Tag Archives: millionaire

Is your first home a good investment?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is Mike aiming high enough?

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Mike is a divisional CEO for JP Morgan (runs a whole country for them!), and he earns $250,000 in a bad year and $350,000 in a good year. He’s running fast and aiming high.

But, is Mike aiming high enough?

If you weren’t following the comments on this post, then you were missing out on more than 50% of the benefit of that post … I think that also holds true for most of my posts; our readers rock!

Anyhow, Mike said:

I’m 36 and have already got up to the savings level of someone who is 50 or 55… question is when do I want to take it easy and stop working for a while- or at least working make myself rich instead of JP Morgan, who owns the company I’m running!

Aspiring to the savings level of someone who is 50 or 55 is no great shakes; it’s where Mike goes from here that will dictate his future, so I asked Mike a few questions:

Disclaimer: We know next to NOTHING about Mike’s true situation, so nothing here constitutes financial advice* … it’s best if you – and, Mike – treat this as a hypothetical, merely illustrating how to apply 7m7y ‘rules’ to somebody on an income rather than working their own business/investments. On with the questions …

1. What’s your Number?

2. What’s your Date?

3. Why?

4. What’s your Current Net Worth?

It may be that Mike’s presumably super-high salary (after all, he is running JP Morgan in his neck of the woods!) combined with an aggressive savings / investment strategy will do the trick …

Mike’s response:

Salary isn’t super high – only $260K USD a year (base salary & guaranteed bonus) – max variable bonus on top of this is another $100K so it’s comfortable but not huge.

My number is abour 10 million – would like to hit it in the next 14 years or sooner.

Current net worth is 1.7M USD with $1.3 M in very liquid assets (cash…) Residence is fully owned and monthly burn rate is pretty low.

Given that Mike’s Prime Financial Objective should be to reach his Number by his Date, his financial strategy should be the one that he is most comfortable with that seems most likely to achieve that target …

… IMHO, he (or anybody) should only choose a more ‘active’ (read: risky) strategy if it’s a by-product of the strategy that he truly resonates with …. for example, I would start a business even if plonking my money in CD’s would have been enough – that’s just me [AJC: but, it wouldn’t have been all of my money – or even a lot – going into starting that business].

What does this mean for Mike … I mean, Hypothetical Mike? 😉

Well, let’s go through the steps:

STEP 1 – What is Your Number / Date?

Mike’s Number is $10 Million and his date is circa 2023.

STEP 2 – What is your Required Annual compound Growth Rate?

Starting with his $1.7 million Net Worth [AJC: reading between the lines, Mike’s paid off house may not even ‘break’ the 20% Rule – and if it does, not by much, so I don’t see a problem here] our faithful online calculator shows me that Mike ‘only’ needs a 13.5% Required Annual Compound Growth Rate on his Net Worth.

[Tip: If you haven’t used this calculator before, it’s simple: Mike’s ‘ending value’ is his $10 million Number; his ‘starting value’ is his current $1.7 million Net Worth – although, I would be tempted to subtract cars/furniture and any other personal ‘stuff’ that can’t be easily turned into cash and/or loses value … house is probably OK to include here – and, ‘the number of periods’ is just his 14 year Date] 

STEP 3 – Select your Growth Engine

This is where it gets fun … Mike simply needs to take a look at Michael Masterson’s table of ‘money making strategies’ – handily reproduced for you in this post – to see that any number of strategies will be enough to propel him from $1.7 million to $10 million in 14 years: anything from stocks to real-estate to small business.

But, not CD’s … this calculator shows that Mike’s biggest risk is actually the low-risk ‘investment’ option that he has so far chosen: cash …

… if he keeps ‘investing’ in cash, Mike’s Number will be struggling to reach $3 million in 14 years, rather than the $10 million that he needs 🙁

Rather than being the ‘safe haven’ that it appears, keeping his assets overly-liquid is actually stopping Mike from reaching his financial objectives … worse still, it’s forcing Mike to think about chasing more income, when it’s the exact opposite strategy that Mike should be following!

That’s why, I recommend that Hypothetical Mike choose stocks and/or real-estate in whatever mixture of either / both that suits his temperment.

