The Hazlitt Maneuver Fallacy

In my last post I shared a lesson from Henry Hazlitt (from his book Economics in One Lesson called “The Broken Window”); in summary:

Some yahoo breaks the window of a bakery. Did he create employment by causing $250 in repairs, thus giving the window repair man more money to go and spend in a kind of economic ‘mini stimulus package’?

Well, no, as many of my readers were quick to point out …

Hazlitt identifies the missing pieces:

What is missing from the thought experiment of the gathered crowd is the fact that the baker was going to buy a suit with that $250 but he can no longer do that since he is $250 poorer. The suit he was going to buy can no longer come into being since the tailor is not going to get that $250 to make the suit. So in this community, the window repair man and all of the merchants he would spend the money with make out but the tailor and all of the people he would spend his money with lose out. So, was there really any net loss or gain? Other than for the baker, no. Instead of having a window and a suit, he just has a window and is now $250 poorer.

Well, d’uh!

But, “the main reason why no one typically considers the tailor and the merchants he would buy from is that, since the suit never came into being and was not readily visible, it never entered into anyone’s thoughts. The window, however, is quite visible and it does not take much to reason through who would benefit from the broken window.”

This issue of visibility is central to the way that most people manage their finances: the money goes where the need is most visible … now!

AJC.

PS Before you point it out, I know that the image, above, isn’t the Hazlitt Maneuver … it’s the Heineken Maneuver, of course 😛

The Hazlitt Maneuver

Here is a short piece by Henry Hazlitt from his book Economics in One Lesson called “The Broken Window” Maneuver  :

A young hoodlum breaks the window of a bakery and the gathered crowd begins to philosophize about whether the hoodlum really harmed anyone at all since he, after all, created employment.

He created employment by having to force the baker to pay the $250 it costs to fix the window to the window repair man. The window repair man will then have an extra $250 to spend with other merchants and those merchants will have more money to spend elsewhere. This line of thinking can continue on forever.

If it weren’t for the broken window then the window repair man would have less money and employment and so would the merchants he would spend the money with and so on.

So, what do you think? Should we stimulate the US (indeed, world) economy, simply by arming our population with rocks and asking them to all go break windows?

Who cares what a millionaire won’t tell you?

I love (not!) these “secrets of how a millionaire thinks” types of articles, like this one called 10 Things A Millionaire Won’t Tell You [AJC: actually, this one really is quite interesting] …

… the problem is that they mix the poor millionaires in with the rich ones!

I’m not sure that I can define a ‘rich millionaire’ for you (seems like a tautology, but isn’t), but it’s something GREATER than $7 million, because I don’t ‘feel’ rich yet. Wealthy, yes. Wealthy enough to live my Life’s Purpose without ever needing to work again … just.

Extravagant, no … but, it would seem extravagant to you, wherein lies one of the problems: you may consider house with swimming pool and tennis court extravagant now. You may consider private schooling for your kids extravagant now. You may consider a BMW M3 Convertible and a Lexus Hybrid extravagant now.

But, when you become a ‘millionaire’ you won’t: you’ll expect the house + a second home in the country. You’ll expect the BMW and Lexus on the street + the ‘exotic’ in the garage. And, you will only want the best for your kids (unless you already live in a top public school district … then, watch your land taxes!).

You need to pin this down … now … when you are working on your required annual living expenses. Inflate this by 4% per year until you expect to retire (a.k.a. begin Life After Work). Multiply by 20. Add in your one-time costs (e.g. house/s). There’s your Number.

Which brings me back to my point; as the article says:

Some 10 million households have a net worth above $1 million, excluding home equity, almost double the number in 2002. Moreover, a recent survey by Fidelity found just 8 percent of millionaires think they’re “very” or “extremely” wealthy, while 19 percent don’t feel rich at all.

A millionaire, these days, can ‘safely’ spin off about $30k to $50k a year. That’s it.

If that makes me rich, then I was rich when I was still working my first job in my mid-twenties.

So, what does it take to truly feel rich, these days. Somewhere north of $7 million …

… Fidelity says the ‘magic number’ is about $23 million [AJC: citation needed; can anyone find the original Fidelity source for this?] before fat boy gets thong girl.

I won’t argue with that! 😉

Enough is enough!

