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

Posted on April 24, 2008 by Adrian

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?

Business and real-estate: a marriage made in heaven

Posted on April 18, 2008 by Adrian

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!

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

Posted on April 12, 2008 by Adrian

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?

The 4 absolutely vital questions to ask before buying ANY business …

Posted on March 25, 2008 by Adrian

There are some great FREE sources of information out there in the Internet.

One of my favorite (when it comes to stocks and options) is The Tycoon Report – and the related (and wonderful) Q&A sister site, Ticker Hound.

However, sometimes you have to question the advice that you are given … for example, The Tycoon Report recently published a post on the …

4 Questions to Ask Before You Buy a Private Company

After soliciting responses from their reader base, here are the 4 questions that they came up with and a little snippet of some of their (generally) excellent advice:

1. Do I understand the business?

To really “understand the business” you must know exactly how the business makes its money and exactly where the business spends its money. That’s the only way you’ll ever be able to properly analyze the company’s Profit and Loss statement.

2. Am I comfortable with management?

Many of you wrote about trust in management as one of the key questions you should look at. You were spot on with that assertion. But how can you tell if the person pitching you the idea is trustworthy? That’s an art in and of itself, and we’ll dive deeper into that in coming weeks also.

3. What is the business worth?

Many of the companies you’ll be asked to invest in are start-ups (very high risk). Some of the companies you may seek investment opportunities in may be existing businesses (like Joe’s Pizza Parlor). Either way, you want to make sure that once you get to this part of the negotiation you’ll have a good handle on what the business is worth.

[PS–You could never determine the worth of a business if you didn’t first “understand the business”.]

4. What do I have to pay?

Many people will argue that they invested in XYZ Company because, in their words, it was a “good company”. But to invest at the highest level of the game, you have to be able to differentiate between a good company and a good price. Now, this is a subject that I happen to know a little about …

… and, I am not sure that these are the ‘4 question’ responses that you would have received had you asked, say, Guy Kawasaki or any other Angel or VC worth his salt.

The first two questions (do you understand the business and do you LOVE the management team?) are gimme’s …

… but, the last two (what do I have to pay? what is it worth?) are a FUNCTION of two FAR MORE IMPORTANT questions:

A. What is my EXIT strategy?

Before you go into a business, you must know how you are going to get out of it. Maybe, you won’t know exactly who you will sell to, but you will know what type of business will want to buy your business, and when (maybe not in terms of years, but at least in terms of stage of business development).

And a related question,

B. How ‘repeatable’ or ‘expandable’ is the business?

… in other words, how much can I make it GROW?

Nobody will buy your business unless they believe that they can:

(a) run it without you, and

(b) continue to grow it.

You can only achieve these if you:

(i) systematize your business, and

(ii) create your first business as though you were going to create 500 more just like it (whether you actually do or not doesn’t matter).

Don’t believe me? Check out this little snippet …

Ray Kroc paid the McDonald brothers $1 Mill. to buy them out, about FOUR TIMES what he estimated their share of the business was actually worth …

… who do you think had the last laugh in that little deal?

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The greatest advice from the Oracle of Omaha

Posted on March 2, 2008 by Adrian

As the latest in my ‘videos on sundays’ series, I offer some advice from the man billed as the ‘greatest investor who ever lived’.

In 7 minutes you will have ALL of Warren Buffet’s secrets 😉

… maybe not, but you WILL have some insights into his life (the first three minutes) followed by some of the best investing advice that I have seen.

Warning: some of these slides flash across your screen so fast that you will have trouble following them, so pay attention to the very last two slides if you are not an expert investor:

http://youtube.com/watch?v=iW1eg9p5wq4

BUT …

If you are a student of investing, have a long-term view and are willing to dedicate some time and effort, take note that Warren offers exactly the opposite advice for you …

Wide diversification is only required when investors do not understand what they are doing.
Warren Buffett

… he also points to this time in history as being possibly a great time to make your fortune:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Warren Buffett

I see a lot of doom and gloom … I bet that Warren Buffet is gearing up for something big …

What are you doing right now?

Against the odds …

Posted on February 16, 2008 by Adrian

For those of you who follow this blog, you will know that a key part of getting ahead is increasing your income.

And, you will already know that I think one of the best ways to do this is to start your own business … perhaps part-time, at first, to limit your risk … and, definitely in combination with other financial strategies that I will be sharing with you over the coming weeks.

For me, the gold-standard in this area is still The E-Myth Revisited by Michael Gerber … a book that I will unashamedly admit changed by life.

But, for anybody heading down the entrepreneurial path, I equally highly recommend a book by Guy Kawasaki (ex-Apple, founder of garage.com) called Art of the Start.

Guy can also be found on his blog, where I found this interesting post, that deals with the various myths around being an entrepreneur.

The problem is that the guest author is an academic who uses ODDS to establish that some types of businesses are better than others, and to suggest that it is the type of business that you go into rather than your ‘entrepreneurial ability’ that determines your success.

Here’s where I disagree …

YOUR odds of succeeding in any business venture are exactly 50/50 … either you WILL or you WON’T succeed!

Obviously, that makes no MATHEMATICAL sense, but going into business rarely does.

That’s why the rewards for those who DO succeed can be so high. If it were easy – and if success was GUARANTEED – we’d ALL be doing it!

For example, we intuitively know that the ODDS of being a huge success are so small in, say, sandwich shops.

In fact, the article suggests that the odds of mega-success in that type of business are 840 times smaller than starting, say, a computer business.

Yet, who wouldn’t like to be Mr Subway, Mr Quizno, Mr Togo, or Mr Potbelly?

I’ll even put up $1,000 that says that each of them knew EXACTLY what they were getting themselves into when they started out.

But, somewhere along the line each and every one of these entrepreneurs … in fact, EVERY SINGLE SUCCESSFUL ENTREPRENEUR IN HISTORY … simply said: “screw the odds”.

Having done some ‘odds screwing’ of my own (a number of times, with great success) over the years, I humbly suggest that you do, too.

Please let me know how well you do …

To buy a new(er) car … or not?

Posted on February 14, 2008 by Adrian

Should you upgrade your car … or simply keep the one that you have … you know, the old rust-bucket that gets you from A to B but not in any sort of style?

It DEPENDS!

Is the vehicle a TOOL OF TRADE? Is it an ESSENTIAL requirement for your business (e.g. if you are tradesman, you need clean/reliable/fuel-efficient transport)?

Or, is it simply a mode of transport for you and your family (in which case you have MANY transport options to choose from: new v. second-hand vehicles of all shapes and sizes; public transport; etc.)?

If it is simply ‘transport’ then by hanging on to your old ‘rust bucket’ (within reason), you have made a GREAT choice!

Why?

A car is NOT an asset, it’s clearly a liability … as Robert Kiyosaki says in Rich Dad, Poor Dad, the definition of an:

ASSET is simply something that puts money INTO your pocket, and a

LIABILITY is something that takes money OUT of your pocket.

The ‘rule of thumb’ is that you should INVEST (into real long-term ASSETS) 75% of your Net Worth: a max. of 20% into your house, and the remaining 5% into your ‘stuff’ …

… once you pay for a new(er) car, it doesn’t leave a lot left for other ‘stuff’, does it?

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How to make 7 million in 7 years …

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