Now, we are talking Value Stocks when we suggest a 15% compound growth rate, and reasonably well-geared (i.e. no more than 25% – 30% starting equity) commercial real-estate – mixed with stocks – when we suggest a 30% compound growth rate.

But, here is the key …

… for Mike, and anybody else whose primary Making Money 201 ‘accelerate your income’ tool has been climbing the corporate totem pole to a position where (a) income is [relatively] high, (b) expenses are reasonably low, so (c) saving rates are high, their net worth will most likely grow even if they merely plonk their money in their 401k and/or Low Cost Index Funds…

You see, Mike will continue feeding his Net Worth with both Investment Returns AND additional salary contributions.

This means that Mike will most likely reach his Number simply sticking his money into low cost index funds:

Mike should follow the advice that Warren Buffett gives to all the Hypothetical Mikes of this world … in fact, it was virtually tailor made for his situation:

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.

Given that Mike’s current salary / job makes reaching his Number a virtual gimme – with such a variety of relatively low impact [AJC: certainly in the context of amassing a $10 million fortune!] Index Fund, Value Stock, and/or Real-Estate investment strategies available to him, what would you advise him when he says:

Right now my best option is to continue to get a successful track record (already turned around the business and changed it from major losses to modest profits) and maybe I can find a better gig.

What advice would you give to Mike?

I know what I would say 😉

* [Insert: ‘Not qualified financial advisor; not financial advice; seek qualified advice before investing; take two Tylenol and call me in the morning; yadayadayada’ disclaimer message of choice]

Stuck for a new business idea?

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I’m not sure why anybody would be stuck for a business idea?! We get at least one million-dollar idea a day [AJC: you may not think so, but it’s anytime that you are dissatisfied … inside every problem is a million dollar solution just waiting to break out], but we either fail to recognize it or – more likely – act on it.

I have two solutions:

1. Carry a small pen and a notepad (yes, an iPhone or PDA is a great substitute) and …. use it!

Write down every idea that you get, then make sure that you act on each: do something to verify that your first idea has / hasn’t merit and … act further: do some research, talk to somebody in the industry, etc., etc. If you feel, at any stage, that it isn’t for you, put a line through it and REPEAT for Idea # 2 and so on.

2. Or, if you are The Vacant Parking Lot Of Business Ideas, don’t fret … just buy this book (Hint: buy the .pdf from his web-site at half the price that Amazon charges).

Disclaimer: I haven’t read the book, but that’s not the point … as far as I am concerned, it only needs to give you a list of ideas to explore – any additional valuable content is a bonus.

Still not sure that you want to spend the ten bucks on helping you reach your Number? Shame on you … but, here’s an excerpt, anyway:

What would you do if you won the 2010 World Series of Poker – Part III?

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Congratulations!

You’ve fought through a field of thousands, and now you’re sitting across the table from Phil Ivey – heads up for the most coveted bracelet in sport.

Of course, you’re just thinking that you already have the $5 million runner-up prize ‘in the bag’ (allowing you to have a very nice – and, ‘guilt free’ – $250k spending spree, and then live this quite pleasant $250k/year lifestyle) …

… but, you’re hoping-against-hope that you beat Phil senseless and pocket the $8.5 million first prize!

Firstly, let me burst your balloon: you’re still a ways off the $11 million (plus a bit extra for up-front ‘splurging money’) that you’ll need if you want to live this rather lavish $550k per year lifestyle … but, you’ve still made your own $7 million in 7 years, and then some! 🙂

I’m now assuming that you’ve made your Number …

… so, the key is to protect your wealth (to ensure that you have that $250k – give or take – to live off, inflation-adjusted, for the rest of your life); you do this in any number of ways:

– Invest in Index Funds and live off 5% (dividends + selling off some shares each year), enduring the ups and downs of the market,

– Invest in Inflation-Protected Federal Government Treasury bonds, suffering the low returns currently available, with the option to ‘spice things up a little’ by using up to 5% of your capital each year to buy 12 month call options over the market,

– Invest in real-estate; since you’re not trying to create new money, you can afford to pay cash and simply live off 75% of the rents (setting aside, perhaps, another 5% of your starting capital and 25% of all net rents against vacancies, repairs/maintenance, and other contingencies).

