Tag Archives: money

Something from nothing …

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In The Art of the Start, Guy Kawasaki (founder of garage.com, one of the earliest ‘business angels’) talks about bootstrapping your startup i.e. starting it on a shoe-string …

… he then proceeded to start his own Web 2.0 startup (perhaps only mildly successful, although he did manage to sell it for an undisclosed amount in 2009), called Truemors for only $12,000 (you can read about it, in this excellent post)!

Now, Guy could afford to spend millions, yet he chose to bootstrap, because it made good, commercial sense NOT to spend more.

For most startups, bootstrapping is a necessity, yet how little you spend up front may not have any detrimental effect as far as the success of your business goes, as the HotOrNot.com video above clearly demonstrates.

BTW: to prove that point, Hot or Not was (reportedly) acquired for $20 mill. not long after this video was shot.

My point: don’t let lack of money be your excuse for not starting your own business!

People came to him for financial advice!

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This video commercial from the New York Lottery shows Louis Eisenberg, the then biggest ever lottery winner with $5 million.

The trouble is he is now broke and living on social security in a trailer park …

… until then, people actually asked him for financial advice:

All of a sudden, people were asking, ‘Lou, what about this?’ ‘What about that?’

All because he – temporarily – won $5 million!

You gotta have a hobby …

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I don’t collect bees!

My hobby is personal finance: talking about it, writing about it, reading about it, thinking about it …

… strangely enough, making money is actually not my hobby [AJC: although, I far prefer it to the alternative ;)] although making money gives me the credibility to do the talking/writing.

Anyhow, one of my latest readings is a series of e-mails that is a section-by-section delivery of what Malcolm Hughes also sells as an eBook.

Presumably, when reading these e-mails, you will get SO EXCITED that you won’t be able to wait for the next FREE e-mail, so you will fork out your money for the eBook – ‘Millionaire Stealth Secrets’ Handbook.

Surprisingly, I found that I can wait 😉

For a ‘Millionaire Handbook’, there’s actually NO advice on making/keeping money that I can see, unless you count e-mail upon boring e-mail of goal setting / visualization / dreaming mumbo-jumbo as ‘millionaire advice’.

In fact, the first piece of sensible advice that I can see is the following passage from the 28th e-mail in the series (!):

Listen to this…   Every single hugely successful person in the history of mankind has failed at least once. In many ways, they had to in order to succeed. Richard Branson [billionaire founder/owner of Virgin Records/Airlines/Credit Cards/etc./etc./etc.] was almost put out of business by the Royal Mail strikes of 1971. His mail order record business relied on the post to make money. Instead of ruining him, it made him stronger and he began opening his record shops. He was also nearly liquidised by Coutts Bank for being £300,000 in overdraft!

But whatever had happened, there would still be a Richard Branson. In fact, if Coutts Bank HAD liquidised him, he might have been even richer by now! You see, what CAN happen to a person when he/she fails is that he/she realises at least 3 things that he/she would not have realised had he/she not failed.

1.      Money is actually easily replaceable

2.      There is nothing to fear about failure

3.      Failure is SOMETIMES necessary and ALWAYS fruitful

Fear of failure is one of the key hold-backs that stops people from stepping out of their comfort-zone, so this is good – and true – advice.

Unfortunately, IMHO the rest is BS 🙂

The Myth Of Saving Your Way To Retirement …

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Quite a while ago, I published a post that took a look at the supposed ‘power’ of saving …

… if you didn’t read it then, now would be a good time to ask yourself if you really care that weekly contributions of $34 could potentially grow to over $76,000 in 20 years, as proudly proclaimed by Fidelity?

One reader, Concojones, thinks that I have underestimated the ‘power of savings’:

Let’s not dismiss too quickly the good old save-your-way-to-retirement advice. Saving $15k/year for 40 years yields an expected $2.5M in today’s dollars (for what it’s worth: $10+M in retirement dollars), assuming your investments go up 5-6% per year after inflation.

Let’s not dismiss it too quickly, indeed. Retiring with $10 million in your pocket (albeit, ‘only’ worth $2.5 million in today’s purchasing power) is none too shabby.

