The MOST important Making Money 101 tool of them all …

Posted on June 9, 2009 by Adrian

I don’t invest in mutual funds, but I know that many of my poor, deluded readers do 😛 For you, The Dough Roller provides some tips … and, for the rest of us, he mentions this blog. Thanks, Dough Roller!
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I posed a seemingly simple question: What is the MOST important Making Money 101 tool of all?

After all, this is basically the subject of almost all of the 2,500+ personal finance blogs in the blogosphere … how to save your way to wealth. We know that it can’t be done, but that doesn’t stop all of those poor blighters from trying … and, worse, writing about it 😉

But, it is an important part of making money, which is why we devote a whole subject to it …

[AJC: Which gives me the fleeting idea for yet another reader poll: which is the most important Making Money stage of them all: MM101, MM201, or MM301? But, you would all too quickly see right through the question: making lots of money (MM201) is useless if you (a) spend it before you get it (MM101) and/or (b) let it slip right out of your fingers once you have it (MM301) … ergo, they are clearly ALL important!]

Now, I thought that I would be pretty smart and ask questions that would lead you away from the ‘hidden gem’, and I could then glide in on my blogging-white-charger and whisk you right off your financial feet with a princely nugget of wisdom, just as you were nodding in agreement with the poor misguided fools who submitted non-optimum answers …

… but, ‘ask the audience’ came bloody close to winning the 7 million dollar question!

Although the majority response was split nearly 50/50 between the ‘common wisdom’ answer and the one that I thought (hoped!) would slide right under the radar, nobody said it better than Ryan:

Without delayed gratification, why would we save money at all? We’d just live paycheck to paycheck and hope we never…didn’t get a paycheck!

And, what pees me off even more is that the general comments, covering all of these choices and more, were so on-the-mark that I could stop writing this blog … but, will instead just have to shift into higher gear [AJC: hang on tight!].

So, yes …

…. this was another almost-trick question in that they are ALL clearly important, but, this is an experiential blog, in that my financial advice is largely shaped by my own experience (much more so than somebody else’s ‘theory’) and, when I looked back it was delayed gratification more than anything else that seemed to keep me out of the poor house … then and now.

Why delayed gratification?

Because it is a habit for a lifetime; it will keep you from spending all of your money:

– when you don’t yet have enough of it

– while you are still struggling to get more of it

– when you have what should already be enough of it

… and, for those whom ‘delayed gratification’ has not yet become habit, we broke new ground by inventing 7million7year’s Patented Delayed Gratifier [AJC: no, it’s not something most commonly found in an Adult Store 😉 ] a.k.a. The Power of 10-1-1-1-1

There you have it: delayed gratification, what I – and, you – believe to be the most important Making Money 101 tool of them all 🙂

How much windfall to spend?

Posted on June 8, 2009 by Adrian

Want to make money in real-estate? Then you need to know where the ‘hot’ cities to buy in are … this US News article from Luke Mullins should tell you just that!

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I classify ‘windfalls’ with all other Found Money: save 50%+ and spend up to 50%

I’m not going to tell you to spend half, but you can and should – at least – spend a significant portion: at least enough to fully celebrate your good fortune (even more so if it was a result of hard work rather than luck).

Interestingly enough, by chance, I came across this quote from Ramit Sethi (I Will Teach You To Be Rich):

I don’t recommend you sock away 100% of unexpected earnings. In fact, I force myself to spend 25%-50% of any unexpected money within a month, a technique I developed to keep motivating myself to earn unexpected income.

Of course, blindly following blanket rules won’t make you rich … you have to qualify them and assess against your own situation, which is why this blog (or others) cannot be misconstrued as personal financial advice … for example:

– If you find $20 on the street, buy yourself a latte and a magazine and then put the other $10 in your end-of-month savings ‘cookie jar’

– If you sell your business for $2 Million don’t spend $1 million

– If you get a $200 a week pay increase:

… do spend $100 immediately (enjoy!)

