Tag Archives: money

A hidden risk of reward …

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I have postulated before on the $5m5y Phenomenon: why is it that 80% of lottery winners, winning absolutely life-changing amounts such as $5 million (all the way up to $150 million) lose 100% of their winnings within 5 years?

Think about it, it’s a staggering amount of money: how would you even go about spending $1m+ a year for 5 years, starting from an almost zero spending base?

Jake hits the nail on the head for at least one of those reasons:

When you hit your number or are well on your way toward it, how do you deal with family that are not making progress to their number (or likely ever will get there).

Specifically, how do you keep a cordial relationship – i.e avoiding acting like a heartless a-hole but also avoiding being the family patsy / sucker who pays for everything.

If you are making good progress toward your number, you are likely very hard working, talented and lucky. Chances are that family members lagging behind are lacking one or more of those traits, often the one associated with hard work.

Yes, after the houses, boats, vacations, girl/boy friends, and Ferraris come the financial-vacuum-cleaning carpet snakes:

Your friends and relatives 😉

Having had [AJC: too much] personal experience dealing with exactly this type of issue, let me try and give you some random pointers, which you will need as your journey progresses:

Stage 1 – When you are still on your journey towards your Number

– Lie about your financial circumstances; the corollary is to keep your spending under control, which has the side benefit of actually helping you to reach your Number

– Complain about everything: business is bad, your investments aren’t doing as well as you hoped, and so on

– Take a preemptive step: actually try and borrow money from those most likely to put the hard word on you [AJC: don’t try too hard though, you don’t actually want to owe your relatives anything]

Stage 2 – Just as you reach Number

– OK, it might be difficult to hide behind a veil of poverty (unless you are some sort of miser); so, you will need to rely on the old “can’t confirm/deny anything” … this is best done by attitude rather than words: in other words, when one of your friends says “Frank’s really loaded now”, just smile wryly or – if you have to say something – try “don’t believe everything you hear”

– You could still try and borrow money from your relatives to “help pay some back taxes that I owe … nothing serious”; this works best if you also put a For Sale sign on your Ferrari.

– At least try and keep your post-windfall spending spree in check; and, it’s likely – if you’ve been following the advice on this blog – that your Lifestyle isn’t going to to take a big jump, rather you will not have to work to maintain it.

Stage 3 – Making Money 301

You have your Number, but you forgot to build into your chosen lifestyle a certain amount for ‘paying off the friends and relatives’ [AJC: if you’re still calculating your Number, now’s your chance to put something in there], what to do?

– You will have no choice but to do certain ‘good deeds of kindness’; for example, we paid for two tickets for family members to fly to the US to see us. We flew them coach, provided no spending money, looked after them generously while they were with us (we paid for all meals, etc.), but they were grateful.

– Keep these ‘acts of generosity’ few and far between, or they will be soon seen as ‘rights’ and you will end up wearing all the cost with none of the benefit.

– Simply accept it as a ‘cost of doing [family] business’ that you will be the one footing the bill at all family events; we find ‘prior engagements’ for as many of those family functions as possible: out of sight, out of our pocket.

– Give 30% to 50% (only for family … friends get no more from you than anybody else) more generously for gifts than others; it will be expected and there’s not much you can do.

– Ditto for tips; if they know who you are, you had better be a little more generous if you want to avoid your food being spat in.

– Listen politely but offer little when friends and relatives come asking you for ‘advice’ … they are really sounding you out to ask you for money (they will call it a ‘loan’, but you know it for what it really is); your only protection is preemptive (see above).

– You are far better off to be seen doing ‘good works’ and giving to charity; the aim is to be seen as a good role model and something that your good-for-nothing-freeloading-ex-friends-and-still-relatives can aspire to when they make their own money.

Just remember, unless you built a huge Charity Case Buffer into the calculation of your Number, you have no choice but to let your friends/relatives do the right thing and work on their own Numbers … unless, you no longer want to be able to live your own Life Purpose?! 😉

The fundamental rule of money?

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Here’s the difference between conventional personal financial advice and 7m7y thinking in one slide; according to Brian Taylor the fundamental rule of money is to:

Either earn more than you spend or spend less than you earn.

Simple … and, much better than the alternative (spending more than you earn) …

… but, wrong!

There is only one fundamental rule of money:

Earn more than you spend

Can you see why? Your financial future depends upon it 🙂

The Myth of the Safe Withdrawal Rate …

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I have noticed an unusual phenonemom: I write a post on one theme and your (i.e. our readers’) comments explore another one entirely!

This is a GOOD thing … it means – I hope – that we are building an online community dedicated to the idea of linking our finances to our life, rather than simply attempting to fit within society financial ‘norms’.

