View your 401k as insurance!

I agree with Financial Samurai’s basic sentiment, which is to effectively ‘write off’ your 401k and Social Security:

Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500.  Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math.  After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match.  Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.

CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations.  In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income.  Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year. With the stock market implosion of 2008,  your 401K has proven itself to be totally unreliable.  Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life.  I

Depending on Social Security is depending on the government doing the right thing.  There’s no way that’s going to happen.  Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.

Because Social Security is a burden on governments and society, it’s always at risk of being watered down or eliminated … this is less of a risk the older your are (hence closer to receiving the payments).

But, not so your 401k: while governments can (and, probably will) water down – instead of increase – the contributions and benefits of your retirement program, the money that you contribute (and, your employer match) is still yours!

I don’t think you’ll ever lose what you contribute + whatever gains the flawed investment choices available may bring.

I look at my retirement plan (which I haven’t contributed to in years!) as insurance: if all else fails, when I reach whatever age the government of the time lets me access MY money, I’ll have something to keep me one step away from homeless … just.

So, I agree with Financial Samurai’s closing advice:

The only person you can depend on is yourself.  This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can.

You’ve heard of Paying Yourself Once? Well, I think you need to Pay Yourself Twice™ … once inside your 401k (there’s your ‘insurance policy premium’), and once outside of your 401k.

It’s the money that you can put aside OUTSIDE of your 401k that will drive your wealth, because you can put it to MUCH BETTER USE (e.g. investing in business, real-estate, value stocks, etc.) than that money locked away inside your 401k and in the hands of grossly under-performing, fee-driven mutual fund managers 🙂

Managing your life through the rear-view mirror …

Not many people are rich, so following COMMON financial wisdom can’t be all that it’s cracked up to be, can it?

Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on 😉

Does MLM go too far?

Silicon Valley Blogger joins some others in hating on a particular MLM company. You can read his/her post to find out which one and why …

Now, I have absolutely NO experience with that particular MLM, and very little personal MLM experience at all, other than reading a lot about MLM when I was younger and participating in Amway for a little while.

But, I take issue with SVB’s sub-heading (about half-way into his post; asking: “Does MLM go too far?” And, I wasn’t afraid to tell him/her so:

I don’t think that there’s anything inherently wrong with MLM; it’s like saying that franchising sucks: it all depends on the company.

It’s POTENTIALLY a great business model on 3 levels:

1. For the company: they get to take a product straight to market, cutting out layers of fixed marketing costs by replacing them with a multi-level commission structure.

2. For the (very?!) small % of ‘distributors’ who build large networks: they get to build a ‘passive’ income stream that lasts as long as the company does. I have a friend who makes $200k+ a month (for years now), and sips coffee and develops property when he gets bored. Not so bad.

3. For the majority of distributors: they get to buy product that they presumably love and use at discounted prices, and they may even earn some ’side income’. It’s what they do with this money (invest? start a ‘real business’?), and what they learn (people skills? sales skills?) that can provide the real value.

… this is all assuming that they do their homework and choose a reputable company. But, isn’t that the case with everything we do or invest in?

DISCLAIMER: The author of this comment has no relationship with any MLM, being a retired multi-millionaire who made his money in MUCH more mundane ways (‘real business’ and ‘real investing’) ;)

Flash of genius?

I was watching the Greg Kinnear movie: Flash of Genius.

It’s the one where an academic engineer beats the giant auto makers in the ’40s to inventing the intermittent wiper that you see on your car.

In case you are thinking of starting a patent-based business … don’t.

To understand why, please watch the movie; you’ll see a man’s solitary struggle over 20 years to (luckily, successfully) enforce his patent rights against a giant corporation (in this case, Ford).

You’ll also get a bit of a wake-up call about the legal profession (they will aim to settle a case early, so that they get their 30% quickly).

But, what piqued my interest was the characterization of the man at the center of the story:

He (according to a screen play that probably had very little to do with reality) suddenly got the notion that fixed speed wipers were stupid, so he immediately – and, I mean that night (!) – set about solving the problem.

Now, I suddenly realized that man is me!

Case in point:

I created a little e-book some time ago for an online experiment that I was running for you guys; I actually gave the e-book away on this site but – for the purposes of the experiment – sold it for a few bucks a copy on a site that I set up for that purpose.