The only problem that I can see – actually, the only FOUR problems that I can see are:

1. You have to be happy (well, ‘happy’ is a relative term) to work for 40 years,

2. You have to save $15k per year – easy at the end of 40 years, very hard at the beginning … and, even harder in the middle when you might be earning ‘only’ $50k (before tax) and have to put away 15% to 30% of your salary “with four hungry children and a crop in the field” [AJC: if you’re old enough to remember that Kenny Rogers song]

3. You have to average 8% to 10% return on your type of investment – but it has to be one that lets you add $15k annual increments for 40 years (which ties you to ‘standard’ products like, CD’s, bonds, stocks, and mutual funds).

4. You MUST be disciplined enough to stick to this simple strategy for the entire 40 years WITHOUT WAVERING in up/down markets: the Dalbar Study [ http://www.canadiancapitalist.com/investors-behaving-badly/ ] says a firm NO to being able to achieve anything like this rate of return.

So, great on a spreadsheet, but I wouldn’t want to bet my life on it 😉

A question I’m not sure I should answer …

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Sometimes, I’m posed a question that I’m not sure that I should answer.

Case in point: Drew asked a question about my 7 Million Dollar Journey :

What were the terms of your first $1.25 million building purchase in 2001? You mentioned you had been in debt and had been losing money in your business until sometime in 2000 when you began to turn a profit. You had to have had a lot of profits quickly to put together the down payment for the building and be approved for a loan in such a short time period after years of money losing operations.

A straight-forward question, but the answer isn’t straight-forward … there’s a question of ethics and also a question of giving my readers potentially dangerous strategies.

After much uhmm’ing and aah’ing, I’ve decided that honesty is the best policy and to throw it to my readers to decide on the issues of ethics and danger:

As I mentioned, I had only recently become profitable, yet I managed to:

1. Stump up the 25% deposit on a $1.25 million commercial real-estate purchase,

2. Make the mortgage payments,

3. Make the additional lease payments on the $400k rehab and fit-out required.

Quite a tall order, so here’s how I managed it:

First, I made sure that I was profitable enough to:

i) Make the mortgage payments as and when due,

ii) Keep up with the lease payments,

iii) Pay back the deposit

Did you catch that?

Number (iii), I said: “Pay back the deposit”

You see, I actually borrowed 100%+ (i.e. the deposit, the mortgage set up fees, and the closing costs), but here is where the question of ethics and danger come into it …

… I borrowed the deposit and the closing costs from my customers!

And, here’s where ‘ethics’ come into the picture – my customers didn’t know!

You see, one of the easiest, best, but most dangerous ways to raise money, is to raise it from your customers.

How?

It’s actually quite simple: most businesses have large inventories (the goods that you hold in stock), accounts payable (money that you owe your suppliers) and accounts receivable (money that your customers owe you).

Any and all of these have value.

For example, it’s quite a normal/accepted practice to borrow against the value of your inventory; unfortunately, your bank may not want to take the risk, and your finance broker may only give you a little money at a high interest cost because of the perceived risk (after all, do they really know how to sell the inventory if you default?).

It’s also quite normal to leverage the value in your receivables by approaching a specialist finance company to ‘factor’ those debts: that means that instead of waiting 4 to 6 weeks for your customers to pay, the finance company may advance you up to 80% of the value of those debts (i.e. your total receivables). This is, in fact, one of the businesses that I still own.

But, there is a third method that requires no bank or finance company to get involved: it’s simply to pay your suppliers slower than your customers pay you!

My business, being a services business had no stock (so no inventory finance opportunity), and factoring can have the stigma of a weak business so I didn’t want to go that route with my ‘Fortune 500’ corporate clients.

But, I did have a very tight contract that saw my largest clients paying my invoices in just 7 days (really!), yet I was only obligated to pay my suppliers in 30 to 60 days. Further, my turnover was huge (compared to my fees) because of the nature of my business.

This meant, effectively, that I had a line of finance equal to 3 to 7 weeks of my sales/turnover!

That was more than enough to raise the deposit for the building.