Of these, the last holds the most attraction for me, because:

– I don’t require much liquidity (I’m looking for steady income), but can always keep aside another couple of year’s of living expenses (say, $500k) in cash … just in case,

– My income (i.e. the rents) is generally inflation-adjusted (and, rents usually go up – over the long’ish run – in line with inflation),

– I never need to worry about eating into my capital: it’s sitting there in bricks and mortar – also growing at least in line with inflation!

Of course, you could always just blow it all on a mansion and a garage full of Ferraris 🙂

Retiring with enough …

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Philip Brewer has written a couple of articles for Wise Bread exploring the question: “Can You Buy Your Way Out of the Rat Race?”.

He says:

If you’re tracking your spending, you know how much money it takes to live on. If you’re tracking your investments, you know about how much return you’re getting from your capital. With those two numbers, you can get a pretty good estimate of how much money it takes to buy your way out of the rat race.

In its simplest form, the cost to buy your way out is just your annual spending divided by the return on your investments. I used to do that calculation a lot. When I got my first job interest rates were in double digits, so I could imagine getting $30,000 or even $40,000 a year — plenty of money to live on — from an investment as small as $300,000.

This is good advice if you want to retire on “$30,000 or even $40,000 a year” … I don’t 😉

The problem with these types of retirement articles is that they usually start from the assumption that your current salary +/- 30% is what you want to live off.

When my salary was $250k, this probably also held true for me … but, just a year or two earlier (when I was actually planning my own retirement) my salary was only $50k – plus my wife’s $60k, making our total household income less than half my ‘required retirement salary’.

So, I describe the retirement calculation process much as Philip describes it, with an extra step:

1. Decide what you want to do with your Life

2. Decide how much annual income you require (probably, without needing to work … but, that’s up to you)

3. Convert that amount to the capital that you need.

Now, Philip would say that you should subtract any income and/or pensions that you expect to receive along the way …

… I recommend that you don’t.

You see, you may not want to – or be able to – continue work through your ‘retirement’ – and, government pensions can always be taken away.

Rather, I recommend that you assume neither of these while you are ‘retired’, and reinvest any such ‘windfall income until you have enough accumulated to effectively increase your Number, hence your standard of living.

Huh?!

Well, Philip suggests:

Among people who invest for large institutions, there’s a rule of thumb that you can spend 5% of your endowment each year, and then expect to have a bit more to spend next year than you spent this year.

Of course, they can’t expect that 5% to be more every single year. Some years the investment portfolio does poorly–and after one of those years, the 5% that’s available for spending will be less than the previous year. Maybe much less.

For households, therefore, the rule of thumb is 4%.

We have a similar rule: The Rule of 20, which seems effectively the same as Phil’s 5% Rule [AJC: we’ll explain why it’s actually a VERY different concept, in a series of MM301 posts, coming up soon] … this is probably enough because you will probably:

– Earn some additional money in retirement (remember those part-time income and pensions that we mentioned?)

– Spend a little less as you get older (unless you feel that health care will outweigh all of those Learjet trips?)

– Overshoot your Number, if you wait until reaching your Number (on paper) before actually trying to sell your business / real-estate, etc.

BUT, don’t let me stop you from building in an additional buffer by modifying my ‘rule’ to anywhere between the Rule of 20 to the Rule of 40.

Hint: I wouldn’t bother … the Rule of 20 is plenty to aim for; but, don’t let me stop you from aiming for more …

…. just don’t try and make it LESS 🙂

What is your Number?

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Well, it certainly took me a long time to ask the question (see Reader Poll: What Is Your Number?) and, it took me almost as long to answer it.

Why?

I’d like to say it was because I was forensically and actuarialy analyzing the results … I’d like to say it was, but that wouldn’t be the truth, which is much more mundane: it was mainly because I forgot all about it after our ridiculously long Australian summer holiday season (Aussie summer = USA winter) 🙂

So without further ado, here are the results:

Now, the first thing that you may notice is that the answers aren’t in any sort of obvious order; traineeinvestor was the first to notice:

The order … is not sequential. I fully expect to be awake all night trying to figure out whether this is really a cover from some experiment in behavioral finance.

