Tag Archives: money

What is the best way to make more money? Payrise? Blogging? Consulting? Investing? Starting a business?

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Let me fill you in on a great guest post  “by FMF of Free Money Finance, a blog devoted to helping readers grow their net worth” that I recently read on I Will Teach You To Be Rich, a blog by Ramit Seth … FMF said:

I’ve faced a money making question a few times in my life and I’d like to get your thoughts on it. Here’s the question: as we all try to grow our incomes, which is better, doing more of what we’re currently doing or trying something totally new?

Here are some options I had for making money in my spare time:

  • Focusing on my investments — I had them fairly under control, but I needed to spend some good hours really sorting through my strategy for dealing with some past bad decisions. I knew that getting things straightened out totally would net me a decent return.
  • Consulting — I had a few people asking me to do some side work for them and help them out in their businesses. The per hour rates were equivalent to what I make at work if you include the benefits from my current job.
  • Blogging — Back then, no one thought you could make any money blogging. But it was something I could do easily and I thought it had potential.
  • Starting a new business — Or maybe even buying an existing business. I had a few ideas for this option, but I wasn’t sure of the time commitment (which I thought would likely be high).

Each of these, like my hobby income, had their own list of pros and cons — potential income, time commitment, “hassle factor”, and so on. But before I selected one I had to decide what was my best option — to keep doing more of what I had been doing or whether I should try something new?

As FMF went on to say: Millions of Americans face similar decisions every day.

So, which option/s would you choose? Before, I give you my opinion, let me share some personal history:

I joined one the world’s best companies to work for, straight out of college … I was sure that I would only be there for two years, then I would be able use that employer’s prestigious ‘name’ on my resume to look for an even better-paying job.

Therefore, I never even bothered joining the company’s very generous stock purchase plan (exploring my stupidity will be a great subject for a future post!).

I had a great – even wonderful career, but at Year 6 a light-bulb inexplicably went off in my head: I suddenly wanted to – in fact, simply had to – do something for myself!

The problem was, I didn’t know what that ‘something’ was …

So, it took me another 4 years to finally ‘make the jump’ (exploring my ability to procrastinate will be a great subject for a future post!) – but, what attracted me to FMF’s great guest post was that he seemed to be covering all the same decisions now that I went through then:

 – Focus on my investments and/or blog: Given that I didn’t have any investments to speak of then, having spent all of my money chasing a couple of failed long-distance relationships (exploring my ability to make bad life choices will be a great subject for a future post!), and given that blogging didn’t yet exist (although, we had – just – moved past the abacus onto the slide rule stage), that left me with …

– Staying in my job: I was past the point of no return on this …. when that ‘light bulb’ finally does go off in your head, you just realize that there is virtually no amount that you can earn in a job that can make you financially free, unless your expectations are very low and you intend to work for a very long time OR you can fight your way to the very top of the corporate food chain.

– Consulting: So that left me with only a couple of choices … consulting was tempting because that’s essentially what I did for this company that I was working for, and I was pretty good at it. But, I quickly realized that consulting was constrained by time and hourly rate … in other words, I was the product that I was selling, and there was only a limited amount of me to sell. And, I would have to divide that limited amount of time between: (a) doing consulting gigs (b) finding more consulting gigs (c) administering my consulting gigs … only one of which paid!

– Go into business: So, I was left with the entrepreneurial path … the path that ultimately lead me to wealth. Why was this path so attractive? I can sum that up in one word … leverage. There is no other activity that – when it works – can produce so much cash (to fuel your passive investments!) for so little investment – other than in blood, sweat and tears – than your own business. None … period.

And, the good thing about a business is that you can minimize your risks by investing little in the way of time (start part time) and costs (bootstrap!) – if you so choose – or, you can jump in boots and all … the choice is entirely yours!