Well, I’d been selling a few copies along the way … but, the experiment served it’s purpose, and I almost forgot about the book.

But, it’s good! A simple, concise overview of everything that we talk about on this blog.

So, on Thursday night, I suddenly get the idea for a site called “little free book”; I thought: “why not give this little book away to everybody … heck, I don’t need the money”.

By Monday morning (that’s now), I have all of the pieces in place: book; graphics; web-site; twitter account; and, Facebook ‘fan ‘page‘.

I have two points that I would like to make:

1. It’s really easy to set yourself up on the Internet, especially if you have a blog: you have plenty of knowledge collected in your own blog (on whatever that subject may be) to create your own for-free and/or for-fee information products.

If I can get all of this up and running BY MYSELF over one weekend, surely you can do the same over a week or two? You may not make much money (or, you may make a lot!) but, you will gain a huge amount of experience with ‘new media’ and ‘social media’ … as well as business.

You might even make enough money to kick-start some other business and/or investment program.

2. What I don’t have is any clear strategy of what to do, other than give these books away to as many people as possible.

But, that’s OK … you read the book by  Ready, Fire, Aim by Michael Masterson didn’t you? If you haven’t, the message is clear: any ACTION is better than no action.

Now, that the site is out of my head and onto the virtual ‘paper’ of the Internet, I have PLENTY of time to cogitate on all the potential strategies and counter-strategies of what I might/should/won’t/shouldn’t do with the Little Free Book.

But, until I got SOMETHING going, I really didn’t have much to think about, did I?

Oh, if you don’t already have my e-book, I would love for you to download a copy for yourself, and even send this link: wwww.littlefreebook.com to your friends.

I would also LOVE for you to click ‘like’ on my new Facebook ‘fan page’ that I set up specially for this book: http://www.facebook.com/pages/Little-Free-Book/119974768055224 and, encourage your Facebook friends to do the same.

And, if you are a fellow blogger, you already know what to do …

But – and, this is a big BUT – only if you like the book … and, me 🙂

Why Vegemite is like personal finance …

It occurs to me that, at the age of 49+, that I still like Vegemite, that quintessential Australian curiosity very loosely labeled as ‘food’.

If you don’t know what Vegemite is, let me give you a few brief ‘highlights’:

– Vegemite is a salty black spread that is best used VERY sparingly on toast or dry crackers;

– Aussie children are almost weaned on it … it’s the only way to learn how to like it!

– It’s predecessor is Marmite, an English product derived from animal fats;

– Vegemite, on the other hand, is made from the sludge left over from pouring beer out of its vats (really!)

– It used to be fed to pigs, because of its very high Vitamin B content, until an Australian Food Scientist discovered how to refine it slightly and feed it to children [kids = pigs?]

Even though I actually LIKE Vegemite, I can understand that to most people it is totally inedible:

I met a food scientist who was working on a project to create Vegemite cookies to help feed the less-fortunate in Africa (again, because of its super-high Vitamin B content); this came on the back of the very successful Milk Cookie project which helped to bring Calcium to places (like Africa) where the shipping and transport of dairy products would be just too difficult.

Unfortunately, they had to cancel the project … there was just no way to make the Vegemite cookies taste good!

Now, I can actually relate to how bad this stuff must taste to others (yet tastes so good to me … in moderation!) because I was traveling to Amsterdam and in the clothing store (that I stopped by to buy a hat and scarf for the bitterly cold winter weather) there was a jar of candy on the counter …

… actually, it was liquorish – so, I took one and almost spat it straight out … it was THAT horribly salty! Apparently, it’s a delicacy in Holland on par with Vegemite (and, as bad tasting to the uninitiated).

One man’s food it definitely another man’s poison.

But, to get an idea as to how popular Vegemite really is – despite the taste (!) – here are three anecdotes for you:

1. Kraft bought the rights to Vegemite at some point, and if you visit their offices in Northbrook, Illinois (as I have) you will see its logo displayed very prominently on the wall above the receptionist’s desk. Not bad for a product only sold in a country of 20 million people (and, stocked in the USA almost purely for visiting Aussies).

