What should you invest in first?

Posted on January 21, 2010 by Adrian

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

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

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

The plan is simple:

Step 1: Start working!

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

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

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

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

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

It’s simple: your own home!

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

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

You forget them for your first home …

… and, replace them with these guidelines:

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

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

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

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

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

Why?

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

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

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

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

I am no longer a student …

Posted on January 17, 2010 by Adrian

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

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

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

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

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

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

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

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

Priceless!

It’s not ALL about money, you know 😉

Call me … make it happen!

Posted on January 10, 2010 by Adrian

OK, so he wants you to buy five houses this year … and, he gives you the quick ‘hard sell’ at the end … but, the basic philosophy – to me – is sound:

– Houses are depressed in the USA, but so are interest rates,

– Unless the USA ‘double dips’ prices will begin to go up (when?)

– You can fix an incredibly low interest rate on your primary residence (can the bank rewrite the mortgage if you move?)

– You MAY be able to receive enough rent to cover most/all of the mortgage

– Who says you need to buy five houses (except for this Realtor!?) … just think about one for now

Do the numbers for your area/s of interest (price of house, monthly cost of mortgage, likely rental income, other expenses such as 6% – 9% property management etc.) … if you can even come close to breaking even, could you find a better return on your deposit plus the cumulative cost of any monthly shortfall (or gain of any monthly excess)?

Now, run the numbers again assuming that the US market stays flat for another 5 years before some sort of rebound … maybe it still makes sense?

Have you run the numbers? If so, what do you think?

A Vacation Question – Part I

Posted on January 6, 2010 by Adrian

As we bask in the sun, a couple of interesting financial questions popped up, both voiced by my 15 y.o. son.

The first was as we picked up our rental car and were offered the choice between the ‘standard insurance’ with its $3,300 deductible (regardless of fault!) to which I said “yes please” just as the guy next to me (receiving the similar offer for his rental car) just as immediately said “yes please” to the alternative offer of ‘reduced deductible’ insurance for an additional $29 per day.

“Why is it that two people can immediately make opposing financial decisions” was the gist of my son’s question (actually, it was “why didn’t you pay the extra $29 a day, too, Dad?”).

Well, it isn’t because I know that car rental companies rake in approx. 25% of their profits from their insurance scams … I mean, schemes … it’s because he is thinking MM101 and I am thinking MM201.

If you don’t have the $3,300 (actually, an extra $3,000 because the ‘reduced deductible insurance’ still leaves you to pay the first $300 of any incident) then the decision is reasonably simple:

Can I afford to pay the daily rental INCLUDING the extra $29?

– If YES then rent the vehicle WITH the reduced deductible coverage.

– If NO, then you can’t afford to rent the vehicle, so you had better look at the bus/train option.

Now, the other guy probably would have had a heart attack if he had to fork over an unbudgeted $3k all of a sudden – as would my son, with his limited eBay-plus-allowance income – but, not me: $3k is a figurative drop in the 7m7y financial ocean.

So, I have a different set of questions because I CAN afford to pay the $3,300 deductible … easily, even though I wouldn’t like to pay it:

What is the daily cost of the waiver? How many days will I be renting for? What is the likelihood that I will have an accident in that period? How much will I be ‘saving’ in deductible if I do have an accident?

Now, three out of the four questions are trivial, and I was able to simply explain to my son that over a three day rental, the extra daily charge would cost me close to $100 and ‘save’ me $3k if I happen to have an accident.

But, what about the likelihood of having the accident? In my son’s (and, perhaps the other renter’s) eyes, the answer was “very likely” … but, the truth is that I don’t know for sure, making this potentially a very hard ‘actuarial’ problem to solve.

[AJC: in fact, I do know that the chances of a policy holder making a claim on their insurance policy is about 14% 😉 ]

But, there is another – more financial – way of looking at this situation … one that works for most complicated financial problems where a critical piece of information may be missing: find the break-even point.

In this case the break even point is trivial to calculate: it’s simply to calculate how many days of additional charges it would take to ‘pay off’ the additional $3,000 of the deductible.

The answer is: $3,000 / $29 per day = 104 days (rounding up a little).

So, my thought process was simple:

– Can I afford the $3k deductible? No doubt about it!

– How likely is it that I will have an accident in less than 1/3 of a year? Not very likely, considering that my last ‘bingle’ was so long ago that I can’t remember it.

Clearly it’s a bad bet … and, obviously so otherwise the rental companies wouldn’t offer it 🙂

Now, this obviously applies to all insurance situations, so you don’t need to be an actuary. Instead, and as I told my son, think about the worst case scenario:

– If you could afford to cover it in the event that it came up, don’t sweat it,

– But, if you can’t afford to cover the cost, then you have no choice but to insure it or risk your financial health.

