I hate budgeting … so, I’ve only ever tracked my expenses once!

No Budget BudgetThat’s why I was so¬† excited a number of years ago (very early on in my Financial Re-birthing Process] to come across John Burley’s ‘No Budget Budget’.

For those who don’t know him, John Burley is a financial spruiker (originally, on the subject of ‘wraps’ for real-estate … something that I have never tried myself, so something that I can’t really comment on); after hearing him speak, I tracked down one of his courses that covered basic financial improvement “in 31 Days” …

… I don’t think I ever got past Day 1 or Day 2, but I’m really glad that I tried his ‘no budget budget’. It’s the ONLY personal budget that I have ever tried (and, don’t even get me started on the subject of business budgeting!).

Basically, the process consists of writing down every single dime that you spend (cash, check, credit) for a month. That’s it!

When I was cleaning out the house for ‘our big move’ recently, I found the actual budget that I had put together … it spans all of 3 pages (part of page 1 is scanned and reproduced here); a small ‘price’ to pay for financial freedom ūüôā

Here’s how it works:

1. Grab a blank sheet of paper and a pen (actually, a little pocket notepad and pencil is ideal … but I kept a folded sheet of paper in my pocket and my wife kept a little notebook and pencil in her purse and every night she would tear the page out that she used and give it to me to add to my sheet).

2. EVERY DAY FOR EXACTLY ONE MONTH [AJC: you don’t have to start on the first day of the month; any day – like TODAY – will do] I wrote on that sheet of paper:

– The Date (each day I started a new section on the piece of paper … when you try this, you should be able to fit a week or so on each sheet)

– What we bought (e.g. lunch; drink; bread; newspaper) … we did this for every single purchase!

– Who bought it (A for me; S for my wife; I guess we would also need to add Ad and Ta for our children if we were starting this No Budget Budget now)

– How much it cost (inc. taxes etc)

– How we paid …. we used a simple system eg Cash, Visa, Check

That’s it; one month …

Also, we added a new ‘last day’ of the month, so that we could write in 1/12 of any annual expenses (eg insurance) whether paid for in that month or not.

You can see that we did this in Australia 9 years ago [AJC: the date 1st Feb, 2000 is written as 1.2.00 in Australia]

You can also see that we were mainly a ‘cash society’ back then as only the haircut (mine) was paid by Visa [AJC: at $28 back then, I must have had WAY more hair than I do now] …

So, we simply kept a log of all of our spending for each day, in exactly the same way that we did for Feb 1 for the whole month … of course, Feb is a dumb month to choose, because it’s the shortest.

I can’t find the summary page, but I recall it being something like $1,000 a month that we were spending then.

That tells you what you’re spending … now, compare that to what you’re earning (after tax):

Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
Charles Dickens, David Copperfield, 1849
English novelist (1812 – 1870)

This worked for us, and we never bothered doing it again; didn’t see the need … now, tell me about your experiences with Budgets (or No Budgets) ūüôā

Meet The Frugals and The Moguls

There are two groups of people in this world:

1. The Frugals Рthose who live their lives frugally, scrimping & saving their way to the Magic $1,000,000,

and

2. The Moguls Рthose who think saving is for pussies and are busy scheming their way past $10,000,000.

What’s wrong with the Frugals:

i) $1,000,000 (or even $2 Mill. or maybe even $3 Mill.) will not be enough for MOST people, you simply can’t¬†SAVE your way to Wealth

ii) Being Debt Free – the Holy Grail of the Frugal World – is a false target that actually serves to keep you poor

And, we all know what’s wrong with the Moguls:

i) Wealth isn’t measured by some arbitrary lump sum – be it, $1 Mill., $5Mill. or even $10 Mill. (OK, I admit, $100 Mill. sounds tempting but, and here’s the point: ONLY because I don’t already have it!)

ii) There’s no such thing as a ‘Get Rich Scheme’ otherwise we’d ALL be doing it ALREADY – you know, word gets around ūüėČ

Now, here is the Shocking Truth – OK, Boring Homily – ¬†you NEED to be a Frugal in order to STAY a Mogul¬†…

The Frugal and Mogul are the same: one is the caterpillar, the other is the butterfly!