So, here’s what I recommend to all of those facing the same choices as FMF and I faced …

1. Make a decision that you will (eventually) go into your own business.

2. Prepare by (a) starting/maximizing your ‘pay yourself first’ savings plan (b) paying down bad/consumer debt as quickly as possible (c) building up a 3 – 6 month income savings buffer.

3. Minimize your risks (financial and otherwise) by starting a business on the side (blogging, writing, consulting, online, hobby-turned-into-income, manically trading stocks or options, aggressively rehabbing/flipping real-estate, whatever) … if it ‘works’ great … if not, start another …

4. Put at least 50% of the excess business income (i.e. after reinvestments in anything that will help you quickly grow the business) into your Savings/Investment Plan

5. Wait until either your business income grows enough to support you or your passive income from investments grows enough to support you.

6. Then fire your boss before he fires you! At least, it would be nice to have the option 😉

BTW: By now, I’m sure that you have picked up the fatal flaw in my original plan, back when I was still working for ‘The Man’:

If I did choose to start my own consulting practice then, I could have eventually turned it into a consulting business by hiring other consultants to do the consulting work; hiring marketing staff to do the selling; and, hiring administration staff to do the rest … there have been plenty of mega-consulting-businesses started in exactly this way (exploring my ability to fail to see the obvious will be a great subject for future post …).

… but, I think you get the point?

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What is the lowest cost, lowest risk way to start a business?

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[AJC: Please do me a favor … I have added a Stumble Upon button to my right-hand tool bar …. if you click it, write a very short comment about my article – How much interest does one million dollars earn – and put it in the “Wealth” category, I would be VERY appreciative! Stumble Upon is one of the VERY BEST ways for me to increase my readership, which is good for all of us! Thanks.]

To make $7 million in 7 years (then keep it!) you need to master all the basic financial tools of multi-millionaires: businesses, stocks, real-estate … and many, many more.

So, let’s start by talking a little about ways to start your own business … having started and sold many ‘small’ businesses, I feel somewhat qualified to pontificate on this subject.

If you are looking to start the ideal small business, my suggestion is to start by looking for the business with the greatest UPSIDE rather than the one that protects your DOWNSIDE.

But, to delve a little into the question of risk:

In the old days, if we wanted to start our own business, you would find some stock, sign a lease on a storefront, hang out your shingle, advertise, and …. wait for customers.

IF the customers came, you made a small profit (competition was always sure to keep prices and profit margins low).

IF the customers failed to come, you went bankrupt (sorry!), because you: paid up front for the stock (you didn’t have a track record with the supplier yet, so COD was the best ‘deal’ they would give you); you put up personal guarantees on the storefront lease; you paid for advertising and salaries and wages; and so on.

But, that was then, and this is NOW:

Now, you can open an e-Bay store, find some leftover goods at local manufacturers and/or wholesalers and sell them … no staff, no leases, very few costs … and, grow from there.

Or, you can go right to the other extreme of Internet-based businesses and come up with the next Facebook.

And, there are a zillion opportunities to make money on the Internet, in between the e-Bay and Facebook ideas, and you can do most of them without even leaving your current job … here are the 10 dumbest ways that people made $1,000,000 on the Internet. If they can do it, so can you!

No matter how you look at it …

… the INTERNET, my friend, is the new Small Business Frontier.

Hook up the saddlebags and go West … Yeehah!

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Don't like your boss? That's just plain, old too bad.

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It seems inevitable that from time to time, life’s just gonna’ suck …

For example, are you suffering from ‘Mondayitis’? Now, imagine:

It’s already 5.45 pm but you’re still stuck in your little cubicle, stapling some dumb papers together that your annoying boss said that he had to have on his desk first thing in the morning or “It’s your ass!” 

 It’s just about then that you start thinking that maybe opening up your own business and throwing in this whole ‘work thing’ is what you should be doing, because then …

… you won’t have some stupid boss telling you what to do!

Right? 

Having sucessfully started (and sold) many businesses across a number of countries, I can honestly say that going into business because you “don’t want a boss telling you what to do” is probably the dumbest reason that you can come up with to go into business for yourself.

