What is the best way for a newcomer to get started in investing in stocks?

I just got back from Omaha, where I attended the Annual General Meeting for Berkshire Hathaway – Warren Buffett’s company – so, it’s timely that I remind you there are only a TWO sensible ways to INVEST in stocks - BOTH recommended by Warren Buffet  – plus one Speculative way:

1. Buy and Hold low cost, diverse Index Funds (check out Vanguard’s web-site, and others) – this is a long-term, low risk (if your holding periods are 30 years) strategy that can help you fund a normal retirement.

2. Invest in a FEW stocks in companies that are:

(a) undervalued,

 (b) have a large margin of safety,

(c) that you love, and

(d) are prepared to HOLD …

… until the rest of the market decides that they love them, too, at which point you cash out and go back to (a).

Anything else is SPECULATING – lots of people have made a ton in trading stocks and options (e.g. George Soros, but he was smart enough to know to quit gambling when you are ahead) – or UNDERACHIEVING such as following the herd and/or buying high-cost Mutual Funds.

You may be one of the few that can succeed in either of these alternative methods … but, please don’t offend the World’s Greatest Investor by calling it INVESTING …

We believe that according the name ‘investors’ to [people or] institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ [Warren Buffett]

So, there are only two methods that Warren Buffet would recommend (and one that he clearly would not) – one for the wise and the other for the even wiser - which one would you choose?

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Well, the ‘news’ of my 7 Millionaires … In Training! ‘experiment’ is finally out … check out my friend, Bill’s post on Money Hacks, then click here to find out more …

The Great Debt Repayment Fallacy … don't fall for it!

Everybody knows about ‘good debt’ and ‘bad debt’, right? And, we all know – and have committed to memory - Personal Finance Prime Directive # 1:

Eliminate All Bad Debt Now … Before Doing Anything Else!!!

This may be the current Personal Finance mantra, but, if you happen to subscribe to the same view, then read on because this post could be the most important piece of wealth-building advice that you will ever read!

But, first …

That simple and clear ‘PF Directive’ was the assumed premise behind a recent (and very good, I might add) post on The Simple Dollar that I want to delve into a little more deeply than usual because it brings out a critical wealth-building point that may not be obvious to all. In that post Trent said:

A reader wrote in recently:

I have kind of a weird situation with our 2 credit cards, and wanted to see what you thought. We have one card (Citi) with a total balance of $4,800. $3,800 of this is a balance transfer that is at 2.99% until paid off. The remaining $1,000 is at 13.49%. Of course, all principal payments are applied to the lower rate debt first. Our other card (Chase) has a balance of $5,700, and is at 0% until September 08, when it goes to 8.99%. Which card do you think is best to “attack” first?

After reading this email, I thought it would be a good time to take a more general look at comparing the debts you owe as well as how to construct a healthy debt repayment plan.

Trent then proceeded to outline a very good and pragmatic approach to dealing with these, and any other, debts … a plan that involved: 

A few sheets of paper and a pen; the latest statement for every single debt; making the first list; ordering all of the debts by their current interest rate; looking for ways to reduce the rates, focusing most strongly on the highest current one; when you’ve reduced rates, making a new list reflecting the changes; dealing debts that are set to adjust in the future; directing all of your extra payments towards the top debt on the list; when a debt vanishes, crossing it off and feeling good about it; updating the list when you acquire a new debt; and, updating the list when one of your debts adjusts to a new rate

Before I weigh in on this, let me ask you a Very Important Question:

Do you really just want to be debt free or do you want to be rich?

I know that sounds self-evident, but stick with me … if you just want to be in the top 5% of the US population and retire on $1,000,000 in, say, 15 years then by all means, do the Dave Ramsey, Suze Orman, and/or Oprah ’debt diets’:

That is, save and be debt free (including your own home) … whoohee! … by the time you ‘retire’ [read: work part-time in Costco handing out free food-samples until you're 75], you’ll be living on the equivalent of $15,000 today  and hoping to hell that the government can still afford to pay you social security!

It’s OK if you slavishly follow this thinking: it’s the Conventional Wisdom …

It’s just that if you want … nay, need … to be rich(er) and retire soon(er) then you’re going to need unconventionally large amounts of money in an unconventionally rapid timespan, and that’s going to take some Unconventional Wisdom!