If you don’t develop the good ‘frugal’ habits on the way UP, you will quickly lose your money and slide all the way DOWN.

So, here’s what you need to do:

1. Get in the habit of spending 10% – 20% less than your earn NOW

2. Eliminate all NEW Consumer Debt and pay off any high-interest existing debt

3. Buy your own house and position yourself according to the 20% Rule

4. Start a business (online, offline, full-time, part-time, trading, flipping) Рtake SOME risk

5. Invest at least 50% of the excess cash that your business activities spin off into PASSIVE Investments

6. Do not drastically increase your lifestyle until the income from Passive Investments (indexed for inflation)¬†‘catches’ up to your required standard of living

7. When it does, retire!

Frugal / Mogul … two sides of the same gold coin … which ‘one’ are you?

The Great Debt Repayment Fallacy … don't fall for it!

Everybody knows about ‘good debt’ and ‘bad debt’, right? And, we all know – and have committed to memory –¬†Personal Finance Prime Directive # 1:

Eliminate All Bad Debt Now … Before Doing Anything Else!!!

This may be the current Personal Finance mantra, but, if you happen to subscribe to the same view, then read on because this post could be the most important piece of wealth-building advice that you will ever read!

But, first …

That simple and clear ‘PF Directive’ was the assumed premise behind a recent (and very good, I might add) post on The Simple Dollar¬†that I want to delve into a little more deeply than usual because it brings out a critical wealth-building point that may not be obvious to all. In that post¬†Trent said:

A reader wrote in recently:

I have kind of a weird situation with our 2 credit cards, and wanted to see what you thought. We have one card (Citi) with a total balance of $4,800. $3,800 of this is a balance transfer that is at 2.99% until paid off. The remaining $1,000 is at 13.49%. Of course, all principal payments are applied to the lower rate debt first. Our other card (Chase) has a balance of $5,700, and is at 0% until September 08, when it goes to 8.99%. Which card do you think is best to ‚Äúattack‚ÄĚ first?

After reading this email, I thought it would be a good time to take a more general look at comparing the debts you owe as well as how to construct a healthy debt repayment plan.

Trent then proceeded to outline a very good and pragmatic approach to dealing with these, and any other, debts … a plan that involved:¬†

A few sheets of paper and a pen; the latest statement for every single debt; making the first list; ordering all of the debts by their current interest rate; looking for ways to reduce the rates, focusing most strongly on the highest current one; when you’ve reduced rates, making a new list reflecting the changes; dealing debts that are set to adjust in the future; directing all of your extra payments towards the top debt on the list; when a debt vanishes, crossing it off and feeling good about it; updating the list when you acquire a new debt; and, updating the list when one of your debts adjusts to a new rate

Before I weigh in on this, let me ask you a Very Important Question:

Do you really just want to be debt free or do you want to be rich?

I know that¬†sounds self-evident, but stick with me … if you just want to be in the top 5% of the US population and retire on $1,000,000 in, say, 15 years then by all means,¬†do the Dave Ramsey, Suze Orman, and/or Oprah¬†‘debt diets’:

That is, save and be debt free (including your own home) … whoohee! … by the time you ‘retire’ [read: work part-time in Costco handing out free food-samples until you’re 75], you’ll be living on the equivalent of $15,000 today¬† and hoping to hell that the government can still afford to pay you social security!

It’s¬†OK if you slavishly follow this thinking: it’s the Conventional Wisdom …

It’s just that if you want … nay, need¬†…¬†to be rich(er) and retire soon(er) then you’re going to need unconventionally large amounts of money in an¬†unconventionally rapid timespan, and that’s going to take some Unconventional Wisdom!

You see, I believe that being debt free and being rich are [almost] mutually-exclusive!