… don’t spend $100 extra a week (unless you HAVE to)

No rules, but some guidelines:

– If the ‘found money’ is life-changing (for me, that means getting you to your Number, or a Big Step closer) then spend a chunk … perhaps as much as the top tier on your version of the 10-1-1-1-1 chart (provided it isn’t more than 5% – 10% of the total ‘found money’). Do me a favor: spend it on something you’ll remember (for me, it was the Maserati and the Villa-in-Tuscany vacation) 🙂

– For the money that you do want to spend – one-off, but not life-changing – still apply 10-1-1-1-1, but kick it all up a notch (e.g. you only need to think about spending $100 for 10 minutes) … but, ONLY until that allocated money is spent

– If it is an ongoing – and fairly reliable – stream of ‘found money’ (e.g. a pay increase), calculate how much of the increase you NEED to spend (i.e. add to your budget because you have been going without, or are behind, or have critical debt repayment, etc., etc.) then gradually wind your spending back to that number and save the rest.

An example may help to illustrate the last point:

You currently earn $500 a week, and are behind a little. You calculate that another $40 a week will be enough to ‘break even’ on your spending (you know: put food on the table; clothe the kids; pay down the remaining balance on the credit cards that you tore up, etc. etc.).

Now, you receive a pay-rise (I guess you got lucky and switched jobs, or decided to take on a second job) of $200 a week (after tax, of course):

1. You are committed to saving at least $100 of that, so $100 a week additional goes straight into the investment account

2. You are committed to spending $40 a week (see above)

3. So that leaves $60 a week undecided:

Week 1: spend $60 … enjoy!

Week 2: spend $40 …. enjoy!

Week 3: Spend $20 … enjoy!

Week 4: By now, you’re actually saving $160 a week extra … what do you expect? Every week to be Christmas?!

Enjoy! 😉

How to Go from $52,000 to Retired in 5 Years?

Posted on June 6, 2009 by Adrian

Phil Town (author of Rule # 1 Investing) talks about his approach to Value Investing as a way to achieve a minimum (presumably, long-term) 15%+ compounded return in the stock market.

On his blog he recently fielded a question from a reader who asked:

I am 30 years old no debt and have a net worth of $52,000 cash. My goal is to be retired by 35 years old. To reach that goal is now the time to go all in?

Even though the reader doesn’t tell us how much ‘retired’ is, I think it’s worth revisiting Phil’s response:

The time frame is too short to stockpile stocks and be sure to retire in 5. We need more like 20 to make that work. So you’re going to trade using Rule #1 strategy and tools.

1. You’ll live to 95, so retirement is 60 years.
2. You’ll need at least $50,000 a year in 2009 dollars.
3. Assume you’re trading and making 30% adjusted for inflation (so 34% or so before inflation).
4. Assume you’re adding $10,000 a year for next 5 years.
5. In 5 years you’ll have $283,000 in 09 dollars.
6. You’ll have to make 18% after inflation to get $50,000 a year in 09 dollars.
7. Conclusion: Doable, but you are not retired clipping bond coupons on some beach in the South Pacific. You’re still investing. Better if you had more in the nest egg in 5.

So, Phil’s basically demonstrated that it’s not doable … at least not with stocks; it MAY be doable with a very high risk (read: great deal of luck) aggressively trading options and / or business startup strategy.

Here’s Phil’s suggested solution:

Q: How to get more when you have less?
A: Leverage. Other people’s money.

Q: How do you get other people’s money?
A: Four ways:

Trade on margin: 50% loan. You’ll more than double your return to $558,000.

Trade derivative (options) so your dollar represents only a small portion of the underlying security

LP: Raise $600,000, 34% ROI is $2.4 million in 5 years. You keep $500,000. Plus you got $40,000 a year to manage it. This is more or less what Buffett did in the 50’s and 60’s

Put half the money in a startup and help make it go big.

… I guess Phil agrees: 5 years from $52k to any number that’s likely to yield a reasonable retirement requires a super-high annual compound growth rate, and that only comes from the strategies that I mentioned earlier; and, of these, business is clearly a better path than trading stocks and options on margin … there’s simply too much luck involved in trying to aggressively mix it with the stock-market pro’s.

What do you think?

