I like receiving questions / comments, etc. via e-mail, even if it’s not always flattering, like this one from ‘hardtop’:
Been reading your website for a while and your posts. What you share is nothing new. Just the same recycled material that all the “guru” financial “experts” share with their flock. None it it will make you rich, nevermind 7in7. Becoming rich is more about being in the right place at the right time (luck) with the right product and enough capital. One could follow yours and similar advice for years and never get rich. Keep up the good work. 🙂
Of course, since ‘hardtop’ has been reading my website for a while and my posts, he should know – as my regular readers already know – that I hold totally opposing views to many gurus such as Suze Orman, Dave Ramsey, and Ric Edelman.
Of course, it was very specific information, with the source, hopefully, credited 🙂
And, while I do agree that it helps to be “in the right place at the right time (luck) with the right product and enough capital”, I had to create the ‘right’ products for the businesses that helped to propel me to $7 million in 7 years, as well as creating a market for them – without ANY outside capital – and, I had to commit to moving countries … and, putting EVERYTHING that I had on the line to get there!
[AJC: Insert favorite inspirational quote about making your own luck, here]
Oh, and before then, instead of spending my meager profits, I invested them in real-estate.
I guess we can put my success down to luck, after all 😉
Previously, I had been trying to post to a Monday/Wed/Thur schedule PLUS a video on Sunday. Unless I really find a video that knocks my socks off, I’m going to drop my Sunday video (for now) and shift my posting schedule to Mon/Wed/Fri each week.
I should also point out some key differences between this free blog and my paid membership site (7m7y.com): my blog (i.e. the site you are on right now) is much more ‘chatty’ and random than my membership site; my blog simply reflects my thoughts, feelings, and experiences gleaned from my own journey from $30k in debt to $7 million the bank in 7 years.
My journey – hence, what I share on this blog – is absolutely authentic and I believe that there is real gold to be gleaned simply by reading this blog 3 times a week.
IMHO, it’s the best 6 minutes that you’ll spend each week, besides your love life 😉
I liken reading this blog regularly to wading in a shallow stream and panning for gold: stand there long enough and you get what you need and, hopefully, enjoy yourself in the process. But, don’t expect instant results …
On the other hand, my NEW membership site (The $7 Million 7 Year Wealth System) is a complete course on wealth; if you’re a regular reader of this blog you’ll immediately recognize the main modules (Finding Your Number, Making Money 101, Making Money 201, and Making Money 301) but it’s covered to a depth that this blog simply doesn’t – and, can’t – go.
And, I’m building it to be a true step-by-step course to fulfiling YOUR financial destiny.
BUT, I don’t advertise on this blog, so the only way you’ll hear more about the course, is by subscribing to my free MONTHLY newsletter – using the form in the right-hand side-bar [see right ====>].
One of Dave Ramsey’s most popular ideas is that of a debt snowball. The idea is that you pay off your smallest debts first, then roll that debt’s monthly payment into the next smallest. When the next smallest is paid off, you roll the two former payments into the next smallest debt.The snowball grows and grow with each debt that’s repaid.
Here’s a real life example; here are your three debts and minimum payments:
$10,000 @ 20% APY, $500 minimum monthly payment
$4,000 @ 10%, $200 minimum monthly payment
$1,500 @ 12.5%, $75 minimum monthly payment + EXTRA PAYMENT
The debt snowball method states that you should put all extra debt payments towards the $1,500 balance. When you finally pay off that debt, your new payment schedule should look like this:
I have only added the words “EXTRA PAYMENT” to both examples, because I want to clarify – then expand upon – BFFP’s example.
First, though, what Dave Ramsey is saying – and, what BFFP is trying to illustrate – is the concept that you take one of your debts (the highest interest rate in the traditional ‘Debt Avalanche’ or the smallest balance owing in Dave Ramsey’s more psychologically-friendly ‘Debt Snowball’ method) and pay that down completely … merely making the required minimum payments on any other loans (but no more!) to stop them from going into default.
The credit card companies will love you for this!
Then when that loan is paid off in full you apply the payment that you USED to make on the first loan that you tackled to the next remaining debt, and so on …
… it ‘snowballs’ because you are applying more and more to each remaining debt, while never having to commit more (or less) to debt servicing than when you first started budgeting.
So, in both examples we are paying $775 (i.e. $500 + $200 + $75) towards debt repayment until all debts are paid off … THEN – conventional financial wisdom will tell you – you get to start INVESTING that $775 a month and you are FINALLY debt free and on your way to … what?
Well, let’s go back and make the small correction: if you only make the minimum payments, you will never pay off any of the debts (or, way too slowly), so you need to find some extra money and make some extra payments to the first loan that you decide to tackle; let’s use an example of $225 a month as an extra payment …
… and, from now on you commit to that monthly $1,000 i.e. $500 + $200 + $75 + $225 EXTRA PAYMENT + C.P.I. + 50% of any ‘found money’ (second jobs, part-time business income, loose change, IRS refund checks, etc., etc.) for your entire working life!