This is a pretty controversial view, I should think … but, I will even go so far as to say that it is [almost] impossible to become rich without using debt: debt to fund your business (working capital finance and/or leases on equipment and/or leases on vehicles, etc.); debt to fund your real-estate investments (fixed interest mortgages and/or interest-only funding); debt to fund your stock purchases (margin lending); etc.

Hold on, all the Personal Finance writers/bloggers out there say:

We can put all of the above examples in the ‘good debt’ category and¬†we already agree that¬†they are OK …

Great!

But, then they always add:

… but, ‘bad debt’ is ‘consumer debt’ (credit cards, student loans, car loans, etc.) and we all know that our Number One Personal Finance Objective is to¬†wipe¬†Bad¬†Debt¬†out, right? After all, it’s not called ‘Bad’ for nothing! Right??!!

Well, not necessarily … sure you shouldn’t get yourself INTO any of this Bad Debt … but, once you have some (you naughty, failed human being, you), you need to mix it with your Good Debt and revisit Trent’s Plan with ALL of your debts in hand … both ‘Good’ and ‘Bad’.

Look at it this way, once you find yourself with a mix of both Good (appreciating and/or income-producing assets) and Bad (depreciating, consumer goods) Debts, the only things that matter are:

1. Paying off the Dollar Value of the Bad Debt as quickly as possible, and

[AJC: Here is the key … its in the¬†“AND]

2. Paying off the highest after-tax interest rate loan off first.

So here was my advice to the person who asked the question on Trent’s post:

Interestingly, in the reader‚Äôs case (if I read correctly) his ‚Äėconsolidated‚Äô card is at a Combined Effective Rate of only 5.2% ‚Ķ because he can‚Äôt attack the 13% portion until he pays off the 2.99% portion I would do the following:

1. Pay off the other card first, then

2. Buy an investment using the money that he would have paid the 5.2% debt off with …

… after all 5.2% is a very low rate of interest!

To clarify: I would not pay either card when interest rates are under the standard variable mortgage rate ‚Ķ I would be financing new real-estate, or paying down the mortgage on my existing (IF I‚Äôm not breaking the 20% Rule). The plan I outlined above starts when the 0% period ends … until then, pay off NEITHER card IF you have a more productive use for the money!

What does this mean for the rest of us?

i) Don’t get INTO Bad/Consumer Debt … save and pay cash for any ‘stuff’ (cars, vacations, furniture, ipods, computers, etc.) that you want.

ii) Once you do get INTO Bad/Consumer Debt … don’t be in such a hurry to get out of it; compare the cost of your Student Loans; Ultra-Low-Honeymood-Rate credit-cards; Super-Low-Suck-You-Into-Buying-More-Car-Than-You-Can-Afford Interest Rate car loans; etc.¬†against the after-tax cost of the mortgage that you have on your house and/or investment properties (or the interest rate on your Margin Loans for your Stocks; or your Working Capital Finance for your Business; etc.).

iii) Work out a repayment plan as though you were going to pay INTO that Bad/Consumer Debt … instead, pay¬†an equivalent amount off against your highest after-tax interest rate loan across your entire Good/Bad Debt portfolio.

iv) Reevaluate at the earlier of Quarterly (i.e. every 3 months) OR when one of the interest rates on ANY of your loans changes OR [yay!] when you have paid one of your loans off.

v) If you don’t want to (or can’t) get out of a higher-interest loan early using (iii) then compare the cost of the lowest-interest loans that you have (regardless of whether they are Good/Bad) against the current FIXED interest rates¬†for new loan on a new investment … if LESS, buy new¬†instead of pay off old.

Remember: The Object of Personal Finance¬†is to end up with MORE money … the object isn’t to SAVE money, PAY off debt,¬†BUY a house, START a business … they are all just all steps along the way.

If you want to get Rich(er) Soon(er) never, ever confuse A Means To An End with The End

… now, let the flames begin!