Getting rich in a depression …

Posted on June 5, 2009 by Adrian

I must admit, the only reason why I’m writing this post is because I happened to read Bill Shrink’s post with 16 Depression Era Money Saving Tips and saw this photo (under the tip: “buy in bulk”) …

… and, the only thing exciting about that is that I have an empty cup of that incredibly spicy ‘instant soup’ (the one in the photo with the Chinese character that looks like a black lantern on a pole) sitting on my desk in front of me, and my mouth is still burning! Yum …

While the tips themselves are sound, I was getting ready to give him a metaphorical pasting, when I saw that he actually did include an increasing-income tip, as well:

Develop Multiple Income Streams: it wasn’t called the Great Depression for nothing, but the gloom and doom we associate with it overshadows the fact that not everyone was hurting. Amidst all the mass suffering and despair, a small minority of people actually managed to thrive by diversifying and developing multiple income streams. You can do the same! Whether it’s investing (Warren Buffet says to be greedy when everyone else is fearful), starting a business, or picking up a second job, anything you can do to spread your risk across more than one thing will make you safer and more secure.

Of course, the aim is to get rich(er) quick(er) – so, that we can reach our Number – which leaves me to wonder, how do people actually get rich during a depression? Well, according to this forum – where this exact question was posted – you can get rich by:

– If you have money buy up assets at depressed values. The key is to have money during the depression. If you don’t then you are in a very tough position as jobs and business opportunities are scarce,

– Save all the money you can in good times, spend it in bad times

– Wait a few days, see if there are further losses and then put in a buy order

– Become a Beer distributor

– Make bras or get into entertainment

– My grandfather worked for a factory that made thread and other home sewing supplies and rode out the depression that way. I guess today it would still be cheaper to buy your threads at WalMart, but there must be other recession-proof businesses.

– In a recession people and companies repair what they have in Capital Equipment

– I knew a family that benefited from an ancestor who wisely saved his cash…and when the Great Depression hit, he bought land…and lots of it and at cheap prices.

– Funeral homes, toilet paper and trailer parks

… and, there are plenty more.

Look, when you buy into a rising market, the chances are that you are already too late … but, the same applies in a ‘depression’: by the time you read about it, it’s too late to panic, you’ve ALREADY been caught. So, it’s simply time to buck the trend and invest.

The opportunities to get rich for the ‘little guy’ are actually MUCH more prevalent in a down-market than in an upmarket: so, buy up assets (land, stocks) at depressed prices and hold for the long-term and/or buy into businesses that are always needed (i.e. the ‘boring ones’) … that’s pretty much all it takes 🙂

It's all about the curve – Part II

Posted on June 4, 2009 by Adrian

Nobody wants their finances to grow in a straight line (too slow, and inflation really hurts), so let’s continue this series with a look at a faster way to grow your money … one that is well covered in mainstream personal finance blogs:

The Compound Curve

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When we do one simple thing [AJC: again, ignoring the effects of inflation], the whole picture changes dramatically:

If, instead of withdrawing/spending the interest earned on the CD, we ask the bank to reinvest the interest then we create an effect known as compounding. Where both the principle (i.e. the lump sum that you originally deposited) and the interest (then the interest on the interest and so on …) earn interest. The effect, as you can see, can be quite powerful … slow, but powerful.

In fact, ‘urban legend’ has Albert Einstein calling compounding “the most powerful force in the Universe” … urban legend because Einstein would never have called such a relatively [pun intended] slow geometric progression ‘powerful’ when he had nuclear reactivity to play with (a far quicker and more dramatic form of compounding).

Be that as it may, compounding is something well understood, but always remember that it is only powerful to the extent that it may keep you out of the ‘poor house’ – but, not by much – hence, compounding is really only a basic (but necessary!) Making Money 101 saving strategy:

– without it, you don’t get to first base, financially-speaking, but

– with it, that’s about all you do.

You can – and probably already do, to a greater or lesser degree – apply the power of compounding to your job/profession (be it as paid employee or paid consultant) when you reinvest some of your earnings into investments such as mutual funds (e.g. via your 401k), direct stocks, and real-estate … and, of course, reinvest (instead of withdraw and spend) the dividends (a.ka.a ‘profits’) from those investments.

How much money can you amass living frugally?

Posted on June 1, 2009 by Adrian

The answer, of course, is a lot … especially if you consider $1.4 million ‘a lot’ … and, who doesn’t?

