I am 21 and clueless …

Screenshot 2014-05-21 12.37.01This is quite typical of the types of questions that I receive from time to time:

I’m 21, and am clueless about finance. I want to start up a business at my mid 20s. Should I opt for endowment plans or unit trust?

The first thing you’ll notice is that there are no further details, as though there’s a ‘pat’ answer for every clueless 21 year old.

Still, let me suggest the following if you are 21 years old and also want to start a business ‘one day’:

1. If you consider yourself clueless about personal finance, start by reading everything you can.

Since you are young, start with I Will Teach You to Be Rich – I was weaned on a diet of Rich Dad Poor Dad, The Richest Man in Babylon, and so on …

Warning: The important thing to note is that these books are only to whet your appetite, they will  NOT make you rich … once you reach a certain point, much of the advice will have to be discarded.

2. If you want to start a business in your mid-20’s the best way to prepare is by starting one now:

It doesn’t matter if the business is successful or not, the idea is to learn by doing.

While you are studying, you can easily start an online business: become an eBay seller; start a drop-shipping business; write a blog about your passion (or, perhaps about your financial journey) and package up some of the posts into a series of information products that you can sell.

3. If you are worried about company structures, don’t!

Just get started … and with your first $1,000 in savings (from 1.) and/or earnings (from 2.) see an accountant and do what they suggest … this isn’t the place for such technical advice.

If you do these simple things, you will be financially better off than 99% of your peers within years, if not months, and should remain so for the rest of your life.

Why?

Because they will remain clueless, whilst you will not 😉

How lucky are you?

luckyMy son and I had a great time in Washington (where he was competing in a student entrepreneurship competition); the life of an entrepreneur can often be a lonely one, so it was good for my son to meet others following the same ‘student entrepreneur’ path.

The trip got me thinking about the interrelationship between ‘luck’ and ‘success’ …

It’s clear to me that the most successful – and, wealthy – people of all ages are indeed lucky … certain things had to go ‘just so’ in order for that big breakthrough to be made.

BUT, I think the luck factor is a rear view mirror effect

… that is, if you position yourself for success, the luck will come but you won’t know exactly when or how.

Richard Wiseman a researcher in the field of luck (he wrote a series of books on the subject) says that lucky people generate good fortune via four basic principles:

1. They are skilled at creating and noticing chance opportunities

2. They make lucky decisions by listening to their intuition

3. They create self-fulfilling prophesies via positive expectations

4. They adopt a resilient attitude that transforms bad luck into good

I’m not sure that this is the same as visualization techniques (a la The Secret), I just think it’s a difference in attitude.

In this context, Richard gives some advice on how to turn your luck for the better:

Unlucky people often fail to follow their intuition when making a choice, whereas lucky people tend to respect hunches. Lucky people are interested in how they both think and feel about the various options, rather than simply looking at the rational side of the situation. I think this helps them because gut feelings act as an alarm bell – a reason to consider a decision carefully.

Unlucky people tend to be creatures of routine. They tend to take the same route to and from work and talk to the same types of people at parties. In contrast, many lucky people try to introduce variety into their lives. For example, one person described how he thought of a colour before arriving at a party and then introduced himself to people wearing that colour. This kind of behaviour boosts the likelihood of chance opportunities by introducing variety.

Lucky people tend to see the positive side of their ill fortune. They imagine how things could have been worse. In one interview, a lucky volunteer arrived with his leg in a plaster cast and described how he had fallen down a flight of stairs. I asked him whether he still felt lucky and he cheerfully explained that he felt luckier than before. As he pointed out, he could have broken his neck.

Hopefully, reading this blog is one giant step along the path to making you a lucky person, too 🙂

The New-Age Lemonade Stand …

Lemonade StandPeople think my son is following in his father’s footsteps …

… but, I didn’t even think about beginning my entrepreneurial journey until I was 26 (and, didn’t actually start until I turned 30).

My son, on the other hand, started his entrepreneurial journey when he was 12.

Whereas most children begin by starting a newspaper delivery round, or opening a lemonade stand – although, at age 10, he wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell) – my son was a little different:

At 12 years old, AJC Jr came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, and your encouragement and support (but, NEVER, EVER push) your children may embark on a similar journey … after all, the barriers to starting a business (i.e. by going online) have been lifted.