Early Retirement Extreme wants to slay the ‘enough’ dragon; while, for many, ‘enough’ refers to their income and/or spending, in ERE’s case it refers to his investment net worth:

In terms of the invested assets dragon, I have several. I want to have a $500k net-worth. Once I hit that, I want $750k; then I want $1M. It’s been like that all along. It might just be my biggest source of stress— not being able to rapidly save money, which, rationally, I’m not going to spend anyway. It’s pretty stupid, I know.

And, before you think that “when I’m rich, then I’ll have enough” remember that when people who you and I think are rich (i.e. with net assets in the $5 million to $25 million range) are asked how much they will need before they consider themselves rich, they tend to say: “about double”.

That is, they tend to think that they need about twice their current net worth in order to feel comfortably rich!?

The solution is to prepare your definition of ‘rich’ … in advance!

… and, that should be to have enough money to live your Life’s Purpose. We call that number your Number.

When you get there, STOP because that is – for you – truly ENOUGH.

On the other hand, my ‘dragon’ isn’t income, investment assets, spending, etc., it’s my entrepreneurial gene … I see opportunity in everything and want to invest in it.

Right now, I’m working on my real-estate development projects, partnering with a young entrepreneur in his first bricks-and-mortar venture, and have any number of browser windows open with new technologies that I want to pursue.

Enough!

While it’s all fun, and mentally challenging, and fits totally within my Life’s Purpose, it all still takes money … so, in some ways, it’s no different to any of the other forms of ‘enough dragons’ out there.

So, how do I deal with my ‘enough dragon’?

Well, I built enough ‘fat’ into my Number to allow both the free time and the free cashflow to play with these new ventures: about 10 @ $50k a pop. Unfortunately, just one of my non-property business ventures is already in $100k territory, so I need to tweak by reducing the number of other ventures that I back.

And, as I’ve already said, this is easier said than done 😉

Pay off debt or invest?

I’m publishing a whole series of posts targeting Debt … it has very little to do with conventional financial wisdom on this critical subject. Here is the second post (I have another one coming up, soon) …

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Gen-X Finance is polling his readers as to whether they would prefer to pay down debt or save:

If you have both debt and a need to save money, how do you prioritize? Some people will pay off debt at all costs before saving a penny. Others will be fine getting by with minimum payments while dumping as much money into savings or investments as possible. While others try to do a little bit of both. That’s why the poll today asks how you view this subject.

You should go ahead and answer the poll.

Now, this is such an important decision – perhaps one of the MOST important mindset changes that you need to make if you want to follow in my $7 million in 7years footsteps – that, for my new readers, I will point you again to my trademark Cash Cascade™ system (don’t worry, it’s simple and free) that replaces the Debt Snowball, the Debt Avalanche and most of the other other debt repayment systems that you may have previously tried.

Here’s why it works:

People make the mistake of thinking that there is GOOD DEBT (typically, investment debt) and BAD DEBT (typically, consumer debt) … but, this is only true BEFORE YOU TAKE ON THE DEBT.

Once you are in debt, then there is only CHEAP DEBT and EXPENSIVE DEBT. Put simply, pay down your expensive debt, until only the single digit ones (on an after tax basis) are left, THEN start investing.

This goes against the ‘pay down all debt’ theories, but works both logically and practically. Try it … and, let me know how it’s working for you?

If you’re well-heeled, you shouldn’t care!

If you’re not ‘twittering’, you’re missing out …

I always thought that Twitter was about “just got back from the dentist and he said “no cavities” … whoohoo!” or just about advertising your latest post. Well, it is both of those things … but, not anywhere near as much as it used to be. At least when it comes to ‘following’ (a Twitter term) personal finance writers.

Now, it seems to be more about genuine subject-matter-related info in small bites, as well as saying “hey, I saw this cool article on …”.

Now, that’s useful – even to me – and it will be very useful to you.

If you like, you can start by following me at http://twitter.com/7million7years … I promise that it will never (OK, hardly ever) be mundane 😉

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Which brings me to a recent tweet from WellHeeledBlog, whom I’ve just started following:

According to Meriam Webster’s online dictionary, ‘well-heeled’ means: having plenty of money.

My question is: if you are well-heeled why do you even care that Vanguard Group lowered the minimum entry level for Admiral Shares? Of course, WellHeeledBlog may not care, but thinks that some of their readers may and is, therefore, providing a useful reader service.