[AJC: High up on that same list are: money, fame, freedom … but, that’s a whole series of posts, sitting right there!]

Having a boss can really suck … I know, because I’ve had ’em and I’ve been one – and, I would not want to work for me 😉

So what?! 

If you really don’t want anybody telling you what to do:

1. Don’t get married

2. Don’t sign up for a loan

3. Don’t take on a contract

4. Don’t have any customers

Get it? But, don’t let that hold you back …

5. Do start a business because it is still the greatest opportunity to make money that you will ever see!

Just don’t do it because of your boss …

So, while you are still in the ‘planning stages’ for that new venture, just remember to treat the little time that you have left with your boss as a ‘training exercise’ to learn how to grovel to: spouses, customers, and bankers …

… oh, and the traffic cop who pulls you over because you’re driving the spoils of your business success a little too fast down that hill in The Valley 😉

AJC.

PS Oh, and while you are on your mid-morning coffee break, why don’t you trot over to the 149th Canival of Personal Finance being hosted over at Happy Rock to see what I and other PF bloggers have to say?

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How much interest do you earn on one million dollars?

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Welcome new readers!

Here are three of my favorite posts to get you started; if you want to find out:

1. If $1 million will be enough to retire with, then click here, or

2. How much house you can afford, then click here, or

3. Why buying a new car is such a losing proposition, then click here.

Otherwise, please enjoy this article, then bookmark my home page (click here) and come back often …

____________________________________________________________________________________________

“How much interest do you earn on one million dollars?”

This was the question that Clint at Accumulating Money asked in a ‘classic’ post – I commented on it earlier this year and still receive click-through’s two or three months later. It must be a very popular question!

I’m not sure why, because it implies that people are happy to just have their life savings ‘sit’ in CD’s …

… but, here’s the answer to the “million dollar” question courtesty of Accumulating Money anyway:

So, to answer the question, how much interest do you earn on One Million Dollars (assuming a 4% interest rate, compounded monthly)?

One Day – $109.59

One Month – $3,333.33

One Year – $40,741.54

Five Years – $220,996.59

Ten Years – $490,832.68

Twenty Years – $1,222,582.09

I think this related question asked by Afroblanco at Ask Metafilter – repeated on Get Rich Slowly (which is where I picked it up) – really goes to show how The Savers (as opposed to The Investors) think:

“What’s the safest possible thing that I can do with my money?” :

I take bearishness to an extreme. Having witnessed the 2000 tech crash, I have no faith in the stock market or the US economy. I keep all of my money (USD) in a savings account. However, with the recent financial turmoil, I have a few questions:

  1. Is it conceivable for the FDIC to fail?
  2. If so, is there a place where I can put my money that will be safer than a savings account?
  3. What’s the safest, most risk-free way for me to save money and not get killed by inflation and the tanking US dollar?
  4. If there is a safe way for me to save money and not be punished by inflation and the depreciating dollar, is there a way that I can do this without having to stress out and micromanage my finances? I don’t want to be checking the finance page and making adjustments every day.

Even though I follow finance news, I’ve never done any investing or money management other than socking money away in my savings account. I’m a n00b, I admit it.

OK … I confess …. I am like our friend, Afroblanco … very risk-averse; yet I have become rich by understanding that it is actually safer to invest than not.

The GREATEST RISK that our friend can take is NOT TO INVEST … inflation will just eat up any bank deposit/CD strategy.

Take Accumulating Money’s example above:

One million dollars approximately doubles in 20 years … but, inflation will halve its buying power!

Think about it, if the average bank interest rate is 4% (pushing the value of your savings UP) and inflation averages 4% (pushing the buying power or value of your savings DOWN), what have you gained in 20 years?

Nothing …

Now, if you just push your savings into a low cost Index Fund that averages, say, an 8% return over the 20 years, then the same 4% inflation means that you should effectively DOUBLE the value (or ‘buying power’) of your million dollars over 20 years.