You see, I believe that being debt free and being rich are [almost] mutually-exclusive!

This is a pretty controversial view, I should think … but, I will even go so far as to say that it is [almost] impossible to become rich without using debt: debt to fund your business (working capital finance and/or leases on equipment and/or leases on vehicles, etc.); debt to fund your real-estate investments (fixed interest mortgages and/or interest-only funding); debt to fund your stock purchases (margin lending); etc.

Hold on, all the Personal Finance writers/bloggers out there say:

We can put all of the above examples in the ‘good debt’ category and we already agree that they are OK …

Great!

But, then they always add:

… but, ‘bad debt’ is ‘consumer debt’ (credit cards, student loans, car loans, etc.) and we all know that our Number One Personal Finance Objective is to wipe Bad Debt out, right? After all, it’s not called ‘Bad’ for nothing! Right??!!

Well, not necessarily … sure you shouldn’t get yourself INTO any of this Bad Debt … but, once you have some (you naughty, failed human being, you), you need to mix it with your Good Debt and revisit Trent’s Plan with ALL of your debts in hand … both ‘Good’ and ‘Bad’.

Look at it this way, once you find yourself with a mix of both Good (appreciating and/or income-producing assets) and Bad (depreciating, consumer goods) Debts, the only things that matter are:

1. Paying off the Dollar Value of the Bad Debt as quickly as possible, and

[AJC: Here is the key ... its in the "AND"]

2. Paying off the highest after-tax interest rate loan off first.

So here was my advice to the person who asked the question on Trent’s post:

Interestingly, in the reader’s case (if I read correctly) his ‘consolidated’ card is at a Combined Effective Rate of only 5.2% … because he can’t attack the 13% portion until he pays off the 2.99% portion I would do the following:

1. Pay off the other card first, then

2. Buy an investment using the money that he would have paid the 5.2% debt off with …

… after all 5.2% is a very low rate of interest!

To clarify: I would not pay either card when interest rates are under the standard variable mortgage rate … I would be financing new real-estate, or paying down the mortgage on my existing (IF I’m not breaking the 20% Rule). The plan I outlined above starts when the 0% period ends … until then, pay off NEITHER card IF you have a more productive use for the money!

What does this mean for the rest of us?

i) Don’t get INTO Bad/Consumer Debt … save and pay cash for any ‘stuff’ (cars, vacations, furniture, ipods, computers, etc.) that you want.

ii) Once you do get INTO Bad/Consumer Debt … don’t be in such a hurry to get out of it; compare the cost of your Student Loans; Ultra-Low-Honeymood-Rate credit-cards; Super-Low-Suck-You-Into-Buying-More-Car-Than-You-Can-Afford Interest Rate car loans; etc. against the after-tax cost of the mortgage that you have on your house and/or investment properties (or the interest rate on your Margin Loans for your Stocks; or your Working Capital Finance for your Business; etc.).

iii) Work out a repayment plan as though you were going to pay INTO that Bad/Consumer Debt … instead, pay an equivalent amount off against your highest after-tax interest rate loan across your entire Good/Bad Debt portfolio.

iv) Reevaluate at the earlier of Quarterly (i.e. every 3 months) OR when one of the interest rates on ANY of your loans changes OR [yay!] when you have paid one of your loans off.

v) If you don’t want to (or can’t) get out of a higher-interest loan early using (iii) then compare the cost of the lowest-interest loans that you have (regardless of whether they are Good/Bad) against the current FIXED interest rates for new loan on a new investment … if LESS, buy new instead of pay off old.

Remember: The Object of Personal Finance is to end up with MORE money … the object isn’t to SAVE money, PAY off debt, BUY a house, START a business … they are all just all steps along the way.

If you want to get Rich(er) Soon(er) never, ever confuse A Means To An End with The End …

… now, let the flames begin!

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Last days for ‘pre-applications’ to become one of my 7 Millionaires … In Training! Click here to find out more …

Business for sale?

As you know, I’m a member of Networth IQ - and quite an active member, at that! I love reading and answering questions … 

[AJC: you've probably already seen that from the detailed responses that I try and give commenters on my posts on this blog ... try me, if you have a question ... I just won't give direct personal advice, because I am not a qualified professional, but I will give general advice if I think it will benefit all of our readers]

… and this unique site provides a great platform (as does Tickerhound, which provides a great Q&A forum on everything from stocks to real-estate).