OK, back to my initial reticence to share this with you:

1. In most businesses, the turnover isn’t large enough, and the negotiated spread between accounts payable/receivable large enough to raise very much cash,

2. I think it’s ethical to use these funds for your business (unless you have lead your customers to believe that these funds are to be, somehow, quarantined and/or held in trust), borderline to use them for the building that houses the business (for example is the building going to be bought in the name of the business, or in a separate entity as I would normally recommend?), and unethical to use them for personal use / purchases outside the business … but, ethics is in the eye of the beholder, so YOU tell me what you think?!

3. I think it’s dangerous because your business MUST have the necessary solvency (not just profitability) to not only keep up with the payments (both mortgage and lease) as well as to ‘buy back’ the deposit over a relatively short period of time (in my case, 12 to 18 months).

So, now you are armed with a powerful – and dangerous – business financing tool. Use it wisely … and, sparingly!

How much home should I buy?

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A reader who works with RE, Whittier Homes, says:

I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That being said there is a risk factor or a comfort zone that every investor has to know. The bottom line is you don’t want to get over leverage and get caught on the short end of a declining market.

Home equity is simply what your home is valued at (today) less what you still owe on it (today).

This leads me to think that I’ve never said … and, nobody’s ever asked: How much equity should I have in my own home?

Well, there’s a reason:

I have NOTHING to say about how much equity – as a % of your house value – and, EVERYTHING to say about how much equity – as a % of your Net Worth – you should have tied up in your own home.

In other words, your equity is a function of:

– How much your house costs to buy

– How much it increases in value over time

– How much deposit you have available now

– How much you choose to put in / take out of the value of your house over time

I have no advice as to how much you should spend on your house in the first place, that’s your business not mine 🙂

But, I do have some guidelines that pretty much help to answer the “how much home should I buy?” question (other than for your first home), albeit obliquely:

1. The 20% Rule ensures that you are always investing at least 75% of your entire Net Worth (after allowing for another 5% to be spent on ‘stuff’),

2. The 25% Income Rule ensures that if you do decide to borrow money to buy a home, that you do not overcommit your cashflow,

3. The Cash Cascade makes sure that if you do have a mortgage, that you don’t pay it off too quickly if better investing opportunities abound.

Put these ‘rules’ into practice and you won’t go too far wrong, when it comes to your own home …

10 Paths To Wealth?

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Ken Fisher is a well-known money manager – I know, because I’ve had to endure phone call after phone call when I stupidly signed up for one of his ‘free’ reports!

However, watching this video (and, maybe even buying his book) seems like a fairly non-threatening way to learn some of his wisdom.

Personally, I think you need to mix’n’match some of these methods to have a bats-chance-in-hades of making your Large Number / Soon Date.

On the other hand, I’m all for marrying into wealth, but who’d have me? 🙂

I’m Angry!

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I have created a new Facebook ‘fan page’ for this blog; it would be GREAT if as many of my readers as can be bothered, clicked on this Facebook widget then clicked the “Like” button on the Welcome! page that it will direct you to.

Oh, you can also sign up for the new $7 Million 7 Years monthly newsletter … these two simple steps will keep you in touch with EVERYTHING that I am doing both on and off this blog AND give you access to lots of free stuff that I don’t get the space to cover on this blog.

Once you’ve done that, come back here to find out why I’m angry …
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It’s funny, I’m an enthusiastic-about-life-and-all-of-its-opportunities type of guy with a fun/happy demeanour …

… yet, apparently, I am angry.

In fact, I am angry … it’s just that I didn’t realize it!

Let me explain …

I’m exploring the options of publishing v self-publishing our first book (‘our’ as in me and Debbie, my co-author), and John T Reed (who makes a VERY good financial argument for self-publishing) says [emphasis per John T Reed’s original text]:

I once read that all good non-fiction books are written in anger. At first I was taken aback by that, then I realized it was true.

Think about it. There are generally already a bunch of books on any topic that you would choose. If the subject has been covered adequately and correctly, why write a book about it?

If you do write a book,you are implicitly saying that the world needs this book. Implicit in that is the accusation that the existing books are either incorrect or incomplete or both.

Think about it, indeed!