2. Vegemite is inherently kosher (apparently pig food isn’t as unkosher as pigs-as-food) , but when Kraft decided to cut costs and take it off the kosher list (meaning that religious Jews in Australia could no longer buy it … a very small minority, in a very sparsely populated country), there was such an outcry that Kraft had to certify Vegemite as kosher again.

3. When we came to America, we brought 6 huge jars with us (and, brought more back on every trip home); this is not just us: my wife accidentally met a girl who was also relocating to Chicago … they were both at the supermarket checkout with a few of these large jars and (naturally) got talking.

So, what?

Well, there is a personal finance message and it’s this: one size doesn’t necessarily fit all … what one person likes may not suit the other at all.

That’s why when Steve asked me why I recommend that you put aside 2 year’s living expenses in retirement (as opposed to zero dollars before retirement) in your ’emergency fund’, I can’t really disagree when he says:

Adrian, what you said makes sense in most cases I suppose, but ,each case /person will have different circumstances ,even after retirement.Some sort of funds set aside seems a wise move.You cannot fore see very situation that might arise,especially at an advanced age.

So, yes I agree that there is no magic in the 2 years’ number: put aside 1 year, 18 months, 2 years, or more …. I don’t really care!

And, does it really matter whether you meet the 20% Rule or make it, say, 15% or 25%?

Probably not …

BUT, the principles behind these rules – indeed, the whole methodology that I am slowly unfolding in these posts (in the random, shambly way that bloggers like to follow) – is One Size Fits All.

Why?

Because the principle is simple: Find out how much you need to make (and why and by when), then work out how hard you need to work (financially) and how much risk you need to take to get there, then go for it!

But, if you stray too far from the the guidelines that I provide, the chances are that you will not be investing enough to make any sort of meaningfully large Number by any reasonably soon Date.

Second guess the Been-There-Done-That Multi-Millionaire who has a passion for sharing his hard-won personal/financial experience at your peril 😉

None of my friends know that I blog ;)

It’s true, I am the ultimate Secret Blogger …

… only two of my closest friends even know that I do blog – about personal finance – but, I won’t even tell them the name of my blog or my ‘pen name’!

[AJC: By now, you probably know that Adrian John Cartwood isn’t my real name – only the Adrian part is. For no reason that I can understand, my daughter started calling me ‘Adrian John Cartwood” when she was 7 … well, when the idea to write this blog sprang to mind in 2008, AJC was the natural choice!]

It’s not comfortable to talk about money: but, I resolved from Day 1 that this blog would need to be authentic and I would have to share the most gruesome details of my financial life.

So, when Bob asked:

From your “I’m a money hacker” post:

What is some financial advice you could give our readers?

Most people don’t really know how much house they can afford, so let me give your readers some very specific advice that will help them through every stage of their own financial journey: never have more than 20% of your Net Worth invested in your own house…

Do I understand from this post that $5M of your $7M net worth is in your own house?

… I can, from a position ‘protected’ by semi-anonymity, remind our readers that my $7 million journey represents a 7 year ‘slice’ of my financial life from when I started $30k in debt in 1998 and ended up with $7 million in the bank in 2004.

My recent ‘bad beat‘ post talks about what happened between 2008 and now 🙁

But, the years in-between (i.e. 2004 to 2008) were very kind to me: dominated by a series of sales of my Australian, New Zealand, and US businesses to a UK public company … it was almost literally raining money for those years.

But, this is a personal finance blog, not a business blog, so I concentrate on the $7m7y because I believe that is repeatable by almost any of my readers.

Even so, my $5 million (cash) house certainly breaks the 20% Rule (my net worth would need to be $25m+) but, it doesn’t matter!

You see, the 20% Rule only applies when you are still chasing your Number!

When you have reached your Number (Making Money 301), THE RULES CHANGE:

Remember when you calculated your Number?

You:

1. Took your required annual living expenses (of course, adjusted for future inflation until your chose ‘retirement’ Date) and multiplied that by 20, and

2. ADDED in the value of your house (plus any additional cash required to pay off the mortgage), initial cars, and any other one-time purchases.

Once you reach your Number, you no longer require 75% of your Net Worth to be in investments: you ‘only’ require the amount that you came up with in Step 1.

