Tag Archives: Investing

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

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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!

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

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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 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!

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It's a musical life?

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[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.

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

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blogrdoc 

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

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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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The ONLY three ways to invest in stocks … and, some ways NOT to …

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So you want to invest in stocks?

And, why not be a bit of a contrarian by getting in now … when the markets are all beat up, and there is doom and gloom around, that’s when most of the money in this world is made … so, if you do want to invest, how?

Well I covered a bit about this subject in a recent post, comparing Index Funds to ETF’s … but, I want to go into it just a little bit deeper:

First of all you need to understand what type of investor you are:

1. Are you a Speculator – living on the edge, trading stocks/options (i.e. gambling) type? Nothing wrong with that – you could be the next George Soros.

If you are, then sign up for some newsletters and courses, such as the Tycoon Report (has the added advantage of being free!)

2. Or, are you a Value Investor – buying cheap, holding for the long term type? Are you the next Warren Buffet? Obviously, nothing wrong with being the world’s richest man, either.

If you are the next WB, then buy yourself a copy of Rule # 1 Investing by Phil Town. It will tell you exactly HOW to value stocks (what measures to use) and WHEN to invest (what indicators to use).

3. If you don’t have the patience for the latter (2.), or the stomach for the former (1.), then buy yourself some units in a low cost Index Fund … keep buying … and, wait!

That’s it in a nutshell …

… but, wait you say … what about:

4. Mutual Funds – too expensive and 85% of fund managers don’t even beat the market

5. Growth Stocks – if you have no special skill or knowledge, what makes you think that you can beat the Fund managers in 4.? You can’t (unless, you are lucky … then you are really just back at 1.).

Did I miss anything?

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Devolving the Myth of Income … Part I

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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?

If so, strap in, because I am about to devolve the myth of income by looking at two case studies, both from Networth IQ a web-site for people to track (and discuss) their own Net Worth.

To start, here is an excerpt from an e-mail that I received from docsd  (you may need to register and log-in to see his Networth IQ Profile):

I have been awaiting approval on a home that I am purchasing and just received word today that I was approved for the loan and that the closing process will proceed. My wife and I plan on staying in the home for many years to come, as it is an older historic horse farm on several acres outside of Louisville, KY and this home fulfills my wife’s dreams of being able to have horses. I actually came to a compromise with her regarding this house because my goal has always been to live as far below my means as possible while accumulating wealth and her goal was to have a considerable and high-end horse estate on several acres (obviously not inexpensive living, especially if this is a 500k-million dollar home that you plan on staying in). The compromise we made was to wait as long as we could to find the best deal possible so that we can fulfill both of our desires between the property and the low personal overhead to help with wealth accumulation. That time has come and we found the property, basically stole it for tens of thousands below its most recent appraisal and we qualified to purchase it while still holding on to our current home. We are purchasing the new home for 325k and our current home is valued at between 307k and 314k.

I feel I am in a unique position as the owner of 2 homes this early in starting my career and have a feeling I can make a much better situation out of my current home by holding on to it instead of selling it quickly in this market….however, I am worried that it is too pricey to be able use as a rental property investment at this time. Provided I refinance it to the going rate, around 6%, which is considerably better than the 8% we qualified for when we bought it just over 2 years ago, the total monthly liability for us would be just over 2k per month and I’m just not confident we can get that much monthly for rent here at the moment. This house is a very nice and large house in one of the more exclusive parts of town (in an area that has been averaging nearly 10% appreciation for homes per year across several years and not impacted near

What would you do if you were the ‘Doc’?

Obviously, we don’t know nearly enough about his situation … and, we can’t give specific financial advice, anyway … but, we can make some general observations:

Firstly, we can see a hard working professional (we presume) earning over $150k per year … easy street!

Then we see the problems that go along with it: too much house, too much lifestyle, too much debt … even though our ‘Doc’ says that he is focused on saving and wealth creation.