Until you reach 7 million, insure it or don’t do it …

… a financial lesson to warm the cockles of many an insurance brokers’ heart 😉

Inspiration at the pump …

Posted on December 21, 2009 by Adrian

When your car runs out of gas, you go to the gas pump …

… when I run out of inspiration (as sometimes happens … not often, but sometimes) I go to the bloggers ‘gas pump’: Alltop.com, a compilation of articles from the best blogs on the web in almost any category that you would care to name.

I got excited when I saw the headline, there, of a CNNMoney article titled: Real estate in your retirement portfolio.

Excited, that is, until I read the first paragraph:

Question: How do REITs work? And is it prudent to have them in a diversified retirement portfolio?

This is the problem with the financial press in the USA: it’s directed to packaged financial products e.g. stocks, funds, REITS, and the list goes on … this is why average (and, 99% of ‘above average’) Americans will remain relatively poor.

It’s ironic then that the wealthiest Americans (and, I would suggest this to also be the case in all developed countries) made their money in business (including the business of investing) and keep their money in real-estate.

According to an otherwise (and, unfortunately) highly flawed book that I reviewed some time ago, the rich keep their money for generations ONLY if they split their assets roughly one-third in a business, one-third in paper (stocks, bonds, mutual funds, etc.) and one-third in real-estate (incl. their own home) … since I called this “the most dangerous idea in retirement planning that I have ever read” (and, you will have to read this post to find out why), I had better give you my much simpler formula:

As I transition into Making Money 301 [protecting my wealth], I would happily keep 95% of my net worth in real-estate (incl. no more than 20% in my own home; remember The 20% Rule?) … and, I am NOT talking about REITs here, I’m talking buy/hold income-producing real-estate.

It’s certainly not the only strategy, but it’s one of the simplest and, IMHO still the best 🙂

Are you a Money Hacker? I am!

Posted on December 15, 2009 by Adrian

Welcome MoneyHackers!

Here are three of my favorite posts to get you started; if you want to find out:

1. If $1 million will be enough to retire with, then click here, or

2. How much house you can afford, then click here, or

3. Why buying a new car is such a losing proposition, then click here.

Otherwise, please enjoy this article, then bookmark my home page (click here) and come back often …

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For those who don’t already know, I am a member of Money Hackers – a group of personal finance bloggers – and Lydia has just interviewed me; you can read the interview on the moneyhackers.net site by clicking here, or read the extract below:

What influenced you to start writing 7million7years?

I started out $30k in debt and made $7 million in 7 years, but the road was bumpy and I found that I had to learn most of the hard financial lessons myself. I started my blog so that others wouldn’t make the same mistakes that I did.

What encouraged you/where did you hear about becoming a 7 time millionaire in 7 years?

When I started out, I had two businesses which barely paid their own way, and I was in serious debt. But, I had no clear goal or reason to do any better. That all changed when I discovered my Life’s Purpose, which is to always be traveling physically, mentally and spiritually. I suddenly realized that I would need both a lot of free time and plenty of money to achieve what I really wanted in my life. In fact, I calculated that I needed $5 million in just a few short years. That epiphany started the amazing journey that took me from $30k in debt to $7 million in the bank in just 7 years.

What financial topic do you most enjoy blogging about?

My own financial journey and showing others how they can also free themselves from a life of work, debt, and drudgery by applying the same financial lessons that I learned. There are no scams or schemes needed to replicate what I achieved, if they just follow some good, old fashioned financial advice.

What crucial point have you learned through this experience of gaining 7 million?

Your money is there to support your life, yet most people act like it IS their life. No amount of money will ever be enough if you have no clear idea what you really need the money for. Find out what it is that you really want to do in with your life (and by when), then calculate how much passive income that you will need to get you there. Then come to my blog to find out how to safely build that income stream. But, once you have enough … STOP and smell the roses.

What 3-5 blogs are essential to understanding how to save money?

My blog isn’t really about frugal living and saving money, but more about accelerating your income through work, business, and investing. It’s also about protecting your wealth, through passive investment strategies (for example, using stock or real-estate). So, if my readers want to know more about saving than investing, then I recommend that they read:

1. JD Roth’s Get Rich Slowly

2. Steve’s Brip Blap

3. Pinyo’s Moolanomy

What is some financial advice you could give our readers?