For those of you who aren’t members of Networth IQ, here is an exerpt of a great question:

I found a business for sale that has generated the following free cash flows since 1998.

1998 – $3,426.0 Mil
1999 – $3,949.0 Mil
2000 – $4,917.0 Mil
2001 – $7,133.0 Mil
2002 – $6,077.0 Mil
2003 – $8,333.0 Mil
2004 – $8,956.0 Mil
2005 – $9,245.0 Mil
2006 – $11,582.0 Mil
2007 – $12,307.0 Mil

The current owners are asking $183.49 Bil, …. I don’t have $183.49 Bil, but they said that they would sell me a smaller portion of the business if I wanted … Should I buy?

I like this question on two levels:

1. It’s a neat reminder that when we buy stocks, we’re not just buying ‘bits of paper’ … we’re buying a small piece of a real, live business!

And,

2. It gives me an opportunity to show you the sorts of questions that I would ask – and the types of information that I would be looking at before buying into this – or any – business.

According to Warren Buffet (or sources who purport to know how he works) the intrinsic value of a business is in its discounted cashflow.

That is, a business is – or should be – a cash machine … what’s the reason for owning it, if not to get some cash out?

So, in the above example, we should be able to decide if the business is worth $183.49 Billion (not knowing the company in the above excerpt, I am assuming that this number represents the entire current market capitalization of the business) by discounting the cash-flows shown above …

… a quick look at the most recent cash-flow figure shows that it is currently producing $12 Bill. cash per year (probably growing, if history is any guide); that would mean about 15 years to get our money back … yuk.

Now you know why the stock market is generally a fool’s game … I would by far prefer to invest in my own business, or buy a private one at ‘only’ 3 to 5 years free cash-flow (better yet, Net Income), and grow it … then float it myself!

Or, at least sell it to a public company who can immediately ‘claim’ 15 times my Net Profit (hence, give me 7 to 12 times my Net Profit).

But, if we are going to play ‘the stock market’ game, what would we need to know before we can make an informed decision about ‘investing’ in this stock?

Do I believe this company will be around for the next 100 years … do I really want to buy THIS business in THIS industry?

Lastly, if I like the answers to all of the above (unlikely … so far I’ve only liked the answers to similar questions for 7 companies out of the 5,000+ that I can currently buy a ‘piece’ of) …

… 7million7years doesn't even know how much is in his Retirement Accounts!

[continued from yesterday]

Now, I’m not particularly proud of this … but, it is true … I have no idea how much is in my retirement accounts; and, I didn’t even bother opening my own 401k account as CEO of my last company!

Why?

Yesterday, I wrote about the costs that can build up in the ‘food chain’ of the investing world, showing that merely accounting for the cost-differential between a typical mutual fund and a typical low-cost index fund can account for 20% of the performance of your entire investment portfolio after just 10 years.

I also, mentioned that I don’t like any of these products (even low-cost index funds, even though I will recommend them to lay-investors), primarily because of lack of control and too much diversification (who ever got rich from diversifying?!) …

So, the second part of this post will, hopefully, tell you why I don’t worry about 401k’s and Roth IRA’s as well as address a question that I recently received from a reader who asked:

Any suggestions on a strategy to use for retirement accounts if you earn beyond the limit for a 401k and Roth Ira? I have no company match for a 401k … get hit hard in taxes and have discovered that there is an income limit to a 401k and Roth IRA. Any suggestions?

Well my simple suggestion is: don’t …

The only time that I invest in a retirement account is when my accountant says:

“AJC, you have too much income flowing in, we had better plonk some into your [401k; Roth IRA, Superannuation Plan, whatever]“.

Yet, using a tax shelter is saving money, and as yesterday’s post showed, even a small difference in cost can add to a big difference in outcome … so, what do I really recommend and why?

If you still have plenty of working years left, I don’t recommend that anybody invests inside their company 401k except to get the ‘company match’ (who can argue with ‘free money’… yee hah!)

I also don’t recommend that anybody – who still has 10+ years of working/investing ‘life’ left – invests  inside any tax-vehicles (such as a Roth IRA) etc. UNLESS they can:

(a) Choose their investments, and

(b) leverage those investments.

By choosing, I mean the whole gamut of what we want to be investing in: e.g. businesses, stocks, real-estate, and ???.