But, Doc has some bigger issues to deal with:

Assets   $ Diff % Diff
Cash $3,400 $400 13.33 %
Stocks $0 $0 –
Bonds $0 $0 –
Annuities $0 $0 –
Retirement $0 $0 –
Home $313,500 $6,000 1.95 %
Other Real Estate $0 $0 –
Cars $8,220 ($280) -3.29 %
Personal Property $25,000 $0 0.00 %
Other $0 ($1,500) –
Total Assets $350,120 $4,620 1.34 %
Debts   $ Diff % Diff
Home Mortgage(s) $279,510 $0 0.00 %
Other Mortgage(s) $0 $0 –
Student Loans $142,725 ($125) -0.09 %
Credit Card $0 $0 –
Car Loans $0 $0 –
Other $15,440 ($780) -4.81 %
Total Debts $437,675 ($905) -0.21 %
 
Net Worth ($87,555) $5,525 5.94 %

1. Student debt and other debt (plus his mortgage) of nearly $160k that must be paid off!

The ONLY reason not to concentrate solely on paying it off now is if (a) the interest rates on these loans are lower than mortgage rates, and (b) the money that should be used for paying off these loans will instead go into long-term, buy-and-hold, income producing rental property.

2. The ‘doc’ has a negative Net Worth!

Now, that’s always understandable for a professional with large student loans to pay off early in their career; I don’t know how long ‘our doc’ has been working, but to be looking to compound this Net Worth deficit by upgrading lifestyle is not something that I would usually recommend.

But, there is also an emotional/lifestyle decision to be made here: 

For example, we need a wife who is onside, so it would be tempting to simply swap one home for the other (keeping in mind it’s probably ‘only’ a $50k – $100k ‘swap’ … new house is slightly more expensive than the existing, but there will also be closing costs and selling costs, etc.).

But, I have a question around the horses … this house comes with a new lifestyle: are the horses just an expense (i.e. buy, feed, maintain) or also an income (e.g. agisting other people’s horses, selling horses, giving riding lessons, etc.)?

If the latter, I would consider upgrading just to keep the ‘little missus’ happy, but only if I was committed to earning more and using that extra income to accelerate debt repayment … if the former … hmmmm.

Given that we are not really assessing the Doc’s situation, because we don’t know enough, we need to realize that high income = high wealth only when that income is put to:

a. Debt reduction, then

b. Passive Investments

Lifestyle comes from the perpetually sustainable income that good passive investments should spin off … at least, that’s how I live.

In Part II, we’ll look at the super-high-flying-sales-rep …

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Measuring my performance against the Edelman 'secrets' …

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Ric Edelman book 

I’m going to do TWO things today that I don’t normally do …

1. I’m going to review a book, and

2. I’m going to do it by using a review of that book on another blog (The Simple Dollar, a Personal Finance blog that I happen to like … a lot)!

Why?

The book review outlines some of the ‘secrets’ suggested in the book … and I would like to give you some insight into how I think …

… so, here goes (everything in italics is from the blog post): 

Ordinary People, Extraordinary Wealth pledges to contain “the eight secrets of how 5,000 ordinary Americans became successful investors – and how you can too.” Intriguing subtitle. I can’t wait to dig in, so let’s get started. Looking Into Ordinary People, Extraordinary Wealth:

Secret #1
They carry a mortgage on their homes even though they can afford to pay it off.
Edelman basically argues that the concept of a mortgage being a bad thing is a relic of the 1930s, where banks would foreclose on a house on a whim, and the negativity associated with mortgages has hung around this long even though there are a lot of protections for the borrower today.

I bought my most recent house without a mortgage … I had plenty of cash, but I simply plonked it down. But, I have two rules around this:

1. The 20% Rule – never have more than 20% of your net worth invested into your house at any one time; for MOST people this means that you will HAVE to take out some sort of mortgage, and

2. Even if you meet # 1. (I do … most people don’t) don’t be afraid to use up to 50% of your home’s equity to support other buy-and-hold investments.

So, recently I took a $1 mill. line of credit on my home (about 50%) to plonk into my Scottrade account (I use margin lending in there, as well, so I am really taking some additional risk with my home equity that I shouldn’t be taking).