Case in point: I wrote a post exploring various windfalls, and the comments lead us down the path of exploring so-called ‘safe withrawal rates’, which is the idea that there is a Magic Percentage of your Number that is ‘safe’ to withdraw to live off each year.

The problem is, what % do you choose?

For example, I have proposed the ‘Rule of 20’ for calculating your Number, which seems the same as proposing a 5% ‘safe withdrawal rate’, but Jake disagrees:

A 5% drawn-down rate on the pot of gold is a little on the risky side if you want the money to last.

After looking at a bunch of data, I feel that a draw-down rate of 2-3% is too conservative, but 5-6% to aggressive. 4% or so seems right. I know, only 1% off from your value but over time it makes a huge difference.

So, Jake has highlighted one problem with selecting a ‘safe’ withdrawal rate … if you are out by even 1% your spending can be over (or under) the ideal by 20%. I don’t know about you, but a 20% payrise (or paycut) is a pretty big deal … people quit their jobs over less!

So, what do the experts recommend?

Believe it or not, there is support out there for just about any annual % of your nest egg that you may choose to spend, for example:

7% – Not so long ago, the financial services industry proposed spending as much as 7% of your portfolio each year in retirement.

6% – More recently, Paul Graangard wrote two books proposing a bond-laddering and stocks strategy that supported a spending rate as high as 6.6% of your portfolio each year.

5% – Investment funds routinely allow spending of 5% of the portion of their investment portfolios dedicated to simply keeping up with inflation. Indeed, my Rule of 20 appears to support this withdrawal rate, too.

4% – A large number of studies – probably, the most famous of which is the so-called Trinity Study – advocate spending up to 4% of your initial portfolio (ideally, 50% stocks and 50% bonds, rebalanced each year), which provides somewhere between a 90% and 100% certainty that your money will last at least 35 years.

3% –  A whole slew of new retirement planning tools (generally using a Monte Carlo approach to modelling tens, hundreds, or even thousands of potential economic scenarios) have been released over the last 4 or 5 years by the financial services industry, purporting to analyse hundreds of alternative economic scenarios to try and model what would happen to your retirement portfolio (i.e. simulating changes in interest rates, market booms and busts, etc.) to find the ideal ‘safe’ withdrawal rate. The trouble is that a lot of these advocate very low withdrawal rates, typically in the 2.5% – 3.5% range. 

2% – Some even advocate a totally ‘risk-free’ approach to retirement savings by investing close to 100% of your retirement portfolio in inflation-protected bonds (i.e. TIPS); historically, these have provided a 2% return, after inflation and with total protection of your starting capital.

So, which is right?

None, as TraineeInvestor explains in his comment to my post:

I’m not fan of draw down models either. If you have to spend your capital to avoid eating cat food (or the cat) or are working with a very limited time period fair enough. But with a sufficiently long time horizon, my view is that any draw down rate is dangerous – in fact I would be uncomofortable if my nest egg was not growing at at least the rate of inflation (after taxes and spending).

Another way of looking at it is that if you are relying on draw down of capital for living expenses you are very vulnerable to adverse events. No thanks – I’d rather sleep soundly at night.

Me too! 🙂

Three feet from gold …

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This video summarizes a book hailed as the successor to Napoleon Hill’s classic: Think and Grow Rich. I’m not sure that you can just think your way to $7 million in 7 years … but, having a burning reason why you might need that much / that soon sure seemed to help me.

But, I can’t help feeling: did I think, therefore attract … or did I happen to think and happen to attract? I guess we’ll never know for sure, as we are all an Experiment of One 🙂

Reader Poll: Manifesting Millions?

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IMPORTANT: Please read this post in full, THEN choose the FIRST answer that applies.

How much money have you manifested in the last 18 months?

View Results

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There are two groups of people in this world:

– those who believe that there are two groups of people in this world, and

– those who don’t 😛

At the risk of parodying myself, I think there are two groups of people in this world:

– those who believe in The Secret, and

– those who don’t.

I want to conduct an experiment, right here / right now, to see if The Secret works …

First though, in case you’ve been living in a cave for these past few years (in which case, you have probably already developed powers far beyond those of The Secret), you will already know that The Secret is the most recent in a long series of books, blogs, and banter about the ‘power’ of creative visualization …

… see it in your mind and you will manifest it into reality.

Believe it, and it will be so.

I don’t know how The Universe works, so I can’t tell you whether I manifested my millions (perhaps by concentrating on my Life’s Purpose and the Number required to get me there) or was merely driven to make it at all costs … you could certainly mount an argument either way.

Also, I am an experiment of one …

Fortunately, we have Steve Pavlina who is an expert in these matters, and  is also the creator of a very interesting project, aptly called the Million Dollar Experiment:

The goal of this experiment is to attempt to use the power of intention to manifest $1 million for each person who chooses to participate.