Most people don’t really know how much house they can afford, so let me give your readers some very specific advice that will help them through every stage of their own financial journey: never have more than 20% of your Net Worth invested in your own house, and no more that 5% in all of the other ’stuff’ that you own (e.g. cars, furniture, computers, etc.). You can adjust the equity in your house by refinancing periodically (always lock in your interest rate when it is below 6% – 8%).

This means that you will always be investing at least 75% of your Net Worth, which is the only real chance that you have to get out of the financial rate race.

If you have your own blog, I’d like to hear how/why you started it … there’s plenty of space to share in the comment section, below …

The Myth of Multiple Income Streams …

Posted on September 2, 2009 by Adrian

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For a while now the web has been a’twitter with ebooks spouting the idea of Multiple Income Streams …

… literally, here is an example from Twitter:

Multiple Income Streams is the ONLY way to Achieve Extreme Wealth …

I’m not so sure that was true for me – hence it can’t be ONLY 😉

But, is it true even if we substitute ‘usually’ for ‘only’?

Again, I don’t think so … in fact, I feel that most people achieve a very high level of INCOME from just one of their ‘multiple streams of income’ (that is, even if they have more than one) … for me, it was very much an 80/20 thing:

– One of my businesses produced $1 million a year EBITDA (earnings before bullsh*t),

– The other produced $200k a year (still does).

Now, for those who are astute, you will see that I twisted the original statement from ‘wealth’ to ‘income’ … and, as we all know by now:

Income [does not equal] Wealth

So, this is what I think: you don’t necessarily need multiple streams of income, but you DO need a place to store the income earned – and, it’s the wealth that “passively” builds up there that creates the true wealth (at least, it did for me i.e. my businesses fueled my property investments, and THAT’S what took me to my first $7 million) – and that more equates to my Perpetual Money Machine concept than it does to the usually espoused Multiple Income Streams Fallacy … they may seem the same, but they are very different:

Build your Perpetual Money Machine and prosper! 🙂

Finally Revealed! The MOST important Making Money 101 lesson of them all …

Posted on June 24, 2009 by Adrian

old light I was just rereading last week’s post where I said that I believed delayed gratification to be the most important Making Money 101 tool of them all.

And, as I said, I truly believed this to be the secret of my financial success …

… until this very morning!

Let me backtrack a little: we delayed gratification (MM101), built up our business income (MM201) and socked money away in passive investments (to prepare for MM301) and we finally made it.

We then started to really live our ‘new life’ as multi-millionaires: we acquired the houses, the cars, the paintings, the vacations, the technology …

[AJC: feel sorry for us, yet? 😉 ]

… but, today we did something just as important (since we are stripping and renovating entirely the new house, which is actually an old house, built in the 1940’s and last renovated some 20 years ago):

We sold some second hand light-fittings for almost $200!

No, you didn’t misread: the new multi-millionaires didn’t just say to the builders “it’s a soon-to-be $6 mill house, so throw the junk away … or, take what you want” … they sold some stuff for $200 😛

Just in case you still don’t see the irony, here was the process:

1. We went to the house and decided what we wanted to sell: a few light fittings; some old built-in shelving (total hoped-for sales price circa $700)

2. We photographed everything that we wanted to sell

3. My wife and son listed each item on eBay (about 5 or 6 separate auctions)

4. My wife dealt with the two ‘winners’ (only two of the items actually sold first time around: both were light fittings)

5. I met the winners separately at the house and helped them remove the light fittings

6. I ‘upsold’ both: one with a heated-towel rail and extra light fitting for an additional $9, and the other for an additional $50 of lights

7. My wife and son are busy relisting the shelving and unsold lights as I am writing this … Round 2. Ding!

So, I spent a whole morning – plus all of the lead-up work – ‘earning’ exactly $140 …

… in some circles (millionaire circles, that is) that would be regarded as sick 😉

But, that’s when it hit me: it was not delayed gratification that set the grounds for our later financial success …

… that’s a result, not a cause.

And, it wasn’t saving 15% – 50% of our income, or putting money into a 401k, and so on … they are all results, not causes.

It was the respect that we had and still have for money as a tool to help us live our Life’s Purpose that caused us to do all of these things …

… read that again, carefully: I didn’t say ‘love’ or ‘need’ or ‘desire’ or ‘greed’ … I said respect.

If we want the money to live our Life’s Purpose, we have to respect money as one of the tools (just one, not even the most important) to help us achieve that. Just as a hunting nomad would respect his hunting weapons, a farmer his plot of land, a charter pilot his aircraft, and so on: we respect the money that feeds us and fuels our needs.

This means that we don’t squander it needlessly, we save it when necessary, and we spend it when it doesn’t make sense not to … that’s Making Money 101, and it just hit me like a sledgehammer between the eyes: delayed gratification is the tool, but gaining a healthy respect for money is the lesson that we all need to learn.