KC (a regular at my new reader community: www.sharyournumber.org) sent me an e-mail asking:

I saw this article: http://www.stltoday.com/stltoday/news/stories.nsf/stlouiscitycounty/story/95052F7B696733CA8625759500189E1C?OpenDocument

[the headline reads: “How social worker Jane M. Buri saved $1.4 million, then gave it all away”] and I can’t begin to think how you could start to calculate whether this is indeed possible for a moderately paid social worker who lived frugally.

What are your thoughts?

Well, on the surface the lady appears to be a classic miser; she:

– never married, never had children, never missed a day of work

– drove a 30-year-old car, watched an ancient TV (she resisted replacing her old TV and icebox), lived four decades in a house bought with cash in 1969 (the furniture was her parents’)

– dressed plainly, wore costume jewelery, dyed and permed her own hair

– would buy five sandwiches for $5.95 from Arby’s (she’d eat one and freeze the four others for later; when she went out with friends, they nearly always split the bill)

I think this statement sums it up the best:

She lived, her friends say, nearly as a nun.

On the other hand; she also ‘lashed out’ from time to time; if you call eating out ‘lashing out’:

Nor did she deny herself small indulgences. Some weeks, she ate out three meals a day, friends said. She traveled to Europe, and to the Rose Parade in California. She bought a baby grand piano.

OK, this is a lesson in frugality: single woman, no mortgage or car payments for thirty years and 100% gainfully employed living frugally …

… does this mean that it’s surprising how much she managed to leave behind?

Well, we have a data point:

She got her first job as a social worker in 1954, according to St. Louis Public School records. She made $3,800 a year. Within 10 years, she was running the department and had doubled her salary.

Let’s assume that she grew her salary from 1964 until 2002 at 6% p.a. (which leaves her a finishing salary in 2000 of nearly $61,000); let’s also assume that despite her frugal habits that she still spent / donated half her money (after all, there “was nothing she wanted and didn’t buy” and she “kept stacking charity donation envelopes in her sun room, until, once a year, she sent them all in”) … which all means, that we are assuming that she saved ‘just’ 50% of her salary.

Putting this all into a spreadsheet (with the final assumption that she just managed to earn 6% on her money, compounded over the 50 years that we are talking about), I can see that $1.4 mill. is reasonable for her to leave behind; in fact – by pure coincidence, because of all the assumptions that I’ve made – that’s exactly what I came up with at my first attempt at running the numbers.

There’s no doubt that living this frugally for 50+ years, having no major expenses (family, house, car, etc.) is the secret to this kind of financial ‘success’ … she apparently enjoyed the life of a ‘nun’ … so might others … would you?

Ooops! She broke the 25% Rule ….

Posted on May 29, 2009 by Adrian

keeping up with the jones I wrote a post some time ago about how I broke (nay, smashed!) the 20% Rule (you know, the one that tells you what % of your net worth you should have ‘invested’ – read: tied up – in your own home) when I bought my latest house – considering that we paid $4 mill., are about to renovate for at least $1 mill., and still own another $2 mill. house that we haven’t been able to sell due to the crash, I’d say that we need some major corrective action … which, I outlined in this post.

The next housing problem that I wrote about, doesn’t affect me (as we paid cash for our houses) but, was how to deal with the now-all-too-common situation where you are ‘upside down’ on your mortgage.

Now, thanks to Alexandria who commented on that post with a question, we can now assess the third major housing-related financial problem: what to do when you break the 25% Rule (the one that lets you know how much of your income to spend on rent/mortgage payments)?

Panic is always a good first option …

… before we do that, let’s hear Alexandria’s ‘problem’:

Ok… after reading the above I want some options on my situation. Married, three school aged kids. Currently own a home with a high mortgage that is worth just about $50K more then we owe. Not the home of our dreams. We are not in foreclosure. I am self emplyed and my husband is a Police Officer. We can make our monthly mortgage but it eats up about 60% of our monthly income. We have no savings, a mininal 401 plan, no large other debt. We are both in our mid thrities. We can rent a much nicer home in our area for about $1k less then our mortgage a month. If you were us, would you sell and rent or keep the house?

OK indeed!