Now, in practice, these 401k/IRA’s are limited, so if you don’t intend to invest in some/all of these classes of investment or you have so little money to invest that you can ‘fit’ the whole or part of your intended, say, stock purchase strategy into one of these vehicles then, absolutely … knock yourself out!

Therefore, for most people, it’s still possible that a 401k or Roth IRA can provide an important place in their investing strategy … simply because the amount that they have to invest is so small …

… even so, they should go ahead only if it doesn’t limit the scope of their overall investing strategy, hence returns!

And, we should all know by now that primary importance of your investing strategy should be set on maximizing growth unless:

i) You are within a few years of retirement, when you no longer have time to take risks and recover from mistakes), or

ii) Have such a long-term, low-value outlook that simply saving in a 401k will do the trick (in which case, invest to the max.).

Just remember, this blog and my advice isn’t for everyone … it’s only for those who need to become rich …

… which usually means getting into investments that:

1. You understand and love, and

2. You can grow over time, and

3. You can leverage through borrowings.

If it doesn’t meet all three of these criteria, I simply don’t invest!

Direct investments in businesses and real-estate are the investment choices of the rich because of these three criteria… stocks to a lesser degree (you can only ‘margin borrow’ up to 100% of these, so the amount of ‘leverage’ that you can apply is lower than for, say, real-estate) … and, Managed Funds even less so (you can margin-borrow only on some of these, and only from limited sources).

For me, the limits that tax-effective vehicles place on me, and the maximums that I am allowed to invest in them, automatically reduce these typical ’tax shelters’ to a very minor position in my portfolio … so minor, that I allow my accountant to manage them for me, totally.

Remember, though, that they only became a minor portion of my portfolio because I followed the advice that I am giving you here when I was still early into my working/investing career!

Now, I hope that (eventually) you, too, will have so much money OUTSIDE your 401K that whatever is INSIDE will be insignificant for you … in the meantime, at least invest for the full company match.

Pretty controversial? Let me know what you think?

Why 7million7years doesn't buy 'packaged' products …

I left a somewhat tongue-in-cheek footnote to a recent post on the differences between Index Funds and ETFs (if you didn’t read it, I favor the former over the latter for neophyte investors, and neither for serious investors):

Important Note: 7million7dollars does NOT currently invest in any Index Funds, Mutual Funds, or other “Packaged Investment Products” … apparently, he is just a (rich) product of the Stone Age

It seems to me that the wave of packaged products has increased over the past 20 years.

No longer do you tend to hear those stories of people like the reclusive and grumpy Old Man Miller who fell off a ladder and died leaving no heirs and a box of dusty old stock-certificates that now just happens to be worth $900,000 (not to mention a pile of gold just sitting under some lumber in the old wood-yard)!

It’s not just stocks … it seems that you can’t buy L’il Jon a toy without taking out your industrial grade laser to burn through 15 layers of impossible-to-open plastic ‘bubble’ packaging.

Think about the cost-differential between a typical consumer product at manufacture (the price it cost the guy who made it in: raw materials, labor, tooling, bulk packaging, and bulk shipping) and the eventual end consumer who buys it at retail: the price can inflate by 5 to 7 times … or even more.

The more hands, the more cost … simple.

Similarly, with ‘investment products’ …

… in my perhaps archaic way of looking at things, the further removed that I am from the investment, the less control I have, the more people who want to add cost (including their profit) into it, and less I like it.

That’s one of the reasons that businesses (my own) are my favorite form of investment … followed by direct investment in real-estate … followed by direct investments in company stock.

 Now, if you do decide to invest in a fund, why would you choose a Low Cost Index Fund over the typical well-diversified Mutual Fund?

Unless, you can guarantee to find me a Mutual Fund that will outperform the market over the next 10 years (considering that 85% of fund managers don’t beat the market, that’s an easy bet for me to take), I would choose the lower cost option, simply because of cost.

If the Index Fund charged you only 0.25% of your total investment amount to enter the fund and another 0.25% a year to manage it for you, but the mutual fund charged you 1.0% and 1.0% [BTW: in this example, the Index Fund fees are too high and the Mutual Fund fees are too low] …

… over just 10 years (assuming an average 8% return for each), you would have paid the Index Fund just over $43,000 in fees … but, the Mutual Fund $157,000.