Secret #2
They don’t diversify the money they put into their employer retirement plans.
The subtitle struck me as quite odd at first, as it seems to fly in the face of common sense. Edelman’s advice, though, is actually pretty common – put your retirement money into a diversity of stocks. In other words, select an index fund or two of stocks in your retirement plan and just dump all of your savings into it.

Firstly, 401K’s are a tool of the poor: if you are young, you want to invest as much as you can outside of your 401k so that you can exert some control (a self-directed fund is another matter entirely – PROVIDED that you borrow money against your invested equity to leverage into investments).

And, if you are old, you should have so much money in outside investments that your 401k is just icing on the cake (I confess that I have NO IDEA how much is currently in my 401k-equivalent).

Secondly, diversification is also a tool of the poor and uneducated; even Warren Buffet recommends low-cost Index Funds over other forms of investing for the uneducated … but Warren doesn’t diversify. Neither do I.

Secret #3
Most of their wealth came from investments that were purchased for less than $1,000.
Basically, Edelman states that people who became wealthy did it not by having a ton of money right off the bat. Instead, they just invested a little bit at a time – less than $1,000 a pop. They just did it regularly.

Hmmm … this is a hit-or-miss one for me; a LOT of my money came from businesses that I started with No Money Down. But, a lot came from other investments, as well … most recently an office building that I bought for $1.4 million (25% down) that sold for $2.4 million less than 5 years later.

Secret #4
They rarely move from one investment to another.
The question then becomes what should one invest in? Edelman doesn’t offer a direct answer here, but does suggest that the only clear way to lose is by rapidly shuffling your money around from investment to investment. The route to success is to buy and hold, not to move like a jackrabbit from investment to investment, losing most of your gains to brokerage fees and taxes.

Another strange one …. you see, to me the VERY DEFINITION of INVESTMENT is something that you buy-and-hold … that’s the strategy that I use in two different ways:

1. To Get Rich Slowly (but surely), and

2. To KEEP my money, once I’ve made it.

But, you can’t just save your way to the sorts of investments that will make you rich; you need to find the money to make those Buy-and-Hold investments by INCREASING YOUR INCOME.

Other than getting a pay rise, working overtime, or holding down 2 or 3 jobs (all of which suck, if you ask me … especially the pay rise if it requires grovelling for 18 months to get it), ONE WAY that I can think of to increase your income is to TRADE …

… that means rapidly moving in/out of ‘investments’ such as stocks (trading stocks or options) or real-estate (flipping). It’s not really INVESTMENT … if it’s RISKY, it’s BUSINESS … but you have to take some chances along the way IF you want to get rich.

Secret #5
They don’t measure their success against the Dow or the S&P 500
Instead of using various metrics like the NASDAQ to judge their investment success, they look instead at whether or not their investments are actually achieving the results they need in their life. So what if the S&P 500 has an up or a down day? What’s actually important is that your investments are giving you the returns you need.

Couldn’t agree more; I have more than $1 million invested (or trading in/out) in the market at any point in time and I don’t track the indexes other than to assess the MOVEMENT of money in/out of the market AFTER the fundamentals tell me that I am ready to buy (or sell).

Secret #6
They devote less than three hours per month to their personal finances.
I think this concept relates very well to the “training wheel” conceptI talked about a while back. Basically, Edelman is correct in stating that the people he’s talking about do spend three hours or less a month on their personal finances, but these are people who already have a firm grip on their financial state.

I’m a terrible budgeter …. I’m probably the only multi-millionaire who ever had their American Express card taken away from them for forgetting to pay the bills (really!) … not highly recommended, but if you increase your income and invest well, personal finances actually take a back seat (and, my wife now controls the houshold accounts!).

Even when I was starting out, I only ever did one budget … actually, I tracked EVERY SINGLE EXPENSE for just one month … that was enough to tell me where I was and I already knew where  I needed to go. 

Secret #7
Money management is a family affair involving their kids as well as their parents.
If there’s one point that Edelman really hits out of the park in this book, it’s this one. You’re doing nothing but hindering your children’s financial education by keeping them oblivious to money.

 My wife and I started teaching our children about money very early and I’m happy to say that they both understand the basics, saving 50% of their pocket-money and only spending what they need to.