But, Afroblanco is even better off BUYING The Bank [i.e. investing in the Bank’s stock] than putting his money in The Bank. The risk of failure is about the same (if the bank fails you will lose the money that you have IN the bank’s vault as well as the money IN the bank’s stock), yet, as long as he has a long-term view (minimum 20 to 30 years), the former strategy will make him rich and the latter broke.

If the bank stock averages just 12% average growth over 20 years – as any well-picked Value Stock, can easily do – then Afroblanco won’t just double the buying power of his money ONCE, he will get to double it TWICE … that’s $4 million AFTER the effect of inflation (or, the $1 million grows to $10 million in ‘raw’ dollars).

What about risk? Aren’t bank deposits FDIC Insured?

[AJC: Well, yeah … up to a paltry $100k – of course, you could open up 4 bank accounts at 4 different banks  … but, $400k is hardly what I hope my readers are aiming at!]

But, inflation is a much bigger risk: 100% certain to eat up your money … and, would the Federal Government (the same entity backing the FDIC) allow a Major US Retail Bank to fail?

I guess we’ll find out in the next few months!

If you don’t believe that’s likely, then isn’t your money just as safe in The Bank as it is in the bank?

[AJC: think about it 😉 ]

And, doesn’t The Bank’s stock at least meet the overall market returns which averaged 8% p.a. for the past 100 years … what have bank deposits averaged in that time? 3%? 5%?

The point here is not necessarily to buy stock in The Bank … rather it’s to think about Investing rather than Saving …

Before suggesting WHAT to invest in, we need to know HOW long is our friend is expecting his money to last? Assuming that our friend is a hands-off investor, here’s what I suggest as the lowest-risk strategies possible:

If less than 30 years, then TIPS are a an option – PROVIDED that he can live off the inflation-adjusted interest (unfortunately, very unlikely in the current low interest environment – but, in 5/10 years, who knows?).

If 30 years or more, then a low-cost Index Fund is ideal for a hands-off investor. There has been NO 30 year period since the recording of the stock market indices where the market has not produced a positive return well above inflation.

If he is more hands on and/or more knowledgeable, then I would recommend no more than 4 or 5 well-selected individual stocks and direct investment in real-estate, for any time period 10 years or greater.

Inflation forces us to invest … because of this, inflation is our friend!

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Business and real-estate: a marriage made in heaven

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I was reading a review of Robert Kiyosaki’s new book, Increase Your Financial IQ, on Patrick’s blog.

The book holds no great interest for me … although, Robert Kiyosaki’s Financial IQ # 1 did:

It simply says: “Financial IQ #1 – Make More Money” …

… which is perhaps the only real ‘secret’ to getting rich – which is strange, since it seems so self-evident … but, that’s the subject for another post.

But, I was interested in Patrick’s summary of what he liked / didn’t like about the book:

Like.Kiyosaki is a contrarian, which at times is a good thing. He believes more people should work for themselves to create wealth and alternative income streams instead of relying on trading your time for a paycheck. This is contrary to what many people believe – go to school, get a good job, and save. Not everyone should run their own business, in my opinion, but everyone can do little things to increase their income.

Didn’t like.Kiyosaki is extremely harsh on the stock markets, which in itself is not a bad thing. But it is a bad thing when you make incorrect blanket statements about them. Case in point: “You can train a monkey to save money and invest in mutual funds. That is why the returns on those investment vehicles are historically low.

Now, I happen to agree with all of the above …

Rich people make their money in businesses and keep their money in real-estate … pure and simple.

It’s what Robert Kiyosaki did (his business was writing books and making/selling ‘Cashflow’ games; his wife looked after the real-estate investing side of the “Kiyosaki Family Business”) … and, it’s what I did …

… and, according to the new book about the wealthy – Get Rich, Stay Rich, Pass It On (think of it as The Millionaire Next Doorfor the new millennium) – it’s the way that the 5,000 rich families that they interviewed got – and keep – their money through the generations.