My first piece of financial advice would be to dump the copper and marry some rich bloke (I’ve seen your photo) who looks like me … but, marriage proposals aside, I can’t offer you any better advice than that, because I am NOT you …

… that’s why I struggle to answer specific “what would you do if …” questions on this blog, because I rarely have enough information to know how to deal with YOUR Life’s most difficult financial decisions.

BUT, it’s not all doom-and-gloom, because I can use wonderful readers’ questions, such as this one, to inspire some general points: just don’t construe it as direct personal advice, even though I may liberally intersperse “you” and “should” in my posts to make them more readable.

Disclaimer out of the way 🙂

Even though I can’t really give you the answer that you can ‘take to the bank’, I can ask why you would consider keeping a home that you don’t like, when you can sell it and rent a nicer one and save/invest an extra $12k a year?

Better yet, what would it do for you financially (balanced against family ‘needs’ … not keeping up with the Jones’ … hence, the image at the top of this post) if you sold this place and used the freed up equity as a deposit against a smaller/cheaper place that fits closer to the 25% income Rule, and then used the money saved on mortgage payments (100% of it!) to finally start to build your financial future?

Remember, given that this is effectively your first home (i.e. you have not built up any housing equity yet) the answer – for you – maybe somewhere between the two …

Nice house v fewer financial headaches … what a trade-off to have to make 🙂

Don't ask "if" … ask "how"!

Posted on May 28, 2009 by Adrian

I got home very late last night to see this e-mail from my son – we live in the same house, but he is 14 years old, so that is now his preferred mode of communication 😛 –

i have decided that this is gonna be my car, i dont know how but somehow …eventually : http://www.carpoint.com.au/used-car/NISSAN/GT-R/Victoria/csn6641299.aspx?State=VIC

You have no idea how proud that made me feel …

To explain, let me give you some background:

I was a ‘late bloomer’ in that I was always willing and able to work, and never stood in line for a handout … but, I didn’t really get hit by the entrepreneurial bug until my late 20’s (even though I always had that vague “make my first million by 30” idea in the back of my mind. Oh, I missed by about 15 years … then retired at 49).

On the other hand, my son has had his own eBay business for about 2 years (off and on due to various accidental – and minor, in my opinion – account ‘oversights’); we are used to the idea of seeing packages on our doorstep in the morning (left by our son for the postman to deliver to his customers) and in the evening (packages left for my son, containing stock from overseas … usually China).

Right now, he is instant messaging (i.e. in ‘live’ conversation) with various suppliers in China looking for more genuine Bose headsets (he has just imported 2 at about $150 each).

Now, to put this in perspective:

– he was 12 when he started his business

– he researched and set it up totally on his own

– he found and negotiated with his own domestic and foreign suppliers (mainly communicating via e-mail)

– he downloaded Quicken (accounting software), integrated it with eBay’s software, and worked out how to set it up (including opening balances)

– his allowance is twice his age (currently $28 per month) and easily outstrips that rate with his eBay profits per week

… and, he did all of this with NO outside help (I have no idea how to do ANY of this).

So, I am proud of my son, not just for his entrepreneurial spirit (he is self-starting 10 to 15 years before I did), but that he has discovered something important:

Don’t ask “if” or “I wish I could have this car” … ask, “HOW can I get this car“; as I said in my e-mail back to him – I think I need to make an appointment in his busy schedule to speak to him about this 😉 –

This car is WAY too powerful for you to drive until you are at least 25 years old … but, after then, the world is your oyster (that means: go for it!) …

BTW: You are asking the right question: How can I get this car? Not: IF I can get this car? Once you ask yourself HOW, your subconscious starts to work on providing the answer and eventually it will come! Good Luck!

Notice that I did NOT say ” good boy, now rich dad will buy it for you” and, notice how he didn’t ask? That’s MY boy 🙂

How do I invest with only twenty dollars to spare each month?

Posted on May 27, 2009 by Adrian

This is actually a very common question: How do I invest with only twenty dollars to spare each month?