My point – because I like and follow WellHeeledBlog and will continue to do so – is that I don’t care and neither should my readers … long-term. Many of you may care – today (perhaps, because you are only starting on your path to wealth) – but, long-term you should not care, simply because these sorts of money tips will not make you rich.

My blogging – and, twittering – niche is to take my readers to $7 million in 7 years (or some other Large Number / Soon Date).

On the other hand, I started $30k in debt and so will many of my readers. So, this type of money-saving info is useful in the beginning of your financial journey … but, not for long – and, not for the important parts of your financial journey.

Fortunately, that’s where I step in …

You see, this sort of ‘beginner’ financial info is available everywhere, and I don’t see the point of simply rehashing stuff that you can find elsewhere.

If you do need this kind of entry-level personal financial advice, go elsewhere, find the info you need, save money, and get yourself (partially) out of debt, then come back here to find the reality of how to get rich.

That’s my niche, and I hope you are finding it as enjoyable/useful to read as I am in writing it? 🙂

She’s an heiress …

Madam X (provocative name) over at My Open Wallet says that she is an heiress:

Remember Great Aunt Minnie? She died peacefully a few weeks ago. I had a chance to see her one last time in May, and spoke to her on the phone a few days before her death … it was even more weird to find a thick envelope in my mail the other night, which turned out to be from Minnie’s lawyer, because I’ll inherit a share of her estate. So now I just have to see what happens once the estate is settled and divided up. I have no idea how much money it will be. I certainly don’t expect much, given I’ll only get one twelfth of her estate.

Receiving money ‘suddenly’, be it from a sad occasion such as this, or from some fortuitous circumstance such as winning a substantial prize in the lottery, can be difficult, because you probably have no plan.

And, because you have no plan, the money can go as quickly as it comes (remember poor-then-rich-then-poor Lou Eisenberg?).

I call this Found Money, and here’s how to deal with it:

If you’re lucky enough to receive such a windfall, you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work – e.g. selling your business – rather than luck).

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you happen to come across:


The idea is that money is for SPENDING and ONLY FOR SPENDING … but, you need to PLAN to spend some now and PLAN to spend some later (a.k.a. saving). That’s exactly what this table is designed to do.

So, if you find $10 in the street, buy yourself a fun magazine, then stick the rest in a jar.

If you happen to inherit $100,000 go ahead and upgrade your car (and/or take a vacation) – totally guilt free – then plan to invest the other $90k very wisely 😉

Comfort kills!

Yes, that is genius …

But, what does T Harv Eker mean by ‘comfort zone’? Here’s what he says in his book:

Comfort kills! If your goal in life is to be comfortable, I guarantee two things. First, you will never be rich. Second, you will never be happy. Happiness doesn’t come from living a lukewarm life, always wondering what could have been. Happiness comes as a result of being in our natural state of growth and living up to our fullest potential.

How ‘comfortable’ you want to live is up to you … but, I can help you convert that into a number: the amount of money that you need in the bank so that you can live your desired level of comfort (or, discomfort).

Then, I can help you get there!

You DO need $12 million to retire …

Money Ning says that you don’t need $12 million to retire.

Except on Planet AJC, ‘Ning!

Money Ning says:

Can you imagine spending $11,250 per month every 30 days until you are 70? It would actually be fun for a while, but by the 24th month, I bet you’ll be tired of buying anything. And if you just leave some money left every month? Well, down goes the savings necessary.

These humongous retirement numbers may catch our attention, but they rarely speak the truth about reality. Plus, chasing a number is a never ending game, because there’s always a higher number to go after.

When I was still $30k in debt, and going nowhere fast, I calculated that I needed $5 million to ‘retire rich’:

– That was in 1998 dollars … in 2010 dollars, we’re up at around $7.5 million

– I under-estimated what I needed; and, so will you!

Right now, I ‘burn’ around $250k per year (land taxes, school fees, vacations; house upkeep; etc.) and don’t consider my spending anywhere near ‘Snoop Dog Lavish’, but it’s WAY over Money Ning’s “$11,250 per month” … and, I can’t EVER imagine spending that little per month. Really.

To that annual spend, I add my two houses (to be fair, I’m trying to get rid of the US one), and my two cars (and some associated expenses) … there’s $12 million, and I don’t live in New York!

Of course, that’s not what everybody needs … maybe not even what ANYBODY needs … but, it is (give – not take – a few million) what I decided that I needed.