Why so much?

Because, you also need to factor in the foregone earnings on the amount that you could have had invested, if those fees weren’t there …

On the other hand, if you invested directly in some stocks and just managed to meet the market, with little to no fees (it costs just $7 to buy, say, $25,000 of stock using an on-line broker) …

… now you know why I don’t like packaged products!

I encourage you to run some numbers for yourself …

[To be Continued]

Applying the 20% Rule – Part I ( Your House)

Since my early post How Much To Spend On A House is still one of the most visited posts on this site, I thought that I should write a little follow-up piece that gives some examples on how to apply this important ‘rule’.

First a recap:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ‘stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

Warning: most people think of their house as an asset, but by this definition, it most definitely is not … let this be a warning to all those ‘house rich … asset poor’ people out there who think they can retire just from their house.

For those mathematically minded, as a formula, this can easily be represented as:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments! Simple, huh?

Also, for those who have been tracking my posts, the difference between your Notional Net Worth and your Investment Net Worth will be the Current Market Value of Your House + the Current Market Value of Your Possessions; if you’ve been following my advice this should be no more than 25% of your Notional Net Worth.

Now, you may have noticed something interesting:

The Current Market Value of Your House will usually go up over time (current market conditions aside!)

The Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Houses generally appreciate … possessions generally depreciate.

This sets up some interesting situations that we should discuss … by no means an exhaustive list:

1. Aspiring Home Owner – The chances are that you have debt (particularly if you were recently a student), little income, some possessions, virtually no savings or investments. You will probably never be able to buy a house at all – or, if you can it may never be bigger than a cardboard box - if you follow the 20% Rule …

… My advice is to buy the house anyway IF you can afford a decent down payment (ideally 20+%) and can afford the monthly payments (lock in the interest rates for the max. period that your bank will allow, ideally 30+ years).

A lot of financial mumbo-jumbo has been written in the press, books, and blogosphere about this … ignore what you may have read: for most people, it’s the only way you will ever get financially free.

2. Already A Home Owner – Revalue your home (be conservative … don’t wear ‘rose-colored glasses’ … check what other houses around you have actually sold for … don’t rely on any realtor’s advice – they may ‘talk’ up the price to convince you to sell – we don’t want to do that, yet!). Do this every 3 – 5 years (yearly is better).

If the conservative value of your house puts the equity in your home (Your Equity = What the Home is Conservatively Worth – Today’s Payout Figure On Your Home Loan) at greater than 20% of your Current Net Worth (you will need to redo this calculation at the same time as you revalue your house), then it is time to extract that ’excess equity’.

What to do with this excess equity? Invest it of course! For example, you could buy a long-term, buy-and-hold, income-producing (get the picture!) rental property … or you could buy stocks … or you could take some risk and buy / start a business … or it’s up to you!

But, if you locked in your home mortgage at a cheap interest rate, you probably don’t want to refinance it, so be sure to ask a professional about suitable options for you (second mortgage; use your home’s equity to ‘guarantee’ the loan on another, etc.) … just be sure that you can afford the loans on both your house and your investment/s … make sure you have a cash [AJC: better yet, a Line of Credit] buffer against emergencies (loss of job, loss of tenant, etc.).

 3. Right-Sizing Home Owner – Again, revalue your home … but, of course you can down-grade (let’s say that you are retiring or the kids have moved out) – but just because you have freed up some equity and can easily fit into the 20% Rule doesn’t mean that you can slack off on your Investments.

ADD the freed up amount of equity to your Investment Plan … it will help you retire earlier and/or better!

Remember, your Investments should be a minimum of 75% of your Net Worth … you can and should invest more wherever and whenever possible! 

Again, if your original house is rent-able, and you have locked in a cheap interest rate (like I told you), you may want to keep it as an investment … consider doing so!

Now, buying houses isn’t always about making the right investment choice; there will be times in your life when you have to consider changing houses whether it fits within the 20% Rule or not (one obvious example was our First Home Purchase) …

… most likely, this will be at major life changes (marriage, divorce, babies). So be it!

Remember our Prime Directive: Our Money is there to support Our Life … Our Life isn’t there to support our Money (that would be just plain sick)!

Just make sure to revalue every year at first, then every 3 – 5 years min. and try not to get off-track, but if you do, simply realize if you are off-track financially and that you just have to get on-track at the first opportunity …

AJC.