[AJC: Before you rush out an buy this book, wait to read my upcoming review … the stats are great … the conclusions that the authors draw from the stats are downright dangerous!]

I recently reminded my Grandmother (95 and still kicking) of a story that she told me when I was very young … one of those simple stories that can define you … it certainly defined the way I think about saving v spending.

She said that when she first emigrated from Europe, and she and my Grandfather had re-established themselves as poor but hard-working immigrants, they had a dilemma …

My Grandmother wanted to use their savings to buy a house so that they could have a stable environment in which to bring up my mother (an only child) in their adopted homeland.

My Grandfather wanted to use their savings to start a business. 

He eventually ‘won’ the debate by saying something that I will never forget:

You can always buy a house from a business … but, you will never buy a business from a house

You can argue whether this is true – after all the 20% Rule encourages you to use your home equity to invest – but, would you have the intestinal fortitude to put yourself deeper in debt to buy or start a business?

Or, would it be better to delay buying that house and pay for it later using the profits of the business?

I for one like the business route: anybody can start a business, just try it part time and limit your financial risk … if it takes off, fine … if not, try again …

Businesses do one thing really well: produce free cash! But, free cash-flow is useless, except for three purposes:

1. Reinvesting in the business to make it grow even faster

2. Increased lifestyle for the owner

3. To fund property acquisitions (build up for a deposit) and/or running costs (cover paying mortgages if the rent doesn’t).

Since I borrowed so heavily from Patrick’s post, I thought that I should let him have the last word on this:

I will guess you like all three of them, but number 1 has the largest benefit while you are growing your business. Do that for a while until you reach the point when your ROI experiences diminishing returns, then use the money for 2 and 3. As long as you increase 2 at a lower rate than the rate your free cash increases, you should be OK.

Right on the money, Patrick … right on the money!

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How to sort the rational wheat from the emotional chaff …

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I published a post last week called 10 steps to whatever it is that you want … how to weigh up the cost of a lifestyle decision which outlined a basic Making Money 101 decision-making process to help you sort your way through a discretionary purchase decision (you know the type: “Hey, that 48″ plasma screen would look really great on that wall!”).

You see, I come from the school of Ambivalent Frugality – sometimes you should … sometimes you shouldn’t. After all, money was invented to trade for ‘stuff’, right?

We just have to trade it for the RIGHT stuff, only when we can AFFORD it; and, the 10 Steps were designed to help us do exactly that.

Now, I don’t normally do a follow-up post so quickly … after all, what will I have left to write about next month?! 🙂

[AJC: kind’a reminds me of the old joke: why shouldn’t you look out of your office window all morning? Because you’ll have nothing to do all afternoon!]

But, Diane had a great question attached to my original post that this post is designed to help her answer – and, I hope that it helps you, too!

Here’s part of Diane’s question:

Have a dilemma regarding is it a need or a want – I have a house now, student loans, bad debt ) and need to decrease everything. I have a rescue Old English Sheepdog I’ve had now over a year and a half. Always meant to get a [larger] fence up, even prior to getting him, but had different expenses and no savings to cover them (hence the debt climb) and have put off getting a fence up … under the 10 questions, it doesn’t qualify as something to change lifestyle, but … I think this is a need, but … it is a financial decision as well. It’s not putting food in our mouths, but it is providing shelter and protection for the family dog who is also protection for us (single mom household). Or is this too left-field?

Now, this is definitely not left field, but – at least on the surface- the 10 Questions seem more designed to answer “can I afford ‘stupid stuff'”-type questions than these really tricky emotional ones.

In my experience, when we get into emotional ‘need v want v life-changing’ questions, rational decision-making can fall flat on it’s head.

But, I have a simple solution …

… one that doesn’t need to involve attempting to answer (preferably, Qualified Shrink Assisted) a myriad of ‘soft’ questions like: “will the animal suffer if you don’t put the larger fence up?” and/or “will YOU suffer if you delay puttin the larger fence up?” and/or “did your parents emotionally ‘fence’ you in when you were young and are you projecting this onto your dog?” and so on [AJC: Sigmund would be SO proud of me].

