Living to 100 …

First of all, let me tell you that living to 100 is not a blessing.

My grandmother just passed away. She made it to 12 days past 100 years.

In fact, the 100 was like the finishing line to a marathon for her; in Australia, you get a letter from the Queen.

She also got a letter from the Prime Minister, the Governor General, and her local member of parliament …

… and, a little party at the old people’s home where she resided, complete with party hats and balloons. Hurrah!

My Grandmother lead almost the whole family unscathed through the holocaust (she ‘only’ lost one brother, where most others lost their entire families) and emmigrated to Australia almost penniless where she (and, my grandfather … but, mainly she) did what most immigrants do: work hard, invest wisely, and slowly rebuild their fortunes.

She may not have made $7 million in 7 years, but she certainly made that much in 30 or 40 years, starting with nothing. I can’t see why anybody would settle for $1 million after a lifetime of work?

So, what have I learned from my grandmother’s experiences?

1. Living to 100 is not all it’s cracked up to be.

My grandmother’s brain was amazing, right up to the end.

When she got her letters, she immediately recalled our Prime Minister’s name as being Julia Gillard.  And, just a few weeks before her 100th, she was still doing mental arithmetic (“if you were only 85, how much longer to 100? I asked. Within a couple of seconds, my grannie answered “15 years”).

But, her body was not so good: the legs went first, then the teeth, and so on … she often told me that living to 100 is not all that great.

2. If you lose it all, get up and do it all over again.

My grandmother lived like a queen before World War II. He husband (my grandfather) was a banker in the small town in Poland where they lived. They also owned the local movie theater. My granny hadn’t worked a day in her life and had maids and servants. My grandfather never drove a car (he could afford a driver).

The war, and the Nazis, changed all of that. Coming to Australia destitute, my grandmother decided to start a business making neckties. Not only did she not have any money with which to start a business, she had never sewed a necktie in her life.

Instead, she took a job at a tie factory to try and learn how it was done and (after convincing the owner that she could, in fact, sew ties) she convinced a couple of the seamstresses there to make some sample ties for her after hours. Using those samples, my granny went door to door (shop to shop) signing orders for those ties.

3. Don’t ever convince yourself that you can’t ‘cold call’

If my grandmother – who had never worked a day in her life before and was a female at a time when all salesmen were … well … men – managed to do it, then so can me or you!

Once she had enough orders, she paid those same seamstresses a ‘per tie’ rate (it’s called “piece work”) to fill the orders. She then delivered the ties and used the money earned to start the process all over again …

… eventually, she had been through this cycle enough times to open a small factory and hire those “piece workers” away from their other factory job, and they stayed with her until my granny retired (she gave the business to her loyal staff).

4. Invest today so that you can live tomorrow.

Most people would take the money that they are earning from their businesses and start paying themselves a decent salary. My Grandmother wasn’t most people: instead, she would invest the profits from their business into real-estate.

Contrary to popular belief, most business people don’t become rich from their businesses (remember, my granny simply gave hers away); they become rich from the investments that they make using their business’ income.

My grandmother was no exception: she bought real-estate.

Not only did she buy real-estate, she also developed her own down-town property. To give you an idea what that may be worth, when he was 93 – and, living in the old people’s home – my grandmother sold another down-town property on behalf of her 3 other partners who were all as old as her.

The realtor told her that the property was worth $11 million. She said “rubbish” and managed to hold out for a better offer, which eventually came in at $18 million. Not bad for a half-deaf, bed-ridden 93 year old.

The corollary to this is something that I learned from my grandfather (but was relayed to me by my grandmother after he passed away many years ago): at one stage, my grandmother felt that they could finally afford to buy a house. My grandfather said: “You can always buy a house from a business. But, you can never buy a business from a house”.

All in all, the value of the life lessons that I learned from my grandmother were immeasurable … but, the business lessons that I learned from her shaped who I am as an investor, and an entrepreneur.

No doubt, I wouldn’t have made $7 million in 7 years without them, and I can finally share the ultimate source of my inspiration here with you.

I’m quite happy in my mansion, thankyou!

This is the view from my tennis court (taken just as the house was almost ready to move into). Which neatly brings me to Budgets are Sexy, who asks: “do you you still want to live in a mansion?”

D’uh, yeah!

The problem is that the example that he cites is so far away from being a mansion, that it barely qualifies as my second house which, BTW, I am still trying to get rid of!

On the other hand, this guy is carrying a monthly mortgage payment of $2,200 which, at 4.75%, means roughly a $450k loan, plus his equity of $500k (now) to $1.2million (pre bubble) means that his idea of a ‘mansion’ is a house b/w $1 million and $2 million. About the same value as my house in the USA.

