Tag Archives: money

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 🙂

So, who’s missed the point?

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Philip Brewer, a freelance writer for Wisebread (I presume, amongst others) has had a couple of mentions here, lately; this one for a comment that he made on his review of the book: Your Money Or Your Life [AJC: snappy title]:

The book has a very simple investment program that many people have taken issue with. The authors want you to invest your surplus money (a growing amount, once you make some progress on maximizing income and minimizing expenses) in long-term treasury bonds. More than a few people have criticized the program on the grounds that a diversified stock portfolio would produce higher returns. These people have missed the point: The goal of the investment portfolio is to produce a very secure stream of income. Long-term treasurys are a perfect choice.

Since I haven’t yet read the book, I can only say that I disagree if the authors – hence Philip – were talking about investing for retirement; after retirement – Making Money 301 – I wholeheartedly agree that the “goal of the investment portfolio is to produce a very secure stream of income.”

I also agree that “Long-term treasurys [sic] are a perfect choice”, especially if they are inflation-protected (e.g. TIPS in the USA), and perhaps laddered in some way; alternatively, you could try:

– income producing real-estate purchased in whole or in large part for CASH,

– index funds (although, you open yourself up to a certain volatility),

– Covered calls, perhaps protected by PUTS (if the option pricing allows).

But, not when you are still trying to build up your nest-egg unless you have such a low required annual compound growth rate (which probably means that you came by the page accidentally and are about to click off, never to return) that bonds / treasuries will do the job.

Until you do get within a few years of retirement, the goal of your investment portfolio is simple: it should be to produce your Number 🙂

Pay yourself first or last?

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Adam (a staff writer at Get Rich Slowly) wants you to “challenge yourself” by replacing the the standard ‘pay yourself first’ advice with:

Only pay yourself first if you deserve it.

Now, Adam isn’t suggesting that you stop saving that 10% to 15% of your gross income that the bulk of the personal finance blogosphere recommends …

… what Adam is really asking is:

Should You Stop Funding Retirement to Focus on Debt?

[This] is one of the most heavily debated dilemmas in personal finance. Unlike “spend less than you earn” or “track every penny you spend”, there’s no cookie-cutter answer to this question. Variables such as age, career, risk tolerance, and even personality type make each individual situation unique.

This is a good line of questioning – and I encourage you to read his article – but, unlike Adam, I think there is a “cookie-cutter answer to this question”:

You should always ‘pay yourself first’ …

… but, where you place that money depends on where you earn the greatest after-tax return.

Keeping in mind that a “dollar saved is a dollar earned”, it could be in:

– Your 401k, potentially earning 8% plus the value of any employer matches (in an earlier post, we calculated this as providing another % point or two to your long term return),

– Your debts, potentially saving 10% to 30% interest on high-interest car, credit card, and consumer loans,

– Your real-estate investment strategy, potentially earning 15% to 25% in long-term rental increases and capital appreciation,

– Your seed capital for your new business, potentially earning 50%+ in future profits and windfall gains on the sale of the business,

– etc.

But, is unlikely to be found in paying off low interest student loans (saving 0% to 5%) or mortgages (saving 4% to 6%) or in investing in low interest savings such as bank accounts, bonds, or CD’s (earning 1% – 5%).

Blindly plonking your money into your 401k, or paying off debt, or paying down your mortgage is not the way to get rich(er) quick(er) … 7m7y readers always look at their options in terms of greatest contribution to reaching their Number.

Business for Cash Flow and Real Estate For Wealth

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I don’t know these guys, but I do like what they have to say: “our philosophy on creating and sustaining income without a job: Business for Cash Flow and Real Estate For Wealth” …

… it pretty much sums up how I achieved my $7 million in 7 years; maybe it’s how you’ll also make yours? 🙂

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 🙂