Instead, I shortcut the whole process for Diane – and, I suggest that you give this a try next time you are trying to avoid answering the 10 Questions because you really need something that you probably can’t afford, too – by simply asking her to do the following:

Follow the 10 questions exactly as written … that’s what I put them there for!

Simple … isn’t it?

Now, Diane, if you followed this advice on Sunday when you left your comment, by now you would have made your own sane, rational decision. Right?

If as I suspect, given your financial position, it was against Poor Pooch then I have a question for you:

How do you really feel now, having made that really hard decision?

…… [Diane inserts emotional feeling of (a) relief having made the ‘right’ decision, or (b) pain having made what feels like a terrible, albeit financially correct decision, or (c) she’s emotionally dead] …..

Diane – and all of us – that is the only way to sort through an emotional need from a want:

Make the decision rationally, then see how you really feel …

… then, go with your feeling!

That’s what LIFE is all about … and, didn’t we just say that our money is to support our life?

AJC.

PS There’s a neat shortcut to this process: when faced with a difficult choice – and you don’t want to pay for professional advice to help you get through the decision-making process – simply flip a coin and mentally go with the decision. Dig deep to see how that makes you feel … and, go with your feeling!

 

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Applying the 20% Rule – Part II ( Your Possessions)

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In my precursor post called Applying the 20% Rule – Part I ( Your House), I defined the 20% Rule and the 5% Rule as follows:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ‘stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

As a reminder, I represented this as a simple formula:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments

I also pointed out in that article how the Current Market Value of Your House will usually go up over time (current market conditions aside) but, the Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Whereas houses generally appreciate … possessions generally depreciate!

Now, as much as I hate to point this out (because the ‘frugal blogging community’ will probably fry me!) you can actually use this interesting financial anomaly to buy more stuff …

… and, according to the $7million7year ‘philosophy’ the process of making money and getting rich should sometimes mean ‘delayed gratification’ but should never have to mean ‘no gratification’!

That means, that when starting out you may have to buy what you need and maybe even buy a house and generally screw yourself up financially (that’s where the ‘frugal blogging community’ comes in handy, because they will show you how to minimize – perhaps eliminate this risk – even better than my basic Making Money 101 Principles can help you).

If you do, by following my Making Money 101 steps and reading (and following) as many of these posts as possible, you will get yourself on the right track and find that:

 1. Your House fits the 20% Rule,

2. Your Meager Possessions fit the 5% Rule,

3. And, you are sensibly Investing the rest!

What now … well, pat yourself on the back and wait … until:

i) You have saved up enough cash to buy whatever it is that you are salivating over – repeat after me: we will never borrow money to by depreciating ‘stuff’ again – and,

ii) You have revalued your stuff (eBay and Craig’s List are two excellent sources of ‘current market valuations’ for all sorts of ‘stuff’) and found that they have lost so much value since you bought them that they now total less than 5% of your Current Net Worth, and

iii) The (hopefully, now increased) equity in your House still fits into the 20% Rule – and, you have applied everything in Applying The 20% Rule – Part I (Your House) if it doesn’t, and

iv) If you do buy the ‘New Stuff’, the total Current Market Value of your Possessions still fits into 5% of your current (hopefully, by now increased) Net Worth.

…. if you can check all of the above ‘boxes’ … go ahead and buy it, guilt free – you deserve it!

Now, the astute investors out there will have realized that if you increase your Investment Net Worth (i.e. the minimum of 75% of your Notional Net Worth that you keep in income-producing INVESTMENTS) – as you should, by an average of 8% compound a year or better – you will be able to increase the other 25% that is in your home equity and possessions to match!

In other words, you will (if you so choose) be able to match an increase in lifestyle arising from a better financial position …. life doesn’t get any better than that, does it?