Actually, the reason is equally mundane: I was trying to copy the following poll from GenerationX Finance, but when you compare them, you’ll find out that I even got that wrong (!?!):

I presume that GenX ‘randomized’ the ranges to make his readers think through all the options before merely selecting the first one that looked OK; at least, that’s what I would have done had I not tried to copy him 😉

But, to help us analyze the results, I have graphed them side -by-side and in logical order:

OK, that tells me that we are on the right track:

– either I am attracting the ‘right’ audience for this blog (which is nice), or

– my readers have altered their perceptions of “how much is enough” based upon some of my preachings (which would be really nice).

Given that GenX’ers are born in the 60’s and 70’s (I was born in the – late! – 50’s … scary, huh?), I can understand why some may be aiming for only $1 mill. to $3 mill., but to my mind, it’s still too low; and for Gen Y and so on, inflation will decimate your living standard by the time you reach ‘standard’ retirement age, so you have no choice but to aim higher.

But given that so many of our readers have lofty targets – and, I just may be responsible at least in small part for at least a few – let me ask you, what would you like to see from this blog in 2010 that you haven’t seen (enough of) yet?

Are you saving enough for retirement?

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This video asks an important question, one that we asked our readers some time ago (and, will answer tomorrow).

It also seems to indicate that roughly 8% is a safe withdrawal rate, at least for men who choose to retire at the standard retirement age in the USA … we’ll explore this further, through a series of posts beginning later on this week.

For now, what do you think is a ‘safe’ % of your Number to live off each year?

What would you do if you won the 2010 World Series of Poker – Part II?

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Last week I gave some unsolicited advice to those who may have finished 6th, 7th, 8th, or 9th in last years’s World Series of Poker – Main Event – pocketing a tidy sum in the range of $1.2 to $1.5 million.

Sounds like a lot, but not if you are aiming to retire on a helluva lot more than $57k a year (plus a $60k ‘one off’ spending spree’) …

… so, what if you finish 5th, where the prize money jumps to a tidy $1.9 million?

Well, where this poker-listings article suggests that you could buy a 1977 Learjet 36A, it’s probably not a smart idea if you want to use it more than once or twice 😉

Well, you now have a $95,000 spending spree on your hands (of course, you don’t have to spend it all), and you could just retire and live off $90k a year.

Job done!

But, if you are still chasing that $7 million in 7 years, then you still need to follow the advice from last week’s post … but, I would tend towards investing more in real-estate (commercial RE with a good spread of tenancies) and, I would not risk too much of such a ‘once in a lifetime’ windfall in my new/existing business (it’s best to start/stay lean ‘n mean, anyway).

But, if you come 4th (picking up a tidy $2.5 million, in the process) then you can afford to live this $100k lifestyle (and, still have $125,000 – once off – to splash around to help you celebrate). Similarly, if you make it all the way to the final 3 before busting out with $3 mill. jangling in your pocket …

Next week, I’ll tell you what to do if you come 1st 🙂

What would you do if you won the 2010 World Series of Poker?

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While you are evaluating whether you can even afford to enter the WSOP this year [Hint: I don’t pay $10k to enter a poker tournament; but I don’t mind playing a few satellites to try and win a seat], consider what last year’s winners COULD have bought with their money: http://www.pokerlistings.com/blog/what-to-buy-with-wsop-main-event-moneyz

Let’s say that you do beat 6485 ‘losers’ to make it to the Final Table of the Main Event (a.k.a. The November Nine), what do I suggest that you do with your winnings?

You finish 9th (pays ~ $1.2 million):

Firstly, you need to console yourself with being in the most embarassing position of having all of your friends, relatives, and hanger’s-on watching you bust out first by buying yourself a gift or two [AJC: I’m not suggesting that you buy the Chopard Super Ice Cube Watch!] …

… my usual Making Money 101 advice for those dealing with large amounts of ‘found money’ is to spend no more than 5% of your windfall [AJC: for this post, I am assuming that (a) you are not a professional poker player, and (b) the amount that you win is life-changing].