But, when calculating YOUR ‘number’, don’t go for the money, do as Money Ning suggests:

Chasing a number is a never ending game, because there’s always a higher number to go after. If you want to feel rich, the more appropriate approach is to just make sure money is out of your way, out of your life decisions, and out of the list of things that you worry about.

That’s what I did … it’s hardly my fault if the answer pointed to $5 Million, nor is it my fault that I ended up cashing out for a whole lot more. And, it won’t even be my fault, if you do, too.  😉

Beat 80% of professional fund managers!

I’m disappointed! I thought that 7million7years.com and it’s membership-site ‘cousin’ 7m7y.com were important enough to be hacked … but, they weren’t 🙁

Turns out that MANY GoDaddy-hosted WordPress sites have been similarly ‘hacked’ – with users seeing a [false] SECURITY WARNING ALERT!!! message. GoDaddy appears to be working on have fixed the issue, in the meantime, please read on for today’s un-hacked post ….

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Shawn at Watson Inc. outlines a sensible ‘system’ – one that I have spoken about before – that beats “80%-90%” of professional fund managers [my highlights]:

Some may ask what I mean by systematic investing. Peter Lynch (Fidelity), Warren Buffett (Berkshire), and even Dave Ramsey recommend a conservative and simple approach for the typical investor: rather than trying to outsmart the markets, use benchmarks to track the markets instead. For example, the Vanguard Index 500 fund has outperformed two-thirds of all mutual funds on a rather consistent basis (Cash Flow Quadrant, 1999). Usually over 10 years, these types of index funds yield a return exceeding 80-90% of returns of the “professional” mutual fund money managers (Motley Fool, 2007). Interestingly, the average millionaire is this type of investor (The Millionaire Next Door, 1996). Although there is no 100% guarantee, this method does dramatically decrease the risk over time and provides respectable returns. Provided that one starts early enough (i.e. before mid-forties), consistent investing over time can be the key to achieving a great deal of wealth.

Now, who wouldn’t kill for a system like that?

Well, me for one … and, I’m guessing, most of you!

You see, we (7m7y readers) have a very special filter that QUALIFIES us; it’s the title of this blog: “How to make $7 million in 7 years”.

Now, there’s no reason why you CAN’T read this blog if your target is, say, $1 million in 20 years … I can’t physically stop you … but, it’s ill-advised, because most of what I say would just be ‘noise’ to you …

… just confusing ‘chatter’ that sometimes runs totally counter to what you read elsewhere.

What I say here is ‘noise’ if you really do have very modest financial goals, or no real financial goals beyond saving and trying to become debt free.

So, in my “$7 million 7 year” context, I say “so what if I can beat 80%-90% of fund managers?” because the amount that I can make simply won’t be enough to help me reach my Number … certainly not if it’s one of my main financial strategies.

Instead of worrying about the pro’s and how the vast majority are simply butchering the mutual funds that they are supposed to be wisely managing, realize that investing in the ‘market’ (e.g. by investing in a low-cost index fund as sensibly suggested by Shawn) actually LIMITS your returns to that achieved by the market: 8% over 30 years in any market, 12% in ‘average’ times, and 0% (or worse) in recent times.

Try this:

a) Plug your starting Investment Net Worth (i.e. what you could scrape together to invest) into a compound growth rate calculator

b) Also, plug in how much you think you will be able to add each year

c) Include the number of investing years that you would like to have before you finally ‘stop work’ to live off the fruits of your investments

d) Plug in any number from 1% to 12% that YOU think an Index Fund will reasonably return over the number of years that you allowed, above

e) Halve the answer that the calculator gives you to (very roughly) allow for 4% inflation, for every 20 years (or prorate, if less than 20) that you chose, above.

f) Divide your final answer by 20: on a VERY GOOD DAY, that’s roughly (in today’s dollars) what you will have to live off, each year.

If that’s good enough for you, congratulations on two counts:

1. Thanks to Shawn, you’ve just found your Ideal Investment Strategy … and, it’s easy / low risk, to boot! And,

2. You’ve also saved 2 minutes a day, because this blog – for you – is just noise …. [crackle … and, out!]

But (!), if the answer is NOT good enough for you [AJC: it sure wasn’t good enough for me! But, it just might be good enough for you – be TOTALLY honest, this could be the financial ‘tipping point’ for you] … commiserations: your life just became a whole lot harder!

If so, keep reading … I’ll do what I can to soften the blow 😉