your car/s should not be worth more than half your possessions – or 2.5% of your Net Worth – leaving plenty for other purchases]

So, buy a smaller (but, still nicer/newer) car, and a vacation, and some celebratory rounds of drinks with family – but, do NOT start paying off their debts and buying them stuff as you ain’t their ‘rich cousin’ even though $1.2 million may sound super-rich to them 😉

Now, how about the other 95%?

Well, if your Number is $1,140,000 then you get to retire!

But, if your Number is larger than that, then realize that what you have just earned is seed capital to reach your Number.

Think about it: $1,140,000 x 5% (which is regarded as a reasonably ‘safe’ withdrawal rate) = $57k a year to live off. Nice for some, but hardly a $7 million in 7 years lifestyle.

Keep your job, invest the entire $1,140,000 in something as motley as Index Funds, and you could double your capital in 10 years (assuming an 8% return). Put it into Real-Estate ($100k down, and $140k buffer against vacancies and repairs/maintenance) and you could end up with a lot more. Invest a portion in your next start up, and invest the rest (“just in case”), and you could be the next Bill Gates.

This advice probably also applies to the 8th ($1.3m), 7th ($1.4m), and 6th ($1.5m) place finishers …

Next week, I’ll tell you what to do if you finish 5th 🙂

So, you want to invest in commercial real-estate …

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… but, you don’t know where to begin?

At least, that’s the case for IJ who e-mailed me:

I’ve always wanted to find some sort of mentor.  It would be great that everyone had a mentor that can help with advice and bouncing ideas off of … [people who’ve] owned their own businesses, residential and commercial RE.  I want to get more involved in commercial RE and do not know of anyone who I could turn to on how to get started.

I’m a great fan of mentors; but, when you can’t find one then you have to make do with getting info. from a variety of sources: friends, accountants, attorney’s, investor’s clubs, and – of course – Realtors.

This takes time and energy, so in the meantime, you can refer to the resources on this site and others …

For example, you can start by checking out these posts;

If you are interested in property development:
 
http://7million7years.com/2009/09/09/ive-been-out-shopping/
 
http://7million7years.com/2009/09/16/can-your-real-estate-development-project-make-money/
 
http://7million7years.com/2009/09/23/how-much-money-can-you-make-developing-real-estate/
 
And, these posts if you are interested in how to analyze a commercial property deal (offices):
 
http://7million7years.com/2008/12/22/anatomy-of-a-commercial-re-investment-part-1/
 
http://7million7years.com/2008/12/23/anatomy-of-a-commercial-re-investment-part-2/
 
http://7million7years.com/2009/01/05/anatomy-of-a-commercial-re-investment-part-3/
 
And, you should follow up these resources if you are interested in multi-family-type ‘commercial’:
 
Dave Lindahl: (I bought and USED his ‘multi-family millions’ course to help me analyze 100’s of potential deal (but, in the interests of full-dsclosure, I didn’t end up buying any, although I already own millions of dollars of residential RE, but my largest is only a quadraplex)
 
Dolf de Roos: I have bought a number of his products, including his Commercial RE audio course and some s/w … more basic than Dave Lindahl’s course, but helpful nonetheless, especially for noob’s.
 
To be fair, a few others consider these guys to be ‘scammers’, but I don’t make any money from either – have bought their material at full price and found it useful, so what more can I say?
 
Oh, and here is a guy who is definitely NOT a scammer and has some useful stuff, too: John T Reed.

Of course, you could also try and do what IJ did:

E-mail me with your questions … I don’t mind, if you don’t mind if I [perhaps] choose your question for a future post 🙂

Free money at last!

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Once my honeymooner guests agreed that purchasing a home would be a good investing goal, the question became how much equity to maintain?

I explained that if you have an empty glass, worth $100 (let’s say it’s a collectors’ item) representing your house then it makes no difference how much fine wine (also a collector’s item at $100 a glass) you have poured into it as to the future value of the glass …

… the glass can be full or empty, but if collectors’ glasses double in value every decade, it will still be worth $200 in 10 year’s time.

Of course, after consuming a few glasses of that fine wine, another question arises:

What happens if I put less money into the house (or other real-estate)?

Simple, you have to borrow the rest: less deposit, more borrowings/mortgage … more deposit, less borrowings/mortgage.

Then, in deciding exactly how much wine to pour into your glass, you think of the next logical question:

What’s the ideal amount (or %) to borrow against the property i.e. how much deposit should I put in?

Given the current ‘crisis’ in domestic RE values, it’s popular to imagine a high number: 20%? 50%? 100%?