PS You may want to bookmark this post (using the convenient links below) and review at every major ‘house change’ decision!

Fire your boss before he fires you … the 50% solution!

There is a cycle of life in the workplace … it begins when you get your first job, and hopefully it ends when you retire.

At least, it used to, when people worked their way up from the shop floor to the executive penthouse by working hard and staying with the same company.

By saving as they could, and relying on a good company pension plan (indexed at a reasonably high percentage of their ‘ending salary’) these loyal, hard-working folk could look forward to a reasonably relaxed retirement at the age of 65.

Not so any more …

A U.S. Department of Labor – Bureau of Labor Statistics news release published in August 2006 examined the number of jobs that people born in the years 1957 to 1964 held from age 18 to age 40.

According to this report, these younger baby boomers held an average of 10.5 jobs from ages 18 to 40 (In this report, a job is defined as an uninterrupted period of work with a particular employer).

Sometimes, this is because of new/better employment opportunities – or simply due to a change in life circumstance – but, all too often, it is due to being laid off.

This brings me to a recent post on Get Rich Slowly that asked “What To Do If You’re Laid Off?” … I’ll let you read the post and the comments, but I can’t help thinking that you need to put in place a ‘backup’ plan (something a little more meaty than the usual “save up a 3 month savings buffer“).

And, I think that the whole process should begin as soon as you get your first job …

… so, I was pleased to see this really cool post on The Simple Dollar, for all you college kids or school drop-outs out there [AJC: this is an equal opportunity 'get rich(er) quick(er)' site!].

The article was called About To Enter The Workplace For The First Time? Try The 50% Solution which really boils down to:

- We all know that Paying Yourself First 10% – 20% of your gross salary is a really cool thing, so

- Starting your very first job by Paying Yourself First 50% of your gross salary must be a really, really, really cool thing?

Read the post for more details, but TSD is absolutely right … why?

A. If you’re used to living on NOTHING, then living on 50% of SOMETHING has gotta be a snap

B. If 10% of your gross salary compounded for, say, 40 years can give you $730,000 then 50% compounded for the same 40 years should give you $3,700,000 [AJC: It won't be WORTH $3.7 mill. but that's another story!].

But, as some of that post’s commenters pointed out, it can be very hard to start saving 50% of your starting salary, even if you lived on nothing before, because now you need to buy: food, shelter, transport, and so on.

But, the principle of setting your target much higher (TSD suggests 60/40 … spend 60% save 40%) when you start out and trying to maintain your momentum holds water.

Here is what I think that everybody who is still working for a living should do, regardless of source and amount of income, or their age:

1. Use this post, and the others that I have referred to, as a wake-up call that your job is NOT secure … therefore, your life is NOT secure until you take your future security into your OWN hands.

2. Once you realize that you are taking a financial risk every day at work, it becomes much easier to think about ways to break free. Start by putting as much behind you as quickly as possible, in case the ‘worst’ happens:

i). Commit to an maintain a Pay Yourself First mentality that may be as little as 10% of your current salary or as much as 50% – anything less is not enough … anything more and you are a miser

ii). For any future increase in salary – commit to saving 50% of the increase and putting it to work in your Investment Plan

iii). For any future ‘found money’ including bonuses, tax refund checks, overtime payment, spouse back to work, etc. – commit to saving 50% of the increase and putting it to work in your Investment Plan

iv). Start a part time business – or find another way to increase your income - commit to saving 50% of the increase and putting it to work in your Investment Plan.

Take these actions with the eventual aim of firing your boss before he fires you!

It's a musical life?

[AJC: Since I wrote this, I notice at least two other blogs posting the same video ... oh well, I guess it's worth another look]

Occasionally, I lapse into the philosophical rather than the purely practical.

For example, I wrote a post fairly recently about the importance of The Journey … money is the result, not the object … yada yada yada.

While true, this Allan Watts video, produced by the South Park Boys (Trey Parker and Matt Stone) says it SO much better … enjoy.

Please!

http://www.youtube.com/watch?v=ERbvKrH-GC4

AJC.

"I noticed you have incredible traffic for a 3 month old blog!"