My 13 y.o. son seems to have an entrepreneurial-flair having his own successful eBay business (he earns more from this than his pocket-money brings in) and even runs his own books and accounts (using Quickbooks). He researched this and set it all up himself … other than gentle encouragement, I can lay no claim to his success 🙂

Both our children know that they will need to find their own way in the world … we will nurture and educate, and that’s about it (financially).

Secret #8
They differ from other investors in the attention they pay to the media.
In other words, they ignore the talking heads on CNBC or the thousands of stock tips floating around out there for the most part. Why? Because it’s information overload and it’s not particularly useful to most of the people Edelman interviewed for this book.

I don’t read the financial press … too boring.

Anyway, to make money, you need to be contrarian (BUY when stuff is cheap … ) … you can only do that if you have the guts to buy when everybody else is lining the windows to jump off the ledge.

How do you match up against the Edelman ‘secrets’?

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Brip Blap beat me to the punch … and, what an important punch it is!

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I came to Brip Blap’s blog because of a trackback somewhere else (I can’t remember exactly where now) but I was attracted to some of his ideas because he seems to ‘get it’.

Firstly, who or what is Brip Blap?

Brip Blap is a blogger who writes about personal finance … unlike most PF bloggers, who mostly talk about ways to save yourself to a fortune [hint: it can’t be done] he also talks about how to make money, perhaps through improving your career prospects …

I am at the other end of Brip Blap’s journey … having made it … and, I also have this desire to teach/write, that’s why I started this blog a month or so ago … as my way of ‘giving back’.

I have made a lot of money, using most of the ‘traditional’ ways (business, consulting, real-estate, investing, etc.) and I am loosely planning a book about the lessons that I have learned … this blog is a way to air some of those ideas and get feedback …

The particular idea that got me to look at Brip Brap’s blog (and, I have added him to my blogroll so that you can easily find him, and others that I like) was the one where he asked people to think about increasing their income  not (just) cutting costs …

The wrong way to think: “spend less than you earn.” If you have been reading about personal finance for any length of time, I’m sure you’ve come across this advice before. It is the wrong way to think, and it will not make you rich.The right way to think is this: earn more than you spend.

He hit that nail on the head!

There was a small book that I came across a few years ago written about this idea for business owners – I wish I could remember the name of that little book – but, Brip Blap beat me to the punch of writing about applying this simple-yet-powerful idea for EVERYBODY.

Let me summarize the concept for you:

You can’t cut your expenses and expect to get rich … you can only cut a maximum of 100% of any cost.

You can’t just save on your current income and expect to get rich … you can only save a maximum of 100% of what you earn.

But, you can increase your income even in just some small way to start … keep going, and you can earn 110%, 200%, 500%, even a virtually unlimited amount more than you currently earn …

… then, invest just a small proportion of that and you can easily be rich.

For 15 years, I saved diligently, I cut costs diligently, I delayed gratification diligently with a very poor outcome … I guess I was laying the groundwork and building some great lifetime financial habits … 

… but, it was only when I also started to concentrate on increasing my income that I made it to $7 million … and, that whole process only took 7 years!

If this strikes a chord with you, go read his post then come back here for ideas on how to apply that thinking and what to expect when you do …

The greatest advice from the Oracle of Omaha

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As the latest in my ‘videos on sundays’ series, I offer some advice from the man billed as the ‘greatest investor who ever lived’.

 In 7 minutes you will have ALL of Warren Buffet’s secrets 😉

… maybe not, but you WILL have some insights into his life (the first three minutes) followed by some of the best investing advice that I have seen.

Warning: some of these slides flash across your screen so fast that you will have trouble following them, so pay attention to the very last two slides if you are not an expert investor:

http://youtube.com/watch?v=iW1eg9p5wq4

BUT …

If you are a student of investing, have a long-term view and are willing to dedicate some time and effort, take note that Warren offers exactly the opposite advice for you …

Wide diversification is only required when investors do not understand what they are doing.
Warren Buffett

… he also points to this time in history as being possibly a great time to make your fortune:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Warren Buffett

I see a lot of doom and gloom … I bet that Warren Buffet is gearing up for something big …

What are you doing right now?