Look at how many books Amazon lists for the topics that I write about:

Finance – 23,637

Investing – 19,615

Personal Finance – 36,613

Real-Estate – 9,716

Small Business & Entrepreneurship – 23,172

That’s a helluvalottabooks 🙂

Now, take a look at how many personal finance blogs there are:

– Technorati lists 586 for finance, 163 for real-estate, and 1581 for small business

– DMOZ (the open directory project) lists 761 for personal finance, alone!

– But, I think the real number is in the tens of thousands, I just don’t know how to find them all!

My point being, why would I – of all people – write a personal finance book and blog? Remember, I don’t need the money!

When I read John T Reed’s comments, I knew he was right … I am angry!

I’m angry at all of those personal finance authors and bloggers who have absolutely no idea what they are talking about … particularly the ones who purport to tell you their methods to make you rich.

Their sub-text (weakly disguised as ‘advice’) really says: “start as poor as your audience, so start a blog, write a book and make millions for giving others advice on some THEORY of how to make millions”.

And, the frugal authors and bloggers of this world have a lot to answer for; convincing people to sign up to a life of self-imposed slavery for a retirement that’s only a little better than ‘do nothing’.

So, this does sound like I am angry …

… but, it doesn’t make me wrong 😉

The No Marketing Plan!

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I hate budgets.

I hate plans.

Most of all, I hate marketing plans!

So, let me tell you about Brandon: he is one of the principals of an interesting Angel Investing firm-with-a-twist. On his company’s blog, Brandon offers some of the best advice for testing your new business idea that I have ever read.

Not only that – like all GREAT ideas – it’s simplicity in itself … here’s what Brandon says:

Let me sum this up in one sentence:
As a startup or new business, the amount of time you spend writing up a sexy business plan to pitch investors would be better spent running a $500 PPC campaign testing your idea.

[Note: PPC = Pay Per Click online advertising]

You are lucky enough to live in a world with Google Adwords.  This is a good thing.  The costs of launching a new business online are hastily reducing to zero.  Testing a business idea or even a half-baked, half-assed business-sorta idea, is easy.  So do it.

Stop thinking about writing a business plan (that you mostly copy of some web template – be honest), and start here:

1. Register a domain name.  Doesn’t have to be good.  Starting a bird feeder biz?  Get birdfeederdepot1.com.
2. Get hosting, install the CMS [e.g. WordPress or Blogger] of your choice.
3. Make 3-4 landing pages.  Ask questions.  Find out some key answers to the market you are hoping to serve with your genius new idea.  Offer to sell your service right now.
4. Setup [a Google] Adwords campaign and spend $500.
5. Read the answers you get.  Scour the analytics, the keywords and clicks.  Any sale or response is good.  Email your new ‘customers’ and find out more about them.

The point is, this is so easy and cheap to do, you should do it.  There’s no risk in doing so, and the upside is possibly priceless.

It could save you from wasting 9 months of your life chasing a bad idea.  It could teach you what people really want, not what you think they want.  It makes you get serious.

Brilliant!

What price security?

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How do you put a price on security?

Well, in this post I’m going to try and do exactly that but, first MoneyMonk asks the question that all people have at the back of their minds:

As a woman, I just want to say that “to each it’s own” Women love security.

If you are not a person that love investing, and you have the cash to pay off your mortgage (considering that you plan to live their forever)

Adrian- not everyone is business oriented. Some just don’t have the business acumen to run a business. Therefore, that group SHOULD pay off the mortgage

This is the dream of home ownership: own your home outright and you have nothing to worry about.

But, do you?

Let’s say that you own a $150,000 home today … what will it be worth in 30 year’s time?

About the same as a $150,000 home today, but in future dollars!

So, let me ask you; when your kids grow up, move out, and you retire, what are you going to move into?

Probably the same, or another $150,000 home … a smaller condo or newer townhouse that will probably not give you too much change, if any, from $150,000, a retirement home that (with fees) will cost you far more than $150,000.

Your home is not your financial security; your realizable net worth is. Put it another way: you can’t live off your home, but you can live off your cash and investments.

True security comes from knowing that you can pay your monthly bills for the rest of your life, without needing to work or get handouts from friends, relatives, or the government, through up markets and down (war, pestilence, and other Acts of God aside).