But, it’s not so long ago (and, I wager it won’t be more than a decade before it comes around again) that it was popular to imagine a low number: 10%? 0%? Even negative 10% (as people borrowed 100% of the property PLUS closing costs)?

But, what’s the right number?!

Surprisingly, at least to me, there’s no magic ‘right’ number …

… once you realize that it matters not what equity you have in the house as to how your future wealth increases – based on the appreciation of such fine real-estate.

So, another question forms instead:

What does it cost/save me if I put in more/less money into the RE purchase?

Well, we know it does not cost you future capital appreciation, but it does cost/save you exactly what the bank would charge in you in mortgage interest and ancillary charges … circa 4% – 5% these days.

So, let me ask you two closing questions:

1. Do you think that you can do better than getting ‘free money’ by owning real-estate that appreciates, perhaps even doubling every 7 to 18 years (depending upon whom you believe), leaving you with virtually ALL the excess over the original purchase price?

2. Do you think that you can invest money that would otherwise cost/earn you only 4% – 5% for more than that [Hint: how about some more of that yummy real-estate? Failing that: stocks; business; P2P lending; etc; etc; etc? But, we covered this question last week ]?

… at least those are the questions that I put to our house guests 🙂

What do you think?

The pyschology of saving …

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Thanks to Ill Liquidity for sharing this video – and, many others – on our sister site: Share Your Number … it’s interesting to see This Clever Guy talk about the psychology of Paying Yourself First, and the Envelope System.

What do you think of these Making Money 101 techniques? Do you have any others to share?

What should you invest in first?

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My wife just got back (well, just before our Noosa trip) from a trip overseas to attend her nephew’s wedding; and, the young happily married couple decided to spend part of their honeymoon in Australia … so, they are staying with us right now!

This was an opportunity for me to interfere in their financial lives … naturally, I couldn’t resist 😉

It’s also an opportunity for me to share my financial plan for our younger readers, whether single or married.

The plan is simple:

Step 1: Start working!

Step 2: Use your pre-work spending and living standards as a guide to ensure that you save at least 10% of your gross salary; preferably more.

Step 3: No matter what your Step 2 Income and Expenditure, save at least 50% of any future salary increase

Step 4: That includes any ‘found money’ such as: change found on the street; tax refund checks; small handouts/inheritences from friends/family (naturally, you will ‘up this’ to saving 95% of any LARGE handout/inheritence); etc.

It won’t take too long to actually have some money (perhaps for the first time in your life) to think about actually INVESTING.

So, what to invest in? Stocks; car parks; italian art; … ?

It’s simple: your own home!

It will probably be a small house or condo to start with … possibly with some ‘fixer upper’ potential …

But, what about the 20% Equity Rule and the 25% Income Rule, which will ensure that you can only afford to buy a shoe-box (literally) at this early stage of your financial life?

You forget them for your first home …

… and, replace them with these guidelines:

– Put as much equity into your house (by way of making a deposit) as you have savings (you’ll want to keep a little buffer against immediate expenses)

– Borrow as much as the mortgage payment that you can afford, which will be the amount per month that you are currently saving (of course, you’ll want to keep a little buffer against extra expenses).

When you (eventually) get tempted to ‘trade up’ to a bigger house, that’s when you apply the 20% Rule and the 25% Income Rule!

But, shouldn’t you invest in something else first? Perhaps you’re not even married yet and can happily rent for a while?

This is true: but, buy the condo anyway … then you can evaluate if your rent is so cheap that you should rent out the condo for a while before moving into it. Same applies if you move to another location: rent out the house/condo and rent for yourself elsewhere until you are ready to trade up (or across).

Why?

Let’s decide whether, over the course of your life, real-estate will go up in price or down in price? The answer for all of history has been UP (over a sufficiently long period).

Decide whether you will ever want to own your own residence? Again, the answer is YES for the overwhelming portion of humanity (and, even if you think not, I guarantee that your eventual spouse will have a very hard go at convincing you otherwise).

So, unless you have an overwhelming reason to believe that RE won’t go up in price for the next X month/years, then you are compounding your money at RE’s typical growth rate (6% … depending upon who you believe and where you live) TIMES the leverage that the bank is giving you LESS (your mortgage payment/costs – rent you would have otherwise paid).

Run the numbers; it’s a VERY good/safe rate of return 🙂

Is money my motivation?

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Ryan, as a new reader to this blog, also asks:

Now that you’ve “made it” financially, has it changed your motivation?  Was money your original motivation or was it simply your desire to create things and watch them grow?