So, we are on the road to success! Or, are we?
The problem is that we have to decide where we’re heading: if our aim is to become a Ramseyesque Debt-Free=Happy clone, then well and good. Your financial plan is set.
[sign off now]
But, if we intend to get rich(er) quick(er)™ we have two huge limitations, neither of which the Debt Snowball or Debt Avalanche address:
If we lose just 10 years to our investing plan by delaying investing while we pay down ALL of our debt and/or pay down our mortgage we can halve our potential return.
Do you think that might be significant?
So, we don’t want our debt-repayment strategy to unnecessarily delay our investment strategy.
Where are we going to get the money to invest?
Sure we can accumulate $1,000 a month (after paying off debt) – and, grow that amount through C.P.I. and ‘found money’ strategies -but, will that really set us off on the path to financial riches?
The same graph shows that for every $1,000 A YEAR we invest, we can expect $100,000 after 20 years … so, our $1,000 A MONTH strategy should yield $1.2 Million over the same time period … unfortunately, that won’t be enough for a DEPOSIT on the Number that you really need …
… and, inflation will take at least a 50% chunk of that (not to mention taxes)!
So, the solution for most people – who don’t want to lower their expectations to match this depressing, but debt-free (!) scenario – is to move INTO debt … to invest!
This is so-called ‘good debt’ and I’m not sure what Dave Ramsey and Suze Orman’s take on this is, but most financial pundits call it ‘good debt’ for a reason. Assuming that you agree, read on [AJC: if not, I’m guessing that you hit <delete> about 4 or 5 paragraphs ago]
So, here’s what we need …. a different mind-set:
Since we already know that we will more than likely need to incur SOME ‘good debt’ as part of our investment strategy (i.e. some safe level of leverage for investment purposes e.g. a loan on a rental property) …
… why pay off OLD debt now in order to accumulate NEW debt later?
It doesn’t make sense, does it?
We merely waste time and money … instead, we should resolve the following:
1. To treat all Consumer Debt as ‘bad’ and incur no further such debt, unless it’s not really Consumer Debt at all (e.g. we need to buy a car to run our catering business, and public transport or a bike really won’t cut it)
2. To apply the minimum required payments + extra payment(s) + c.p.i. + ‘found money’ not merely to the lesser goal of paying down debt, but to the greater goal of helping us get to our Number (i.e. the financial representation of our Life’s Purpose [AJC: if you don’t buy into that philosophy, then simply insert the words “helping us become financially free”])
3. To, from this day forth, look at all debt as an INVESTMENT in your financial future: and, simply ‘invest’ where you get the greatest returns: is that in paying off an old debt? Or, is it in acquiring a new debt?
In the example above, we have three debts of 20%, 12.5% and 10% (are they tax deductible? If so, look at the after tax cost which will be 25% to 35% lower than the nominal interest rates circa 14%, 8.5%, and 7% respectively) …
Compare these interest rates to the cost of money for the types of investments that you want to make …
… in this example, all three are higher than current mortgage rates so you will probably want to keep paying them off (although a good argument can be made for paying off the 20% loan first, then buying an investment property BEFORE paying off the others).
Let’s make two changes to our example:
Let’s assume that one of the loans is a 2.5% Student Loan, and swap the amounts owing (so that the Student loan is now the ‘biggie’) and, let’s assume that we have at least 5 more years before it HAS to be paid back (so we have time to make an investment work for us); here’s our starting position:
Once we have paid off our two HIGH INTEREST loans, instead of paying down the low interest student loan, we continue to make its minimum monthly payment, and instead apply all of the previous / extra loan payments (from our OLD loans) to building up a ‘reserve’ in a bank account (it pays us a – low – rate of interest!) …
… at this rate, we will have a deposit on a small rental (or our own first studio apartment) in less than a year, then our financial picture will look something like this:
Keep in mind that if you used Reserve # 1 to build up a deposit on a small apartment to live in, then you will have no rent to pay, so you can apply part to home ownership expenses (rates/utilities/taxes) and part towards your next Reserve!
And, if you bought a rental, then you may be in an excess rent situation and have more to apply to building your next Reserve, as well … if not, then you will need to decrease the amount going towards your next reserve to cover any rental shortfalls (e.g. mortgage payment deficits, vacancies, repairs & maintenance fund, etc.).
Now, you know why this is not a Debt Snowball, a Debt Avalanche, or even a Debt Meltdown:
It’s the Cash Cascade …
… the new way to look at paying down debt!
In the two years that it would have taken you to pay off your Student Loan and buy your first property, you now own two properties and are well on your way to financial freedom!