Oh, and I paid cash for both of my houses.

The point here is not to brag, that would be unseemly and [AJC: I know it’s hard to believe from what you read here] is a little out of character. The point is to set your expectations, particularly if your Number points you to a similar $7 Million 7 Year lifestyle.

Look, a $1 – $2 million house is nice, and in a poor area, where land and building costs are cheap, it may very well qualify as a ‘mansion’ …

… but, in a reasonable area, I don’t even think that my new house qualifies as a ‘mansion’ – well, IMHO, barely – yet it cost $5million+ and has a tennis court, heated swimming pool, home theater, sauna room, and each bedroom has it’s own study and en-suite!

Having said that, I agree that the running costs are huge: you can’t wash this many windows and glass balcony panels yourself (we spent $50k+ to install the glass panels plus another $70k on glass windows and doors, alone); you can’t clean a house this big yourself (we have a cleaning lady almost 2 full days a week); you can’t garden a place this big yourself (well, you probably could, but I hate gardening); and, imagine the cost of heating, cooling, and lighting the damn house.

But, if you have the money to live your Life’s Purpose (without ever needing to work again), you give back in more ways than one, and you still have enough money left over to buy the house of your dreams … then I can highly recommend getting the mansion …

… so far, it’s everything it’s cracked up to be 🙂

This is what happens when you don’t pay your bills!

I’m moving house (well, when i say moving house, our stuff was delivered on the same day that hot water, heating, and cooling came on … and, the first time we took a shower the kitchen flooded. Oh, and we have no gas cooktop, as they won’t have any of those beautiful, Italian thingy’s even in the country for another 6 weeks!), so this video – naturally – caught my eye.

Financial moral: don’t set yourself up financially, to have to live in a trailer park … but, if you do: always pay your rent on time 😉

How much home should I buy?

A reader who works with RE, Whittier Homes, says:

I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That being said there is a risk factor or a comfort zone that every investor has to know. The bottom line is you don’t want to get over leverage and get caught on the short end of a declining market.

Home equity is simply what your home is valued at (today) less what you still owe on it (today).

This leads me to think that I’ve never said … and, nobody’s ever asked: How much equity should I have in my own home?

Well, there’s a reason:

I have NOTHING to say about how much equity – as a % of your house value – and, EVERYTHING to say about how much equity – as a % of your Net Worth – you should have tied up in your own home.

In other words, your equity is a function of:

– How much your house costs to buy

– How much it increases in value over time

– How much deposit you have available now

– How much you choose to put in / take out of the value of your house over time

I have no advice as to how much you should spend on your house in the first place, that’s your business not mine 🙂

But, I do have some guidelines that pretty much help to answer the “how much home should I buy?” question (other than for your first home), albeit obliquely:

1. The 20% Rule ensures that you are always investing at least 75% of your entire Net Worth (after allowing for another 5% to be spent on ‘stuff’),

2. The 25% Income Rule ensures that if you do decide to borrow money to buy a home, that you do not overcommit your cashflow,

3. The Cash Cascade makes sure that if you do have a mortgage, that you don’t pay it off too quickly if better investing opportunities abound.

Put these ‘rules’ into practice and you won’t go too far wrong, when it comes to your own home …

What price security?

How do you put a price on security?

Well, in this post I’m going to try and do exactly that but, first MoneyMonk asks the question that all people have at the back of their minds:

As a woman, I just want to say that “to each it’s own” Women love security.

If you are not a person that love investing, and you have the cash to pay off your mortgage (considering that you plan to live their forever)

Adrian- not everyone is business oriented. Some just don’t have the business acumen to run a business. Therefore, that group SHOULD pay off the mortgage

This is the dream of home ownership: own your home outright and you have nothing to worry about.

But, do you?

Let’s say that you own a $150,000 home today … what will it be worth in 30 year’s time?

About the same as a $150,000 home today, but in future dollars!

So, let me ask you; when your kids grow up, move out, and you retire, what are you going to move into?

Probably the same, or another $150,000 home … a smaller condo or newer townhouse that will probably not give you too much change, if any, from $150,000, a retirement home that (with fees) will cost you far more than $150,000.

Your home is not your financial security; your realizable net worth is. Put it another way: you can’t live off your home, but you can live off your cash and investments.

True security comes from knowing that you can pay your monthly bills for the rest of your life, without needing to work or get handouts from friends, relatives, or the government, through up markets and down (war, pestilence, and other Acts of God aside).

