You don’t need to become a barber to become rich …

Darwin’s Money shares a story about his barber that shows how anybody can become rich; here’s a trimmed down version of Darwin’s assessment of how his barber became rich:

• Real Estate Mogul – He owns multiple rental properties.  He started off small and kept rolling his profits into more and larger properties.
• Business Savvy… and Patient – He knows the real estate market very well and he waits for deals to come around.  He’s patient.
• Frugal – Just through some casual observations, it’s evident he’s a frugal guy.  He dresses modestly, he doesn’t take extravagant vacations, and he doesn’t drive a fancy car.  The combination of multiple streams of income and frugality make for a huge net worth in your later years.
• Small Business Owner– Like all smart business owners, he gets other people to work for him and generate income and offset his costs.  Rather than just running a one man barbershop, he has a couple other barbers working there.

This looks likes an great observational report … I’m not certain that Darwin actually asked his barber how much money he has or how he made it?

I’ll do the reverse; I’ll tell you how I made my money … it’s much the same as the barber, but I think it’s the order that’s critical:

Business Savvy, Impatient, Small Business Owner – I started by becoming a small business owner, then trying to become business savvy. But, it was a slow path. When I finally hit rock bottom (business-wise) and found my Life’s Purpose, hence my Number, I suddenly became impatient. In fact, this was the turning point for me: as I accelerated my business growth, I accelerated my income, which is the first key to becoming rich.

Frugal – Now, this is where most high income earners go wrong: as their income increases, they become looser with their money. It should be quite the reverse: in dollar terms it’s OK to (in fact, you should) reward yourself by increasing your expenditure [slightly] in $ terms. But, and this is the secret, you should be decreasing your expenditure in % terms. While it’s fine and dandy to be frugal while you are still on a low and/or fixed income (i.e. job), it’s actually critical to become more frugal in relative terms as your income increases.

… and Patient Real-Estate Mogul - What to do with the rapidly increasing bank balance? Well, you could put it in mutual funds (but the fees are too high and/or the returns are too slow), stocks (but, they are not leveraged enough), or other businesses (but, you run the risk of spreading yourself too thin). For me, the best compromise between the leverage of a true business and a passive investment is – and remains – investment-grade real-estate. This is where being patient finally kicks in, because buy/hold real-estate is subject to the vagaries of the market. But, I had a primary source of growing income, so I didn’t need to touch my real-estate investment income until I finally began Life After Work.

So, my assessment is that Darwin is right, but the order is wrong.

Oh, I also think that you can substitute small business ownership for any high income potential (e.g. highly-paid professional; CxO-level employee; consultant; etc.) with the only catch being that you miss out on the potential capital gains that owning a business may offer – on the other hand, you may be able to negotiate yourself a nice golden parachute …

How well do you think this simple strategy could work for 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

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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

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

Anatomy Of A Startup – Part VII

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Please let me know (in the comments) if my slightly off-topic forays into the world of internet-startups are interesting, boring … or, somewhere in between.

If you’re still not sure, read today’s post then answer the poll

I’m sure that many people are put off the idea of starting a business – any business, not just a web-business – by the perceived failure rates: the ‘urban myth’ is that 9 out of 10 businesses fail in their first five years, so I wouldn’t blame you for simply dismissing the idea of becoming an entrepreneur!

For you, though, the chance of failure is 50/50: either you will fail … or you won’t.

Statistics (i.e. what happens to OTHER small business owners) mean nothing to you … but, your personal success or failure means everything.

Even if you subscribe to the statistics more than my philosophical view, we can still agree because the real numbers are much closer to 50/50 than 90/10 [click on the image to enlarge]:

[Source: Amy Knaup, Monthly Labor Review]

The chart shows that the four year survival rate for small businesses across the USA is anywhere from nearly 40% to nearly 60%. While not quite 5 years, and not quite 50/50 (you can reduce these 4 year survival rates by approx. 10% for each succeeding year), it’s certainly not as glum an outlook as the 90% failure rate that the popular press would have you believe.

So, how would you like a surefire way to tell IN ADVANCE if your Internet-business has an 85% chance of surviving, with an additional 9% chance of being sold for millions of dollars, and with a ‘booby prize’ of at least a 75% chance of achieving a huge amount of additional funding (an average of $500k)?

Fortunately, for the Internet entrepreneur there is a super-reliable way of doing this:

Simply apply to join one of the respected Venture Accelerators springing up all over the world!

If you DO manage to make your way through their selection process, here’s what you can expect in terms of survival/success after 4 years:

[Source: Techstars]

Time to dust off that business plan?

Reader Question: How can I start a small business with no capital?

I guess some of my readers appreciate small / online business advice as well as personal finance advice, so I’ll keep the mix going for a little while longer.

On that note, let’s take a look at Jeff’s question; it’s a very common one, indeed:

I have always wanted to run my own business, and I know what business it is. I have planned out all the details, even got as far as making the business plan for startup, short term and long term. But i keep becoming discouraged at the idea when I hit the same wall every time. Which is startup capitol. Do you have any suggestions as to where or how someone who is smart and determined, but has virtually no personal capitol, can get the means to start a small business?

I don’t have enough (any) information on Jeff’s personal financial situation to make any specific recommendations. However, since this is such a common reader question, let me try and answer it for everybody in this situation.

Startup capital almost always comes from the Four F’s:

- Founders – What does your personal ‘balance sheet’ look like? Do you own a house, car, etc. Many a business has been started by refinancing existing assets, borrowing money on credit-cards, and so on. Desperate times call for desperate measures.

- Friends/Family – These two groups will invest small amounts – from $100 to $10,000 each. Pull a few together and you may get enough. Usually, they are investing in YOU, so financial results are less important to them. But, if you have a business plan that reads well, and you have a wide circle, you’re ready to start asking!

- Fools – These are seed-stage investors who MAY invest in an idea, but they are VERY hard to come by. You probably need more than one cofounder (one-man businesses are usually seen as too one-sided), and you will need to demonstrate a business with good upside.

Putting together business plans is one giant step forward for Jeff.

But, now he finally needs to decide if he’s going to drop it, or go for it. Only Jeff can make that decision

Anatomy Of A Startup – Part VI

If you’re a Dave Ramsey Fan, welcome!

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

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

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

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

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

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

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

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

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

We will launch with this …

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

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

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

- What problem you are solving,

- How you are solving it,

- What your ‘secret sauce’ is,

- Who your competitors are,

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

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

- Your implementation plan.

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

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

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