Why should your entrepreneurial child start a mere lemonade stand, when any child can now start an online marketplace for anybody who wants lemonade and anybody who can make it (or supply the ingredients and know-how)? 😉

The Magic Number for successful sales …

Magic Number For Sales

The Magic Number for small-business sales success is 5 …

… this means, that you shouldn’t give up too easily when trying to contact new prospects.

Don’t give up after just 2 attempts at contacting them, your prospect may just be busy, not quite ready to buy, or may really not want to talk to you.

The trouble is, you won’t really know which of these reasons it is – or, whether you really should give up on them – until you have tried to contact them 5 times!

That’s 5 e-mails; 5 voicemails; 5 calls to their cell-phone; 5 handwritten letters; 5 rocking up on the doorstep with coffee and donuts; or …

… better yet, some combination of the above (probably, in the order that I’ve presented).

Make more money with the watermelon plan …

20130522-123549.jpgIf you want to make money, you need a plan …

… a simple plan.

And, nothing could be simpler – or make more sense – than The Watermelon Plan.

Simple?

It has to be; you see, this ‘plan’ was created by an 8 year old!

Here’s the plan, as told by the boy’s uncle, Jack:

I will never forget my little 9 year old cousin who lives in the UK, who shared a pretty simple money making plan with me. He told me he is planning on:

1. Buying a watermelon for $5
2. Cutting it up into 10 pieces and selling each piece for a dollar.
3. Go back to the store and buy 2 watermelons.
4. Etc.

I love this simple and basic business-building thought process.

There’s nothing difficult about making money if 8 year olds can do it.

And, they can. Here’s proof … a little closer to home … It’s my son’s story, as told on Quora:

At 10, my son wanted to start a cake shop outside his grandmother’s house (naturally, she would bake, he would sell).

But, at 12 y.o. he came to me and asked for $50 to start his new business on eBay. He offered me 49%. I accepted, just to see what would happen.

And, something did happen: a week later a package from China arrived at our front door, and over the next week a few smaller packages left the same way.

Two weeks later, my son came to me and said “here’s your $50 back” … he bought me back out!

[I didn’t have the heart to tell him that it doesn’t work like that. That’s probably the only non-commercial assistance that I’ve given his business in the last 6 years].

Since then, after growing his eBay store for 3 or 4 years, my son ‘graduated’ to an online service-based business that nets him in excess of $60k p.a. (turning over $100k++ p.a.) and has bought him a car whilst still in high school.

He contracts programmers in India and has 2 full-time customer service contractors in Manila. One of them just sent him a Christmas present and a card thanking him, saying that – because of my son – he can now fulfil his life ambition of opening up his own coffee shop.

Not only is my son setting up his own life, he’s changing other people’s lives already … and, he’s just finished high school.

With luck, you – or your children – may be able to embark on a similar journey.

But, I’m not smart enough to be rich!

Firstly, let me warn you: this post will have absolutely no bearing on how wealthy you will become!

Now, do you need to be smart to become wealthy? Is “but, I’m not very smart” a valid excuse for not even trying?

It turns out that the answer to both questions is NO.

You see, your IQ (more correct: your cognitive ability – i.e. your ‘smarts’) has very little to do with how wealthy you will become …

… studies have shown that 97.5% of the factors that can explain wealth have nothing to do with how smart you are:

Zagorsky found a correlation of 0.30 between IQ and (recent annual) income, which is relatively low — roughly 9% of the variance in income can be accounted for by IQ, and the other 91% is due to ‘other factors’. On average, he found that each IQ point added about $200 to $600 in annual income. As for net worth, the correlation with IQ was even lower, at 0.16, meaning an explanatory power of about 2.5% (leaving 97.5% of the variance to be explained by non-IQ factors). In his words, “Since the statistical results are not distinguishable from zero, this suggests IQ test scores and net worth are not connected.” You can view a scatter plot of net worth vs. IQ here: http://www.flickr.com/photos/pke…

 

the non-relationship between financial worth and iq

from the journal intelligence

He also dives into about 30 other variables with interesting outcomes. For example, your net worth at age 28 has only a slight correlation of 0.13 with your net worth at 33-41. Self esteem has a correlation of 0.11 with net worth. Being US-born (as opposed to being an immigrant) has a correlation of negative 0.01 with net worth, while having siblings has a net worth correlation of -0.06; but don’t worry, those aren’t significantly different from zero either.