I hope that you see my point …

So, let’s look at two scenarios for a $150,000 house that you just bought and locked in a 30 year fixed rate loan at 6% (a bit higher than today’s actual rates, which are still between 5% and 5.5%):

1. You pay off your mortgage early

Note: We will assume that you are allowed to pay off as little / much as you like on your loan (not the case with some fixed rate loans in the USA, and certainly not the case with most fixed rate loans in most other countries!) because it makes the math simpler.

This is great, because you ‘earn’ 6% on your money [AJC: remember, a dollar saved – in interest – is the same as a dollar earned], better yet:

– The amount you ‘earn’ is guaranteed; every year that you are no longer paying that 6% loan, you are in effect earning 6% … simple and guaranteed!

– Unlike an investment that pays you 6%, there is no tax to be paid on the 6% mortgage that you save (although, there can be a negative benefit of losing the tax deduction on your home loan interest … but, I’m trying to keep this simple), so it’s more like earning 7.5% – 8.5% (depending on your tax rate) in any other investment.

– Let’s say that you plonk the entire $150k down in one hit, you save the entire $175k INTEREST (yes, a house that you buy for $150k in 2010 will have cost you $325k, just in principal and interest, by the time you have paid off the 30 year loan in 2040).

2. You do not pay off your mortgage early

NotePaying the loan off slower will, naturally, save you something greater than $0 and less than $175,000 … but, is too hard to calculate, here, so we will continue to use the assumption that somehow, you were able to pay that entire $150k loan off in one hit.

Well, it’s a fairly simple calculation then, isn’t it: what can you invest $150,000 in that will return more than $175,000? Let’s run some numbers and see:

Business: If Michael Masterson is right, and we gain 50% (or more) from our own business, then after 30 years you would have earned $29 Billion on your $150k ‘seed capital’.

But, MoneyMonk is right: there is extreme risk and skill involved in being successful in business … just a shame the potential reward is so low 😉

[AJC: just a tad more than the $175k interest that you would have saved if you used the money to pay off your mortgage instead of starting a business]

Real-Estate and Stocks: Again, if Michael Masterson is right, and we gain 30% by investing in a mixture of buy/hold real-estate and stocks (naturally, continually reinvesting the rents and dividends), then after 30 years you would have $392 million …

… if that sounds a lot, remember that Warren Buffett built up a $40 Billion+ fortune over 40 years at not much more than 21% compounded.

Stocks: I agree with Michael Masterson, that if you buy stock in just a few good businesses when they are are going cheap (as the market does from time to time) and wait 30 years, you should have no trouble getting a 15% compounded (pre-tax) return so, after 30 years you would have nearly 10 million.

But, all of this has some risk / skill associated with it … so, maybe paying off the mortgage and snaffling that $175k is still the way to go for all of those risk averse people [AJC: Like me. True!] out there?

But, wait, what if we just do the ‘no brainer’ thing and plonk that entire $150k in a set-and-forget-low-cost-Index-Fund?

Here’s the good news: paying off your mortgage is a 30 year investment (you have forgone 30 years of being locked in to a loan and paying 6% interest year in, year out), so it’s only fair that we buy $150k of Index Fund units and don’t even look at our portfolio for 30 years, right?

Well, that’s an ideal strategy – THE ideal strategy – for Boglehead set-and-forget investors! So …

Index Funds: Over 30 years, the markets (hence the lowest cost Index Funds) have averaged something more than 12% – set and forget (!) – so, after 30 years you would still gain close to $3.5 million!

But, wait … we’re all about security here: you can’t live off averages, right? What happens if there’s another crash like 1929 and 2008 the day after I plonk my entire $150k into an Index Fund?

Well, you lose half your money immediately 🙁

But, we don’t care what happens immediately, this is a 30 year set-and-forget plan … and, there has been NO 30 year period where the stock market hasn’t returned AT LEAST 8%.

Now, isn’t 8% (since we have to pay tax on it) exactly the same as the equivalent after-tax 6% mortgage (give or take 0.5%)?


The lowest possible return that we can get with any reasonable investment strategy that we can come up with is exactly the same as the best possible return that we can get by paying off our mortgage early.

Now, isn’t that interesting?

Is your home an asset?

I spend a LOT of time on this blog talking about your home, and rightly so; your home is often regarded as your single largest asset.

Or, is it?

TraineeInvestor reopens the debate with what I think is a really interesting – seemingly ‘throwaway’ – line in his comment to this post:

The overwhelming consensus of opinion on internet forums and blogs is that your home is not an investment. (There are even people who think it is a liability rather than an asset!!!).