From what I can see, the experiment ran from November 2005 until July 2007 … just over 18 months. Here’s what happened:

In that 18 month period, nearly 1,600 participants reported ‘manifesting’ anywhere from $504,873.56 (in just one day; if you choose to believe him) down to just one cent.

The average was closer to $3,500 in less than a year, with the median being just $180.

I’m not sure what you would count as a worthy ‘manifestation’ amount (I mean, would you dream of anything less than $10k in a year?), but 120 people – just 7.5% of those participating – ‘manifested’ $10k or more in that period.

Cast your mind back 18 months: how much have you manifested in that timeframe? I guess by ‘manifested’, I mean by following Steve Pavlina’s instructions to his own readers:

Only count the new money you feel has come into your life as a result of your participation in this experiment (i.e. the manifestation of this intention), not your regular income. Obviously your interpretation of that will be subjective, but this is a subjective experiment. Just do your best, and trust your intuition.

Just pretend that you signed up to Steve’s experiment 18 months ago … what money (if any) that came into your life since then would you have reported on Steve’s blog?

Oh, and feel free to tell me what you think about the power of The Secret, Steve’s Million Dollar Experiment, and/or this post … but, don’t forget to scroll back up to the top and make your poll choice first 🙂

Is he really a clever dude?

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[Disclaimer: Artist’s rendering of AJC … any resemblance to other bloggers living or dead is purely coincidental]

Have you noticed that I don’t have a category for debt on this blog?

[AJC: you can click on any of the keyword/categories in the orange header-banner above to see a list of blog posts focusing on that subject]

It’s not because we don’t talk about debt, as we clearly do …

…. it’s because, to me, creating or paying off debt is just the same as investing (after adjusting for tax: a dollar saved in interest, is the same as a dollar earned in interest or investment income, right?).

That’s why I was genuinely interested in finding out what was going through fellow-blogger Clever Dude’s mind when he loudly proclaimed:

We’re Free of Consumer Debt!!!!!!

As of today, we have paid off all $113,000 of our student loans, auto loans and credit card debt.

We are debt free!!!

My fellow blogger is right to be proud of his achievement … but, does that make it the right investment choice?

Check it out:

He paid off $113k … now, this is no small achievement, some people don’t even save that in their entire lifetime! Still I couldn’t resist asking Clever Dude for some details:

The rate on the student loans was 6.25%. The 2nd mortgage is 7.875%. First was 5.25%.

I chose to pay off the student loan because it was more manageable and I could get it off the books faster than the 2nd mortgage. Mathematically, the 2nd mortgage makes more sense until you factor in the tax deduction which brings them down to about equal.

I also wanted to know a little about his current net worth (after the mammoth debt-payoff feat) – nosey, aren’t I?! Anyhow, Clever Dude was happy to share:

Don’t mind the math as I rounded:

Cash: 17%
Investments: 37%
Home Equity: 6%
Autos: 17%
Personal Property: 12% (if I could sell it all right now)
Whole Life Insurance: 5% (yep, I got it, it’s expensive, but I’m not giving it up!)

So, Clever Dude has ‘invested’:

-> $113k in loans returning (by avoiding having to pay) around 6.25% after tax

-> 17% of his net worth in cash returning (I’m guessing here) 2%?

-> 6% of his net worth in his home returning some unknowable amount in future (potential) capital gains

-> 5% of his net worth in insurance ‘investments’ of dubious value after (often) exorbitant fees

-> 29% in (presumably) depreciating ‘assets’ such as autos and personal property

Now that he is debt-free, what  will drive Clever Dude’s investment strategy from here on in? He says:

Investing and savings are next up in our planning. Honestly, we’ve spent so much time just thinking about debt, we haven’t spent much time on the future. Now is the time.

Now, I’m not here to pick holes in Clever Dude’s investment strategy as he had a strategy and moved mountains to achieve it – not to mention, that we know so little about Cleve Dude’s true financial situation that we are in no position to advise / criticize …

…. but, I do want to use this example to show why following a blind – and, in my mind totally arbitrary – investment goal such as “reducing debt” is not always the best idea:

Clever Dude has only 37% of his net worth in investments right now (OK, he is working on his Master’s Degree, so he has had other things on his mind) and has limited the bulk of his net worth’s returns to only 2% to 6% (or so) by almost-totally focusing on paying debt.

Why?

So, that he can start “investing and saving”!

Now, does that make sense to you?

Even more on the debt-free fallacy …

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I’m not a Ramsey fan, and I am equally not a fan of pithy statements that are supposed to make us financially secure, both for the simple reason that they are unlikely to help me – or, you – achieve a Number (i.e. retirement nestegg) amount that is large enough to live my – or, your – Life’s Purpose.