So, you can buy as much ‘stuff’ (houses, vacation homes, cars, etc.) as you like with any extra cash that you happen to have!

For me, it doesn’t really matter how much house I bought, as long as I still have >$5m in investments, generating my annual living requirements.

So, Bob, you don’t have to worry about me … yet … I just like to complain 🙂

Suffer any bad beats lately?

I have to admit that it’s very exciting seeing my two real-estate development projects coming to fruition [AJC: this is the architect’s rendition of just one of my two condo projects … click on the image to enlarge it … go ahead … do it … I’ll love you for it].

I’ll get back to that in a sec’ …

… first, let me tell you about a conversation that I just had with a friend, while we were playing poker today:

FRIEND: Do you find any parallels between business and poker?

AJC: It’s uncanny, but yes I do … and, it’s caused me to totally rethink the way that I think about money

Well, not so much ‘totally rethink’ as remind me about some important Making Money 301 lessons that I seem to have forgotten …

…. but, I keep getting side-tracked; back to the poker:

Case in point: I had quickly tripled my starting stack in a cash game but, just as quickly lost it on a series of bad beats; bad calls (by them, not me); and bad luck.

When you’re running hot, you feel invincible.

When you’re running cold, nothing that you do turns out right.

… and, your poker bankroll quickly slips away.

Well, it’s pretty much the same thing in business and personal finance:

Your investments and/or businesses are ‘on fire’ … the market’s running hot, and – if you’re smart – you cash out at the peak, building up quite a bankroll.

Maybe you even reach your Number.

What should you do then? STOP and smell the roses!

But, the trouble is, greed and the adrenalin kicks in … you believe that you’ve got the Midas Touch. And, you push for the next project.

… and, that’s the one that gets you.

You know, market downturn, bad luck, bad advisers, etc., etc. sob, sob, sob.

Which is, perhaps, why Ill Liquidity asked me:

I don’t get it. You make a tidy sum and retire from the rat race, paying yourself a salary… why go forth and try new money making ventures?

Given my own ‘stop and smell the roses’ advice in that regard, I agree, it’s hard to understand. Sometimes, it’s even hard for me to understand 😉

So, let me take a stab at explaining it; the story so far:

I made my $7 million in 7 years (mainly through reinvesting the profits of my businesses into buy/hold real-estate), and then made a heap more (by selling those businesses just before the 2008 crash), but ….

… then the crash hit, and here’s where my money went:

1. $1.5 million cash into my house in the US (you know I can’t sell that, right?)

2. $5 million cash into my house in Australia

3. 25% of what I sold the businesses for in taxes [AJC: sheesh!]

4. Lost 100% of my $3 million bonus on company stock price crash + taxes paid on the full $3 million [AJC: double sheesh! … but, it’s nice to know that I have a heap of capital gains tax credits to use for the rest of my life]

5. Gave my accountant $1 million to invest in the Aussie stock market for me … he promptly lost 75% in about 6 weeks. My fault for trying to time the market, not his 🙁

Don’t feel too sorry for me: when others try to get to sleep by counting sheep, I count millions!

My problem is this:

All of this bad luck and bad management has left me with assets – not including my $5 million primary residence – that I consider just enough to live my Life’s Purpose.

But, I am an über-pessimist and I really want a large margin for error.

Now, in my rational moments, I realize that my house provides me that i.e. as soon as the kids move out, in approx. 10 to 15 years, we will sell down into a, say, $2 million apartment, which would free up another $3 million (all in today’s dollars, but the price differential should still hold true).

But, even that’s not good enough for me.

So the question that I am wresting with – and, have decided to put off answering until I have building permits for both projects in my hands:

Will I take my own advice and sell both development sites (with permits) for a tidy profit (if all goes well), or will I pull the trigger and dump most of my net worth into these developments to get the Really Big Bucks?

Only time will tell … but, you will be amongst the first to know 🙂

In the meantime, have you suffered any ‘bad beats’ lately?

There IS an entrepreneurial bug!

This post has been featured in the Carnival of Wealth: http://personaldividends.com/news/admin/carnival-of-wealth-august-7-2010-edition

________________

People often say that they have been “bitten by the entrepreneurial bug” … and, I can say that is perfectly true!