The “overwhelming consesus” hasn’t made $7 million in 7 years, and probably never will 😛

But there is grounding to the home-not-an-asset way of thinking; for example, in this post I quoted Robert Kiyosaki who first told me that a home is NOT an asset [AJC: Unlike many others, I am not a Robert Kiyosaki detractor … Rich Dad Poor Dad was the first book that I ever read on personal finance and, at the time, it really opened my eyes to the value of financial education].

Here’s what RK said: 

  My Poor Dad Says   My Rich Dad Says
  “My house is an asset.”   “My house is a liability.”
  Rich dad says, “If you stop working today, an asset puts money in your pocket and a liability takes money from your pocket. Too often people call liabilities assets. It’s important to know the difference between the two.

Yet, paradoxically, TraineeInvestor also pointed to the exact opposite: study after study has shown that the wealthy own their own homes and the ‘poor’ do not!

So, what do I think?

Well – and, this may also SEEM paradoxical – I actually agree that a home is not  an asset in the sense that it doesn’t earn an income.

Of course, you could rent to yourself.

Tell me then, though, when do you – could you – ever realize the value in that ‘asset’?

Only if you sell (you never will); or, pass it on (it’s not an asset for YOU).

Yet, there is one way to realize at least part of the value of your asset (while you still need a place to live), and that is to release some equity by refinancing.

So, technically, I agree with the ‘non-asset’ thinking, which is why I ask you to at least minimize the equity in your own home to a mere (by Dave Ramsey standards) 20% or less of your current Net Worth (and, review annually).

I also advocate buying your first home – more for some ‘human nature’ reasons rather than strict financial reasons – but, nowhere in this blog have I ever said: “… then, upgrade it”! 😉

Why bother keeping up an esoteric “is your home an asset or a liability?” debate at all, when the only real question that you need ask yourself is:

Can I reach my Number if I buy my own home, then keep [insert ‘% of current home value’ of choice: 0%; 10%; 20%; 50%; 100%; other] tied up as home equity?

My standard advice is, YES … if:

a) I buy my first home (with whatever starting equity that my bank and I can agree on), then

b) [as soon as reasonably possible, start to] maintain no more than 20% of my net worth in that – or, any future – home as equity

c) and, reassess b) annually (against both my home’s and my own net worth’s current value)

Ultimately, the equity that you choose to keep in your home either helps you to reach your Number, or it doesn’t.

For most people, “reaching their Number” means amasssing ‘real’ assets in the range of millions of dollars. Logically, tying up valuable equity in something that can’t possible reach ‘millions of dollars’ in value is wrong, so why do it?

What does this all mean for you?

My ‘rules’ of home ownership are designed to give you the best chance to reach your Number by your Date.

Depending on how YOU choose to look at it, your home is either your single largest asset or single largest liability …

… the real point of this blog is to make sure that it doesn’t stay that way 🙂

Is your first home a good investment?

This is a loaded question, obviously, because I just revisited the subject of buying your first home (of which I am now an avid fan) a week or so ago; Rick suggested:

Since equities also have a good long term investment record, why not scale back on the primary residence somewhat and invest in both real estate and equities?

At the time, I responded by saying: “The effect of the 20% Equity Rule and 25% Income Rule is to ensure that you are always investing AT LEAST 75% of your networth elsewhere (could be business, RE, equities, etc., etc.).”

Of course, that doesn’t address the question, as I have also said that these rules are up for grabs – meaning, you can just ignore them – when considering buying your first home.

Now, I am clearly a fan of buying your first home – you just need to go back to one of my very first posts to see that – but, it wasn’t always that way …

… I started by believing that there were other investments out there that performed better than your first home.

And, that still holds true; after all, as my Grandfather once told my Grannie when they had the same decision to make soon after immigrating to Australia:

You can’t always buy a business from your home … but, you can always buy a home from [the profits produced by] your business.

This still holds true … as does the 20% Equity Rule. In other words, if you are absolutely committed to using the funds to start a business, or are ABSOLUTELY committed to ALWAYS investing at least 75% of your Net Worth, then by all means keep renting.

It’s just that 99% of people will – sooner or later – fall off the investing wagon. It’s human nature.

Then they’ll end up with no investments, little net worth, and no home. Buying your first home, and using that as a springboard into other investments, is a great way to go; just remember what I said, way back in the beginning of 2008:

 If you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key – ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

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

… 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:
And, these posts if you are interested in how to analyze a commercial property deal (offices):
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!

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?

What should you invest in first?

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).


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 🙂