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Applying the 20% Rule – Part I ( Your House)

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Since my early post How Much To Spend On A House is still one of the most visited posts on this site, I thought that I should write a little follow-up piece that gives some examples on how to apply this important ‘rule’.

First a recap:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ‘stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

Warning: most people think of their house as an asset, but by this definition, it most definitely is not … let this be a warning to all those ‘house rich … asset poor’ people out there who think they can retire just from their house.

For those mathematically minded, as a formula, this can easily be represented as:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments! Simple, huh?

Also, for those who have been tracking my posts, the difference between your Notional Net Worth and your Investment Net Worth will be the Current Market Value of Your House + the Current Market Value of Your Possessions; if you’ve been following my advice this should be no more than 25% of your Notional Net Worth.

Now, you may have noticed something interesting:

The Current Market Value of Your House will usually go up over time (current market conditions aside!)

The Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Houses generally appreciate … possessions generally depreciate.

This sets up some interesting situations that we should discuss … by no means an exhaustive list:

1. Aspiring Home Owner – The chances are that you have debt (particularly if you were recently a student), little income, some possessions, virtually no savings or investments. You will probably never be able to buy a house at all – or, if you can it may never be bigger than a cardboard box – if you follow the 20% Rule …

… My advice is to buy the house anyway IF you can afford a decent down payment (ideally 20+%) and can afford the monthly payments (lock in the interest rates for the max. period that your bank will allow, ideally 30+ years).

A lot of financial mumbo-jumbo has been written in the press, books, and blogosphere about this … ignore what you may have read: for most people, it’s the only way you will ever get financially free.

2. Already A Home Owner – Revalue your home (be conservative … don’t wear ‘rose-colored glasses’ … check what other houses around you have actually sold for … don’t rely on any realtor’s advice – they may ‘talk’ up the price to convince you to sell – we don’t want to do that, yet!). Do this every 3 – 5 years (yearly is better).

If the conservative value of your house puts the equity in your home (Your Equity = What the Home is Conservatively Worth – Today’s Payout Figure On Your Home Loan) at greater than 20% of your Current Net Worth (you will need to redo this calculation at the same time as you revalue your house), then it is time to extract that ‘excess equity’.

What to do with this excess equity? Invest it of course! For example, you could buy a long-term, buy-and-hold, income-producing (get the picture!) rental property … or you could buy stocks … or you could take some risk and buy / start a business … or it’s up to you!

But, if you locked in your home mortgage at a cheap interest rate, you probably don’t want to refinance it, so be sure to ask a professional about suitable options for you (second mortgage; use your home’s equity to ‘guarantee’ the loan on another, etc.) … just be sure that you can afford the loans on both your house and your investment/s … make sure you have a cash [AJC: better yet, a Line of Credit] buffer against emergencies (loss of job, loss of tenant, etc.).

 3. Right-Sizing Home Owner – Again, revalue your home … but, of course you can down-grade (let’s say that you are retiring or the kids have moved out) – but just because you have freed up some equity and can easily fit into the 20% Rule doesn’t mean that you can slack off on your Investments.

ADD the freed up amount of equity to your Investment Plan … it will help you retire earlier and/or better!

Remember, your Investments should be a minimum of 75% of your Net Worth … you can and should invest more wherever and whenever possible! 

Again, if your original house is rent-able, and you have locked in a cheap interest rate (like I told you), you may want to keep it as an investment … consider doing so!

Now, buying houses isn’t always about making the right investment choice; there will be times in your life when you have to consider changing houses whether it fits within the 20% Rule or not (one obvious example was our First Home Purchase) …

… most likely, this will be at major life changes (marriage, divorce, babies). So be it!

Remember our Prime Directive: Our Money is there to support Our Life … Our Life isn’t there to support our Money (that would be just plain sick)!

Just make sure to revalue every year at first, then every 3 – 5 years min. and try not to get off-track, but if you do, simply realize if you are off-track financially and that you just have to get on-track at the first opportunity …

AJC.