This was a comment that I just received from a fellow blogger …

I didn’t know I had any ‘fellow bloggers’, but bloggers seem to have an ‘unofficial’ fraternity … so, I guess it’s kind’a nice to be part of a ‘group’ even if I didn’t set out to do so.

I have been communicating off-and-on with one particular fellow blogger that I only know as the mysterious  blogrdoc (that’s him in the picture!) ever since he left me a rather ‘flattering’ comment on one of my earlier posts:

I’m sorry, but if you made $7M, you would *NOT* be running a blog.

I immediately knew that I would like this guy!

After we got to ‘know each other a little better’ through a series of comments and e-mails, blogrdoc asked me a question that I thought I should share with you all:

I wanted to get your opinion on something. I’d *like* to make 7M in 7 years. Do I *necessarily* need to assume a lot of financial risk to do this?

No … blogrdoc … you just need an awful lot of luck

You also need to take at least some risk and put in an awful lot of sweat … it’s just that the risk doesn’t need to be financial, and the sweat can be a little less or a lot more depending upon how quick you want to become rich (and how much ‘rich’ means to you) …

Let’s look at it this way:

If you want to make $1,000,000 in 20 years, just buy a house and keep up the payments and … wait.

Guaranteed millionaire!

If you want to make $7,000,000 in 7 years you need massive passion/action - and, a little (or a lot!) of luck - to get it …

But, if you want to end up somewhere between the two, then we can talk turkey.

First, here is blogrdoc‘s plan:

My Strategy is a multi-layered approach and will include: 1. Blog/Ad based revenue (for starters, I am aware that this is extremely difficult to monetize. Particularly for me since I don’t have too many connections. 2. Several product based revenue ideas. May file for a patent then license. 3. ???

Blogrdoc has hit the nail on the head … these are excellent Making Money 201 strategies:

1. Blogging may not make much money, but it may bring in some (at least 50% of which should go towards your Investment Plan) … the more money it brings in, the shorter the time to the ‘end game’.

2. But, blogging also brings those ‘connections’ that you need to make your life a success … this is just a new twist to an old game called ‘networking’ … it’s not what you know, but who you know that counts.

3. Product based ideas become businesses … businesses (with a lot of hard work, and a little luck) become income … income becomes fuel for your Investment Strategy and we are back to 1. … the more money these businesses bring in, the shorter the time to the ‘end game’.

Now, here is where I think the people who have taken the time to read this whole post get their reward:

In none of these cases am I anticipating putting more than $10k or so at risk. My main concern is that I’ve got a family and I just don’t have the stomach to put too much at risk. I can’t just leave my day job or anything like that. Do I have a chance? Am I looking at this all wrong?

No, my friendly-neighborhood-bloggerman, you are doing this all RIGHT!

Even THE Guy Kawasaki (Apple co-founder; founder/ceo of Angel Investing firm) started his last two successfull online ventures (including Alltop) on something like $10k each … I am into three right now, with a max. of $50k committed to each.

Here’s the low-risk (but, not no-risk) way to reach your financial goals … for any blogger and/or just-starting-out business person out there:

… I can’t promise that this simple plan will make you $7 million in 7 years (first, you have to really need it to get it … just wanting it won’t cut it), but it has a better-than-even chance to make you more money than you ever thought possible:

i) Maintain your Making Money 101 habits: pay yourself first (you know, that “10% into your 401k” thing); pay down your consumer debts (car loans, c/cards, etc.); buy your own house (better yet, buy a rental).

ii) Accelerate your income: Use any excess cash from your job, your side ventures (e.g. ‘starbucks experiment’), tax refund checks, anything that helps you to build up little pots of investment capital.

Hint: that does NOT include anything in (i) … never ‘gamble’ with anything you cannot afford to lose … and you cannot afford to lose your savings or investments … ever!

iii) If you want to get rich slower, simply add these ‘pots’ from ii) to your Investment Plan … if you want to ‘roll the dice’ and take, really, only a little extra risk to (maybe) get rich quicker, use these little pots of investment capital to fund your ‘product based revenue ideas’ and fund those patents.