I say, “as a new reader” because any of my regular readers – or, those who have simply followed my $7 million journey – will already have drummed into them:

Your Life isn’t about your Money … your money is merely there to support Your Life!

This is a 180 degree turnabout for how we usually live our lives … generally, solely in pursuit of money: whether just to get by, or to pursue riches.

That is, until we reach some mythical point when we can stop work and RETIRE.

Then what? For many of us, nothing!

Which is why my motivation to become rich was driven by finding my Life’s Purpose [AJC: which is to be constantly traveling physically, mentally, spiritually].

Making the money has been the key to start making this happen, and without money it would be far more difficult to live the kind of ‘traveler’s life’ that I want [AJC: after all you need (a) lots of free time to travel … and, free time means spending money rather than earning it, and (b) travel costs – a LOT of – money].

In other words, making the money was never my motivation – it was merely the means to the end – and, I actually considered my life to be a bit ‘on hold’ until I made the required amount of money … of course, making that sort of money is far from boring (if not necessarily fulfilling in its own right), and I hope that your journey to 7m7y will be every bit as exhilarating as mine 😉

Travel or invest?

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Ryan from Planting Dollars asks:

Having been raised by self made real estate millionaires it’s not shocking that I agree with the vast majority of what you have to say.  The reason I’m emailing you is because I was wondering if I could get your advice.

As a 23 year old recent college graduate I understand the power of real estate investing and building businesses, but at the same point would like a nomadic lifestyle and be able to travel while living frugal at a young age.  In my experience real estate and most business ventures aren’t possible with this lifestyle.  So I’m simply wondering:

If you were in my situation, how would you perceive this challenge and what types of businesses would you pursue?

Simple: anything internet!

Specifically, anything internet that trades in downloadable products and services (information products are ideal), or of the ‘virtual infrastructure’ type (e.g. FaceBook) … of course, once you become successful, you will need staff and support of the financial kind, and these require phyical access more often than not [AJC: Venture Capitalists are soooo 90’s 🙂 ].

That’s the short answer; now for the long answer 😉

The first thing I would suggest that Ryan do is to ask the “self made real estate millionaires” who raised him for their advice … after all, they’ve been there / done that … know Ryan better than possibly anybody else … and, being a parent myself I have no doubt that they ABSOLUTELY have his best interests at heart!

As to the second part of Ryan’s question, which asked whether I would “place travel and new experiences in [my] twenties as more important or less important than investing and capturing the time value of money?” 

The easy answer is that (by some coincidence) I just addressed this in some small way in yesterday’s Video-on-Sunday post …

…. but, the harder answer is “it depends”:
 
– I would rank those Life Experiences very highly

BUT

– If the desire to be an entrepreneur burns bright, and you have a rip-snorter of an idea just bursting to get out … well THAT can be the “new experience” that Ryan mentions, and it may very well more than make up for itself by funding your future travels.
 
I would be willing to delay a boringly ‘normal’ savings plan a little for those one-of-a-kind of Life Experiences.
 
Let’s say that you do decide to compromise, by being that nomad, yet starting a business; what’s the ideal business for this sort of traveling, hands-off lifestyle?

As I said above, anything Web, however I suggest that you buy a copy of the 4-Hour Work Week first!
 
But, I would also say not to be so quick to discount real-estate …

… I maintained 5 condo’s and a small’ish office block in Australia whilst I was living in the USA.

Buy anything by Dolf De Roos and Dave Lindahl, both of whom claim to own real-estate in far flung places (Dolf across the world, and Dave across the USA) and learn all you can about ‘hands off’ real-estate ownership; it can be done.
 
Of course, Ryan still has direct access to Millionaire RE mentors … so, he should first ask his parents what they do with their RE investments when they wish to travel?

I am no longer a student …

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I can’t offer advice for my younger readers as to what they should do with their lives (right now!) as I am no longer a student of anything (other than Life and Finance) 🙁 nor am I young 🙁 🙁

… but, I would recommend that you take this guy’s advice EVEN if it seems to come at the expense of your short-term personal finance goals.

So, let’s say that you do take 3 months off to volunteer abroad:

– It will probably cost you airfare and clothes, insurance, shots, etc .

– But, it may not cost you a lot in (spartan) food and (even more spartan) accommodation

And, you can probably Net Present Value the cost of these items PLUS the foregone income from your Summer Job.

But, I can simplify the cost as probably putting you one year behind in your financial life (of course, you can compound this out to a large number later) and the extra work that you will need to do next year to catch up with what you spent.

However, what about the Life Experience that you have earned? The Fresh Outlook that you have gained? The Favorable Karma that you have built up?

Priceless!

It’s not ALL about money, you know 😉