 

_______________________________________________________________________________________________

Casting Call

Last days for ‘pre-applications’ to become one of my 7 Millionaires … In Training! Click here to find out more …

 

 

Who is the Devil's Advocate's "devil's advocate"?

Have you noticed whenever you have an idea that goes against the mainstream (as most of my good ideas seem to) that people always pop up to rain on your [idea] parade?

They often justify their negativity under the guise of that old cop out: “oh, I’m just playing the Devil’s Advocate” … meaning that you get to listen to their endless diatribe. If you’re unlucky, they just may succeed in having you ‘come to your senses’ [a.k.a. miss yet another opportunity].¬†

My response usually is: “In that case, I’m the Devil’s Advocate’s Devil’s Advocate! ;)”

… which means, this time¬†I get to explain why their [contra]-ideas are dumb, and they get to sit there and listen!

I particularly like to play Devil’s Advocate’s Devil’s Advocate with the typical Personal Finance mantras as published in so many PF books and blogs – and, we have already covered a few, with a whole lot more to come –¬†because so many of them are so self-limiting.

I go the idea for this post from a PF blog that I like, Bargaineering, who has a whole section called Devil’s Advocate … I have reprinted a section from his latest roundup, and have included the links in case you want to review the actual articles [AJC: I haven’t had time to review them all, yet]:

I have a few good ideas in store for future articles but I wanted to do a little roundup, in part for myself to see all the topics we’ve covered, so that you could join in the rock throwing against mainstream ideas.

  1. Don’t Invest in the Stock Market
  2. Cancel Unused Credit Cards
  3. It’s Okay To Ignore Your Problems
  4. Ignore Personal Finance Experts
  5. Don’t Have Kids
  6. Buy More House Than You Need
  7. Don’t Move From Job To Job
  8. Get A Store-Branded Credit Card
  9. You Don’t Need College to Succeed
  10. Four Reasons You Should Get A PayDay Loan
  11. Don’t Get Married
  12. Buy That Home Warranty
  13. Adjustable Rate Mortgages Are Awesome!
  14. Pay Cash for Everything
  15. Don’t Budget to the Penny
  16. Invest In Your Company
  17. Say No To Credit Card 0% Balance Transfer Arbitrage
  18. Why Roth IRAs Are Bad
  19. Lease A Car, Don’t Buy It
  20. Don’t Just Buy Index Funds
  21. Don’t Optimize Payroll Deductions
  22. Rent Forever, Don’t Buy A Home
  23.  

My view?

Great ideas – in fact, I made a fortune by FOLLOWING ideas # 4, 6, 13, 15, 16, 18, 20, 21. ;)

Here’s how I look at it:

Follow conventional thinking and you’ll get conventional results.

Follow Unconventional Wisdom, and you just MIGHT get rich, too (but, don‚Äôt be stupid about it, because you will probably remain poor) ‚Ķ but, you need to throw in some ‚Äôspecial sauce‚Äô as well [AJC: that’s what this blog is for].

Nothing wrong with following good advice … nothing wrong with ignoring it, either … I’ve made money both ways Рjust be sure you know WHY you are following/ignoring it!

Here are the Top 4 Personal Finance Myth’s that I will be doing my very best to destroy over the coming weeks:

1. ‘Bad Debt’ is to be avoided at all costs!

2. Your house is NOT an asset or Your house IS an asset!

3. Max. your 401.k and other Retirement Accounts

4. You can [and, must!] save your way to wealth

5. The Magic Number is $1 Million

… a whole plethora of ideas for us to explore!

But, first a word of caution:

If your target is just an amount like $1 Million to $2 Million in 15 Р30 years, then you do NOT need to read any further Рthis blog is NOT for you and you will get far more benefit for your time invested by reading here, here, and here, or probably ANY of the places listed here instead.

However, if you are going to join me on this exploration of Anarchic Personal Finance Ideas – and be the Devil’s Advocate’s Devil’s Advocate – then let me know¬†which DUMB ūüėȬ†ideas that worked for you, so far …

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

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?