PS You may want to bookmark this post (using the convenient links below) and review at every major ‘house change’ decision!

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10 steps to whatever it is that you want … how to weigh up the cost of a lifestyle decision

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In Devolving the Myth of Income – Part I we discussed the case of Docsd (or just ‘Doc’) who said:

I have been awaiting approval on … an older historic horse farm on several acres … my goal has always been to live as far below my means as possible while accumulating wealth.

This generated some debate, which eventually boiled down to the following well known saying:

Never invest in anything that eats or needs repairing.

Attributed to Billy Rose, the famous Broadway producer and investor.

But, you can’t always just distill your life down to the pursuit and saving of money – there is a word for being too frugal: it’s called being a miser! Sometimes, you have to make a lifestyle decision …

For example, buying a house to live in may not be the best financial decision in the strictest sense (but, still a sensible financial decision for most people) yet we often buy them for the emotional values: sense of ownership, stability, a house is a home, my wife will divorce me if we don’t 🙂 and so on.

Put simply: there are many acquisitions that we want to make in life that are lifestyle acquisitions not investment acquisitions.

And, the real financial question associated with them is: I really want it but can I afford it?

Unfortunately, there are no hard and fast rules on these things … so I came up with a fairly simple financial decision-making check-list that you can use:

1. Are you saving at least 10% of your GROSS income? If not, do not buy.

2. Are you putting aside enough to meet your future obligations (e.g. college fund, donations, family medical expenses)? If not, do not buy.

3. Have you paid down all of your consumer / bad debt? If not, do not buy.

4. Do you have all of the right insurances in place and have you saved and put aside a 3 – 6 month buffer against emergencies? If not, do not buy.

5. Have you bought your first home? If not, do not buy.

6. Have you paid down your mortgage sufficiently (and/or has the equity risen sufficiently) to ensure that you meet the 20% Rule (i.e. no more than 20% of your current Net Worth as equity in your own home)? If not, do not buy.

7. Are you Investing at least 75% of your Net Worth? If not, do not buy.

8.  Have you saved enough money so that you can pay cash for the item without changing your answer to any of the above and still meet all of your current commitments? If not, do not buy.

9. Can you afford to pay all of the associated expenses (insurance, repairs & maintenance, running costs) on the item without changing your answer on any of the above and still meet all of your current commitments? If not, do not buy.

10. If you have made it all the way to this Step without triggering a ‘do not buy’ …. what are you waiting for?!

… you’re a hard-working adult, if you really want it, go ahead and buy it … you deserve it!!

There you have it … 10 Steps to Whatever It Is That You Want, simply designed to ensure that you can buy the things that you want as long as you put things of lesser long-term intrinsic value (maybe of a higher emotional value) behind activities that:

Keep you out of the poor house, and keep you heading towards your ultimate financial goal. There is a short-cut if neither of these goals are important to you: Buy now and hang the expense!

But, I don’t recommend it 😉

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Celebrating Spending Week!

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For the remainder of this week I want to do something that I believe has never been done in the history of Personal Finance: encourage spending!

Why would I do a ‘heathen’ thing like that:

1. Well spending is good for the economy … it’s how we got things going after WW2 … go ahead be a Patriot!

2. Money has NO PURPOSE until you spend it

3. Money SPENT NOW is worth more than MONEY SPENT later (due to a little thing called Inflation)

4. Learning when/how to spend is AS IMPORTANT as learning how to save … after all, you WILL spend b/w 50% and 90% of your weekly paycheck!

5. If you don’t SPEND when you CAN and SHOULD, society has a word for you: Miser and we don’t want to confuse being SENSIBLE with being STUPID, do we?

But, there is a why and a wherefore that I will be exploring for the rest of this week … enjoy!

And, don’t forget to let me know what you think … we want to be on the cutting-edge of Personal Finance thinking, not the BLEEDING EDGE … your feedback will help us determine where we stand.

AJC.

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