Now, if you don’t have a lot of travel and free time associated with your own Life’s Purpose, then you may be able to live nicely off $50k a year indexed (assuming that you have a $1 mill. nest-egg, in today’s dollars)  … but not me!

I aimed for – and, achieved – a $7 million in 7 year target (starting $30k in debt) because that’s what I decided that I needed (actually, calculated) … and, this blog is written primarily for those who want to achieve the same.

So, it shouldn’t come as a great surprise that I both agree and disagree with Jesse – the Debt Go To Guy– who says:

Risking $1,000 a month on a possible 8% return instead of a guaranteed after-tax ROI of 5% by paying down mortgage debt is NOT such a “Duh” decision. If you do get 8% you must pay taxes, and if you live in a state like CA, then after taxes you’re about even. Plus you have slippage… transactional fees etc for the investment / trade. So risking your $1,000 a month on 8% instead of a guaranteed after tax return of 5% is not always so smart, and a bad example.

People with double-digit interest rates on credit card debt, especially the many folks paying 20-30%+ interest, are not likely to find a better investment opportunity in their entire life than inside their own liability column. Every dollar in debt paid off is a guaranteed after tax ROI of 20-30%. Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time. What makes you think someone in debt could pull off such a stunt?

OK, that’s sound commonsense advice and hard to argue with:

– Sort your debts into high interest and low interest, and have a good crack at the high interest ones first, because the money that you save on interest is probably way higher than you could earn elsewhere. A dollar saved is a dollar earned, right?

– Now, when comparing the lower interest debts and investments, you really need to look at all the factors, such as risk, taxes, costs, etc. Often, it will be paying down the debt that wins, although I would be surprised if paying down a 5% mortgage ‘wins’ over any sensible RE, value stock, or business strategy in terms of serious wealth building.

But, I don’t really think that “Warren Buffet, Peter Lynch and Sir John Templeton would all agree and even George Soros couldn’t produce a better ROI over time”. I know that Warren Buffett has produced 20%+ compound returns, and George Soros didn’t become a billionaire on less than 20% – 30% compounded returns.

That doesn’t detract from Jesse’s statement that “every dollar in [credit card] debt paid off is a guaranteed after tax ROI of 20-30%” and I do agree that it would be almost impossible for anybody except [insert: Forbes Rich 1,000] 😉

But, here’s where I disagree with Jesse:

I think Dave Ramsey provides sound advice for most people, and while I think it’s better to expand your means and increase your income instead of living like a popper, his advice has proven to help many hundreds of thousands of people to stop paying interest and start earning interest, and that’s the key.

– readers attracted to this blog are not in the same position (at least, no longer wish to be in the same position) as the ” hundreds of thousands of people” that Dave Ramsey has helped, and

– “stop paying interest and start earning interest” is not the key to reaching a large Number by a soon Date.

Look, there is nothing intrinsically right or wrong about paying interest, it’s merely a by-product of a loan that you have taken out. Just make sure that the loan produces more income than the interest expense that you paying, by a wide enough margin to account for the risk, taxes, and costs that may be involved.

This is a ‘no brainer’ when you realize that a rental property can produce income (assuming that your calc’s prove that it is all worth while … by no means the case on all – or even many – properties), and it is equally a ‘no brainer’ when you realize that borrowing money on your credit card to buy an LCD TV produces NO income, so why would you do it?

But, it takes a giant leap to suddenly realize that – for any existing debt that you may already have – paying down debt on a mortgage that costs you 5%, or a student loan at 2% may not be such a brilliant idea when an investment that can produce 15% compounded comes along and you now need to decide where to put your cash: into paying off those loans (to blindly achieve a ‘no interest’ outcome) or into the investment (hopefully, to produce an income-producing asset with excellent cashflows).

Of course, we’re making an assumption that reasonable people can achieve reasonable investment returns … but, if you think those kinds of investments are almost impossible to come by, take another look at:

– Value stocks (read Rule # 1 Investing by Phil Town),

– Real-estate (read Multifamily Millions by Dave Lindahl),

– Business (read The E-Myth Revisited by Michael Gerber).

[AJC: and, if these all sound too scary for you, just remember that over a 20 to 30 year period a low-cost index fund that tracks, say, the S&P500 will return circa 11% to 12% (yes, before taxes and ultra-low fees), and – if you are worried about risk – has NEVER produced less than an 8% return over 30 years]

I didn’t become a multi-millionaire by blindly entering into debt, but neither could I have become a multi-millionaire by blindly avoiding it … debt, for me, was a tool that I used sparingly, yet wisely.

I recommend that you do the same 🙂

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.