It was most recently asked by Jacqueline Robinson of TX in response to a US News article that I contributed to:

Basically, I would have to put back pennies at a time and hope that one day it will add up to a nice saving for me in the future. Ok, yes I would like to have that special person to come onto my job at Sobway and say, I read your story on the us news and how I feel that this money would benefit you more than it would me at the moment, or that you are the lucky winner today. Well, that would be living in a fantasy world, so if I could get some good, strong suggestions on how to save money and invest at the same time for my future I would leave El Centro College in Dallas TX with a smile on my face.

Well, Jacqui, I’m certainly not going to come into your ‘Sobway’ for a sandwich and write you a check for $150,000 as a ‘tip’ as you will no doubt lose it pretty quickly because you need to first learn the lessons of money before you make your money so that you can keep your money 😉

The question is normally asked in a manner that suggests: “$20 is such a small amount, what possible difference can it make if I save it instead of spend it?”

Well, in some respects I understand the ‘losing attitude’ because even if you faithfully save $20 each month and somehow manage to match the 30 year ‘guaranteed’ stock market return of 8.5% compound (ignoring fees), after 30 years Jacqui will have saved less than $30,000 (which is worth less than $9,000 in today’s money if inflation averages just 4%).

But, Jacqui will no doubt be receiving better and better jobs and at least increasing the $20 monthly savings with inflation (won’t you, Jacqui?), so she should end up with something approaching $45,000 (or, less than $14,000 after inflation) …

… so, I share her implied pain.

But, with $20 a month you can rent a stall at a market and sell on consignment seconds from local manufacturers (that means that local manufacturers will gladly let you have a bit of their not-quite-right stock on ‘loan’ until you can sell it and pay them a pretty cheap price) … or, one of a hundred other ‘micro businesses‘ that require little to no start-up funds.

With the couple of hundred dollars a month that you might make from that activity, you might be able to build up a ‘nest egg’ 10 times larger than before …

… better yet (because, who can live the rest of their lives off the equivalent of $140,000 after inflation … total?!) use that money to gain a higher education and/or start an internet-based business that might make you an extra few hundred dollars a month.

With, say, an extra $700 a month you could ‘retire’ after 30 years with the princely sum of $450,000 (in today’s ‘after inflation’ dollars) or use that few extra hundred dollars a month to start a ‘real’ business … one that can …

… well, you know the rest: it’s how I went from $30k in debt to over $7 million in the bank in just 7 years.

Jacqui, you’re already $30k – and, $20 a month – better off than I was when I started my journey, so suck it up and get to it! 🙂

Please cough, sir …

Posted on May 25, 2009 by Adrian

This is a neat little tool produced by CNNMoney to check your ‘financial health’ … it asks a few simple questions and gives you a diagnosis, highlighting problem areas in the red ‘bubbles’ (the blue ones are all OK).

The one shown here has been done for somebody who certainly seems to have some financial problems, having scored only a C+; this person is:

1. Paying too much for housing

2. Not diversified enough

3. Has too much of their stock portfolio in company stock

4. Has no life insurance

The problem is, this person is me 😉

CNNMoney thinks that a multimillionaire scores a C+ on their finances, but somebody who can’t rub two sticks together scores an A+ as long as they:

– Are diversified,

– Have life insurance,

– Pay too much for their house

[AJC: CNNMoney recommends no more than 38% of your gross income; we would say no more than 25% of net income]

… and, so on.

A common-wisdom tool with a common-wisdom result for a common-wisdom (work for 40 years, retire on minimum wage at 65) outcome. At least you won’t be broke.

BTW: Why did I [almost] fail?

a) We are renting a house ($35k a year) while renovations on our new one are underway, and we have not yet sold our US home, so land taxes ($30k a year) still have to be paid; both temporary costs

b) We fail diversification because it doesn’t ask about real-estate and we have too much in cash at the moment; the way I look at it, we pass on the ’emergency fund’ bit because we have at least 20 years living expenses on hand right now 🙂

c) We failed on company stock because we had a few mill. in bonus shares [AJC: now worth two-tenths-of-f**k-all as they say in Aus] and are waiting for some semblance of a ‘rebound’ before we sell … could be a loooonnnngggg wait

d) Life insurance? see b) 😛

Try the tool and let me know what you think ….

7million7years

How to make 7 million in 7 years …

Tag Archives: Saving