I hope that you see my point …

So, let’s look at two scenarios for a $150,000 house that you just bought and locked in a 30 year fixed rate loan at 6% (a bit higher than today’s actual rates, which are still between 5% and 5.5%):

1. You pay off your mortgage early

Note: We will assume that you are allowed to pay off as little / much as you like on your loan (not the case with some fixed rate loans in the USA, and certainly not the case with most fixed rate loans in most other countries!) because it makes the math simpler.

This is great, because you ‘earn’ 6% on your money [AJC: remember, a dollar saved – in interest – is the same as a dollar earned], better yet:

– The amount you ‘earn’ is guaranteed; every year that you are no longer paying that 6% loan, you are in effect earning 6% … simple and guaranteed!

– Unlike an investment that pays you 6%, there is no tax to be paid on the 6% mortgage that you save (although, there can be a negative benefit of losing the tax deduction on your home loan interest … but, I’m trying to keep this simple), so it’s more like earning 7.5% – 8.5% (depending on your tax rate) in any other investment.

– Let’s say that you plonk the entire $150k down in one hit, you save the entire $175k INTEREST (yes, a house that you buy for $150k in 2010 will have cost you $325k, just in principal and interest, by the time you have paid off the 30 year loan in 2040).

2. You do not pay off your mortgage early

Note: Paying the loan off slower will, naturally, save you something greater than $0 and less than $175,000 … but, is too hard to calculate, here, so we will continue to use the assumption that somehow, you were able to pay that entire $150k loan off in one hit.

Well, it’s a fairly simple calculation then, isn’t it: what can you invest $150,000 in that will return more than $175,000? Let’s run some numbers and see:

Business: If Michael Masterson is right, and we gain 50% (or more) from our own business, then after 30 years you would have earned $29 Billion on your $150k ‘seed capital’.

But, MoneyMonk is right: there is extreme risk and skill involved in being successful in business … just a shame the potential reward is so low 😉

[AJC: just a tad more than the $175k interest that you would have saved if you used the money to pay off your mortgage instead of starting a business]

Real-Estate and Stocks: Again, if Michael Masterson is right, and we gain 30% by investing in a mixture of buy/hold real-estate and stocks (naturally, continually reinvesting the rents and dividends), then after 30 years you would have $392 million …

… if that sounds a lot, remember that Warren Buffett built up a $40 Billion+ fortune over 40 years at not much more than 21% compounded.

Stocks: I agree with Michael Masterson, that if you buy stock in just a few good businesses when they are are going cheap (as the market does from time to time) and wait 30 years, you should have no trouble getting a 15% compounded (pre-tax) return so, after 30 years you would have nearly 10 million.

But, all of this has some risk / skill associated with it … so, maybe paying off the mortgage and snaffling that $175k is still the way to go for all of those risk averse people [AJC: Like me. True!] out there?

But, wait, what if we just do the ‘no brainer’ thing and plonk that entire $150k in a set-and-forget-low-cost-Index-Fund?

Here’s the good news: paying off your mortgage is a 30 year investment (you have forgone 30 years of being locked in to a loan and paying 6% interest year in, year out), so it’s only fair that we buy $150k of Index Fund units and don’t even look at our portfolio for 30 years, right?

Well, that’s an ideal strategy – THE ideal strategy – for Boglehead set-and-forget investors! So …

Index Funds: Over 30 years, the markets (hence the lowest cost Index Funds) have averaged something more than 12% – set and forget (!) – so, after 30 years you would still gain close to $3.5 million!

But, wait … we’re all about security here: you can’t live off averages, right? What happens if there’s another crash like 1929 and 2008 the day after I plonk my entire $150k into an Index Fund?

Well, you lose half your money immediately 🙁

But, we don’t care what happens immediately, this is a 30 year set-and-forget plan … and, there has been NO 30 year period where the stock market hasn’t returned AT LEAST 8%.

Now, isn’t 8% (since we have to pay tax on it) exactly the same as the equivalent after-tax 6% mortgage (give or take 0.5%)?

Yes!

The lowest possible return that we can get with any reasonable investment strategy that we can come up with is exactly the same as the best possible return that we can get by paying off our mortgage early.

Now, isn’t that interesting?