I won’t forget this lesson … will you?

The MOST important Making Money 101 tool of them all …

Posted on June 9, 2009 by Adrian

I don’t invest in mutual funds, but I know that many of my poor, deluded readers do 😛 For you, The Dough Roller provides some tips … and, for the rest of us, he mentions this blog. Thanks, Dough Roller!
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I posed a seemingly simple question: What is the MOST important Making Money 101 tool of all?

After all, this is basically the subject of almost all of the 2,500+ personal finance blogs in the blogosphere … how to save your way to wealth. We know that it can’t be done, but that doesn’t stop all of those poor blighters from trying … and, worse, writing about it 😉

But, it is an important part of making money, which is why we devote a whole subject to it …

[AJC: Which gives me the fleeting idea for yet another reader poll: which is the most important Making Money stage of them all: MM101, MM201, or MM301? But, you would all too quickly see right through the question: making lots of money (MM201) is useless if you (a) spend it before you get it (MM101) and/or (b) let it slip right out of your fingers once you have it (MM301) … ergo, they are clearly ALL important!]

Now, I thought that I would be pretty smart and ask questions that would lead you away from the ‘hidden gem’, and I could then glide in on my blogging-white-charger and whisk you right off your financial feet with a princely nugget of wisdom, just as you were nodding in agreement with the poor misguided fools who submitted non-optimum answers …

… but, ‘ask the audience’ came bloody close to winning the 7 million dollar question!

Although the majority response was split nearly 50/50 between the ‘common wisdom’ answer and the one that I thought (hoped!) would slide right under the radar, nobody said it better than Ryan:

Without delayed gratification, why would we save money at all? We’d just live paycheck to paycheck and hope we never…didn’t get a paycheck!

And, what pees me off even more is that the general comments, covering all of these choices and more, were so on-the-mark that I could stop writing this blog … but, will instead just have to shift into higher gear [AJC: hang on tight!].

So, yes …

…. this was another almost-trick question in that they are ALL clearly important, but, this is an experiential blog, in that my financial advice is largely shaped by my own experience (much more so than somebody else’s ‘theory’) and, when I looked back it was delayed gratification more than anything else that seemed to keep me out of the poor house … then and now.

Why delayed gratification?

Because it is a habit for a lifetime; it will keep you from spending all of your money:

– when you don’t yet have enough of it

– while you are still struggling to get more of it

– when you have what should already be enough of it

… and, for those whom ‘delayed gratification’ has not yet become habit, we broke new ground by inventing 7million7year’s Patented Delayed Gratifier [AJC: no, it’s not something most commonly found in an Adult Store 😉 ] a.k.a. The Power of 10-1-1-1-1

There you have it: delayed gratification, what I – and, you – believe to be the most important Making Money 101 tool of them all 🙂

It's all about the curve – Part II

Posted on June 4, 2009 by Adrian

Nobody wants their finances to grow in a straight line (too slow, and inflation really hurts), so let’s continue this series with a look at a faster way to grow your money … one that is well covered in mainstream personal finance blogs:

The Compound Curve

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When we do one simple thing [AJC: again, ignoring the effects of inflation], the whole picture changes dramatically:

If, instead of withdrawing/spending the interest earned on the CD, we ask the bank to reinvest the interest then we create an effect known as compounding. Where both the principle (i.e. the lump sum that you originally deposited) and the interest (then the interest on the interest and so on …) earn interest. The effect, as you can see, can be quite powerful … slow, but powerful.

In fact, ‘urban legend’ has Albert Einstein calling compounding “the most powerful force in the Universe” … urban legend because Einstein would never have called such a relatively [pun intended] slow geometric progression ‘powerful’ when he had nuclear reactivity to play with (a far quicker and more dramatic form of compounding).

Be that as it may, compounding is something well understood, but always remember that it is only powerful to the extent that it may keep you out of the ‘poor house’ – but, not by much – hence, compounding is really only a basic (but necessary!) Making Money 101 saving strategy:

– without it, you don’t get to first base, financially-speaking, but

– with it, that’s about all you do.

You can – and probably already do, to a greater or lesser degree – apply the power of compounding to your job/profession (be it as paid employee or paid consultant) when you reinvest some of your earnings into investments such as mutual funds (e.g. via your 401k), direct stocks, and real-estate … and, of course, reinvest (instead of withdraw and spend) the dividends (a.ka.a ‘profits’) from those investments.

7million7years

How to make 7 million in 7 years …

Tag Archives: Making Money 101