Now, before you go spending most/all of that ‘guilt free’ $60k on a car, realize that in a number of years it won’t be as new and exciting as it was when you bought it, and you may not be able to afford to replace it.

Why?

Well, the 5% Rule accounts for ALL of your possessions (incl. furniture, clothes, art, knick-knacks, guitars, consumer electronics, etc., etc.), not just your car … if you spend 5% of your entire net worth on a car now, you may have problems buying ‘other stuff’ later.

 [AJC: Remember, the 5% Rule states that ALL of your possessions other than your house and investments must not account for more than 5% of your entire Net Worth at any point in time. In fact, a good rule of thumb is that your car/s should not be worth more than half your possessions – or 2.5% of your Net Worth – leaving plenty for other purchases]

So, buy a smaller (but, still nicer/newer) car, and a vacation, and some celebratory rounds of drinks with family – but, do NOT start paying off their debts and buying them stuff as you ain’t their ‘rich cousin’ even though $1.2 million may sound super-rich to them 😉

Now, how about the other 95%?

Well, if your Number is $1,140,000 then you get to retire!

But, if your Number is larger than that, then realize that what you have just earned is seed capital to reach your Number.

Think about it: $1,140,000 x 5% (which is regarded as a reasonably ‘safe’ withdrawal rate) = $57k a year to live off. Nice for some, but hardly a $7 million in 7 years lifestyle.

Keep your job, invest the entire $1,140,000 in something as motley as Index Funds, and you could double your capital in 10 years (assuming an 8% return). Put it into Real-Estate ($100k down, and $140k buffer against vacancies and repairs/maintenance) and you could end up with a lot more. Invest a portion in your next start up, and invest the rest (“just in case”), and you could be the next Bill Gates.

This advice probably also applies to the 8th ($1.3m), 7th ($1.4m), and 6th ($1.5m) place finishers …

Next week, I’ll tell you what to do if you finish 5th 🙂

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

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… but, you don’t know where to begin?

At least, that’s the case for IJ who e-mailed me:

I’ve always wanted to find some sort of mentor.  It would be great that everyone had a mentor that can help with advice and bouncing ideas off of … [people who’ve] owned their own businesses, residential and commercial RE.  I want to get more involved in commercial RE and do not know of anyone who I could turn to on how to get started.

I’m a great fan of mentors; but, when you can’t find one then you have to make do with getting info. from a variety of sources: friends, accountants, attorney’s, investor’s clubs, and – of course – Realtors.

This takes time and energy, so in the meantime, you can refer to the resources on this site and others …

For example, you can start by checking out these posts;

If you are interested in property development:
 
http://7million7years.com/2009/09/09/ive-been-out-shopping/
 
http://7million7years.com/2009/09/16/can-your-real-estate-development-project-make-money/
 
http://7million7years.com/2009/09/23/how-much-money-can-you-make-developing-real-estate/
 
And, these posts if you are interested in how to analyze a commercial property deal (offices):
 
http://7million7years.com/2008/12/22/anatomy-of-a-commercial-re-investment-part-1/
 
http://7million7years.com/2008/12/23/anatomy-of-a-commercial-re-investment-part-2/
 
http://7million7years.com/2009/01/05/anatomy-of-a-commercial-re-investment-part-3/
 
And, you should follow up these resources if you are interested in multi-family-type ‘commercial’:
 
Dave Lindahl: (I bought and USED his ‘multi-family millions’ course to help me analyze 100’s of potential deal (but, in the interests of full-dsclosure, I didn’t end up buying any, although I already own millions of dollars of residential RE, but my largest is only a quadraplex)
 
Dolf de Roos: I have bought a number of his products, including his Commercial RE audio course and some s/w … more basic than Dave Lindahl’s course, but helpful nonetheless, especially for noob’s.
 
To be fair, a few others consider these guys to be ‘scammers’, but I don’t make any money from either – have bought their material at full price and found it useful, so what more can I say?
 
Oh, and here is a guy who is definitely NOT a scammer and has some useful stuff, too: John T Reed.

Of course, you could also try and do what IJ did:

E-mail me with your questions … I don’t mind, if you don’t mind if I [perhaps] choose your question for a future post 🙂