Warning: this money has to come from somewhere … it will probably be the same money that you used to use for vacations, new sunglasses, baseball tickets, fancy dinners … you know. ‘stuff’ that you couldn’t possibly begin to do without

iv) Starting more than one venture part-time (not necessarily more than one at a time, though) is exactly the kind of ‘controlled risk’ thinking that I like … just make sure that you have your ‘end game’ in mind right from the start (who are you going to licence those patents to? Who is going to buy those ‘micro businesses’ that you spin off).

v) Until the income from one of these ‘side ventures’ makes it seem stupid for you to do otherwise (you will know when this time comes), by all means: keep your day job and keep feeding your family!

vi) If you work hard, delay gratification, stay innovative, keep investing, get lucky, and keep those Step (i) Money Making 101 habits in place the whole way through, you probably won’t need $7 million to do whatever it is that is in your Life’s Dream … but 7 years should be just about enough time to get there.

Good luck to blogrdoc and all of the other Personal Finance (and other) bloggers out there …

… indeed, good luck to anybody who is reading this in order to break out of the pack. Hopefully, by following the advice in this post and others, you’ll need a little less of it (luck) to succeed!

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Devolving the Myth of Income … Part II

In Devolving the Myth of Income … Part I we explored the following question: “what’s your definition of ‘rich’ … would being a highly-paid professional (such as a doctor) or a high-flying executive (such as a high-tech sales rep) earning megabucks-per-year do it for you?”

Today, I want to finish exploring this subject by looking at question recently posed on Networth IQ a web-site for people to track (and discuss) their own Net Worth.

The question was posted by mario  (you may need to register and log-in to see his Networth IQ Profile):

Like many Americans, I have a great deal of equity in my home, built up by “trading up” over the past 20 years. At this point I have over $2M of equity in my home, which represents two-thirds of my overall net worth. While this is all good, I am starting to feel like this flies in the face of my diversification goals; how can I consider myself diversified if I have 66% of my net worth tied up in one piece of real estate? I would sell the house in a minute except for the tax consequences. Does anyone have a strategy other than selling?

Here is a guy with a high-flying sales career, earning more than $250,000 a year and he’s less than 50!

He also has a house worth $2,000,000 …

…. now, you could be describing me!

But, there’s only two differences:

1. If I choose to stay in bed tomorrow … that’s OK. Stay in bed the next day … fine. The day after, the day after … it doesn’t matter. Even if I never bother getting out of bed again … the money keeps rolling in.

2. I can afford my $2 Million house, my Maserati and my $250,000 a year lifestyle!

Let me explain …

In a recent post I wrote about the Fisherman and the Investment Banker; ‘Mario’ is the Fisherman, I am the Investment Banker … what happens when Mario’s ‘fishing career’ stops?

When Mario stops, his income stops, and he can no longer afford his lifestyle. This is mainly because, Mario’s Investment Net Worth is much lower than his Notional Net Worth.

Here is what the Mario’s of this world – that is, those with high-flying corporate jobs and those in high-income-producing businesses (and there are plenty of both!) - need to do to ‘bullet proof’ their lifestyle:

1. Stay in the habit of saving - maintain the same good savings and debt control habits and (relatively) low-cost lifestyle as I hope you had when you were starting out, because you will need these habits when the income eventually stops flowing in … that will happen when you retire but it may happen even sooner than you think.

2. Only buy as much house as you can afford – obey the 20% Rule  and make sure that you only carry enough mortgage that you can afford without compromising you savings and investing goals.

3. Revalue your house every 3 to 5 years  – whenever your equity exceeds 20% of your Net Worth (Mario!), refinance the house and put 100% of that money towards your Investment Plan.

4. Accelerate your Savings Plan- save at least 50% of non-reinvested business income, every future pay increase, bonus, tax refund check, found money (the loose change in your pockets, Aunt May’s inheritance, that lottery win … anything and everything!). Enjoy the other 50% … go ahead … you worked for it!

5. Implement your Investment Plan – Every time that your Savings Plan builds up sufficient funds, add to your investments by buying and holding for ever any mix of the following that suits your skills and interests (do NOT trade with this money … build up a separate ‘spec fund’ if you want to do that):

a) Income-producing real estate, and/or

b) 4 or 5 direct stocks in companies that you understand and would love to own, and/or

c) Low cost, broad-based Index Funds.

I prefer investing in exactly this order, simply because you can leverage (i.e. borrow more) and improve returns by selecting/managing carefully (a) over (b) over (c) … but, that’s personal choice.

This simply boils down to saving more and spending less (now) to live well and securely (later) … no matter what you income is today … delayed gratification in action!

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