I always wanted to be a ‘millionaire by 30’, but I missed my first million and jumped straight to making my 7th by the time I was 49 😉

But, that did not translate directly into wanting to be an entrepreneur; in fact, I was working for a Fortune 10 company and happily dreaming about becoming its CEO (“one day”) …

… apart from one or two disastrous years, I had a charmed time there, winning ‘bonuses’ left, right, and center – and, traveling around the world on the corporate budget, having the time of my life.

But, that all changed by Work Year 6.

Suddenly – and, I mean suddenly and inexplicably – I was struck with the desire to be in my own business. Almost literally, I was bitten by the entrepreneurial bug!

From that point on, I was miserable in my job … I schemed and planned my way to a myriad business ideas that I couldn’t quite translate into a real business.

In the end, I wimped out and joined IDB.

Yep, the Great Entrepreneur was In Dad’s Business!

Thankfully, that business promptly went broke leaving me with nothing but a $30k debt and a customer list, which I turned into a ‘cloned’ business (i.e. same customers, same concept, very similar name) that I still own, nearly 20 years later. And that business helped to fund the ‘other business’ that took me to the USA.

So, I guess I found the true Entrepreneur Within, after all …

But, what I wanted to share was my thought process, all those years ago when I was still at my ‘desk job’:

I wanted to be in business, and all I knew was IT (information/computer technology), so here were the choices that I came up with:

1. Consulting: as I mentioned in passing, in a recent post, I was something of a ‘world expert’ in my little niche so consulting was a natural first choice for going it alone. But, I realized that I would still be trading hours for dollars.

The formula is (from memory) 1440 possible working hours of the year – hours lost due to marketing, administration, and time off x billable rate = MAXIMUM total revenue. Plug any number in that you like, and it doesn’t add up to $7m7y.

2. Sell something: The only thing I knew how to sell was computers, and the only ones of those that I would likely be able to get a licence to sell would be PC’s. Unfortunately, I could see a price war and shakeout happening which would crush the small guys (this certainly happened).

3. Build something to sell: Again, the only thing that I knew was software: I could develop a piece of software and sell it. Unfortunately, every piece of software has a lifecycle … when the better one comes along, I’m toast.

There was my dilemma …

Fortunately for the world, Mr Price and Mr Coopers didn’t think about the consulting equation before starting PWC (one of the world’s biggest consulting companies before selling off to IBM).

Equally fortunately, Steve Jobs didn’t worry about costs and margins when creating the Apple 1 and 2 – then Lisa and Macintosh – computers and offering them to the world.

Perhaps unfortunately for the world (if you’re a M$-basher), Bill Gates didn’t think about obsolescence before licencing his piece of of software to IBM, then others.

Bottom line: if you’re passionate about an idea, give it a go … you’ll find a way to make money if the idea is good enough. If not, what you learn will be worth the ‘cost’ in lost time/money.

To mini-retire or not to mini-retire?

DrDollaz takes issue with whole ‘eat hamburger now so that you can eat steak later’ philosophy:

Problem with that philosophy is that years later – after being used to eating nothing but hamburger – most people have a hard time splurging on steak!

The whole fallacy of ‘saving so that you can enjoy retirement’ is BS – your life should be filled with mini-retirements.

But, Think Simple Now tried a mini-retirement and found that it wasn’t all it was cracked up to be:

When I first learned of the mini-retirement concept, I was immediately attracted to the idea. To me it represented freedom. I had all these romantic notions associated with it, and when I found a way to take three months off from work, I jumped at the first chance and ran with it.

While traveling is an eye-opening experience and a chance to see how others live in vastly different cultures. It is exhausting, on many levels. It quickly became clear to me that the romantic concept of traveling is flawed.

It turns out that TSN is more disillusioned with travel rather than mini-retirements, per se.

Fortunately, I agree with DrDollaz …

The $7million7years Way  is all about leading you to some future date where you have amassed the required amount of money to start living (your Life’s Purpose).

But, of course, if that’s all you take away then you’ve missed half the story:

Because I also say that money has only one purpose: to spend.

And, I have written many posts telling you to save now, but also to spend now!

Life is a journey …

… and, that includes the bits both before and after your reach your Number 😉