Ironically, you will need a reasonably high IQ just to understand what this is all telling you, so let me simply remind you of a story that I shared some time back:

I bumped into a friend of mine, who was voted “least likely to succeed” at high school. I was surprised to see him stepping out of a shiny, new, red Ferrari.

After we exchanged pleasantries, I congratulated him on his success, told him that I wrote about personal finance, and asked him how he made his money.

He said that he simply bought and sold stuff on a 3% margin, and that’s been enough to fund an amazing lifestyle and a huge real-estate portfolio to underpin his retirement.

Well, I was incredulous … only a 3% margin?! And, I told him so.

But, no, he said: “I really do work on a 3% margin: I buy stuff for $1 and sell it for $3. That’s 3%!”

As I said, whether or not this post makes any sense to you whatsoever, it will have absolutely no bearing on how wealthy you will become … thank goodness 😉

Getting the keys to the golden treasure chest …

golden keyI love it when I receive an e-mail that begins:

As much as I know that I should read some of your posts to better understand some of the questions I’m about to ask, I thought it may be faster to drop you a line.

Yep, this really is part of an e-mail that I received today …

Now, I don’t mind – in fact, I love – receiving e-mails from my readers.

And, as many of you will attest, I really do try and answer them all (often backing up my answers with a post, such as this one)!

But, there are so many online sources that provide great, basic information …

… so, why waste your time asking a multimillionaire how to tie up your shoelaces, when he’s willing to almost-literally (well, as good as) give you the keys to the golden treasure chest?

Instead, I heartily suggest you first try doing your own basic research then, by all means, ask me to help you fill in the blanks

[AJC: Google is an amazing tool for finding the answers to standard personal finance questions. Another great tool is the comment section to my posts, where one of the other readers may be able to help; and, I often respond to comments, as well]

… believe me, I’ll be more than happy to do so.

And, if you’ve put in the work ahead of time, what you’ll end up with is some information that you will not be able to find anywhere else.

That, I can promise!

Happy googling 🙂

 

Why you’re not rich yet …

I’ve been writing this blog for 5 years …

… and, I made $7m in 7 years.

So, if you’re an early reader, that means that you should have added around $1m to your net worth since you started reading this blog.

Have you?

If you haven’t, I’m guessing that it’s for this reason:

Screen Shot 2013-04-09 at 8.42.30 AM

[Source: http://www.quora.com/Life-Lessons/What-is-the-most-important-life-lesson-that-you-have-learned-up-to-this-point]

The things that I discuss in this blog aren’t for reading or intellectualizing [AJC: is that even a word?] …

… they are for doing.

If you don’t get out of your comfort zone and actually change the way that you go about things – and, I’m speaking financially, here, but this is equally valid for any aspect of your life that you wish to improve – then how can you expect your results to change?

As Albert Einstein said:

insanity

If what you’ve been doing hasn’t brought about the life-changing financial situation that you’ve been hoping for, then think about what you should be doing …

… and, just starting doing it.

How to do a personal budget …

4fWhilst it’s very tempting to go to your 4-F‘s (friends, family, financial planner a.k.a. ‘lifestyle planner’, financial advisor a.k.a. accountant) for advice on budgeting, I find that it’s quite a personal exercise.

In order to budget they – actually, you – have to ‘get’ … well … you.

Confused?

Let me give you an example:

I tried going to my accountant when I got back to Aus after a few years in the US, and here’s how the conversation went:

Him: Well, you could start off with a budget of $150k per year and see how you go
Me: Start by writing 4 things on your whiteboard:
1. Private Schooling for 2 children
2. One to two overseas trips per year
3. Invest in at least one startup per year
Him: OK, now what?
Me: Write $50k next to each of those
Him: OK, that’s $150k total
Me: That’s $150k per year, then you can add your $150k ‘starting budget’
Him: Oh shi …

The steps to perform the only kind of budget that really makes sense are as follows:

1. Do a One-Time ‘As Is’ Budget

I described this kind of budget in this post, and it truly is the one and only time that I have ever made a personal budget.

It consisted of everybody in my family (at the time, only my wife and me) carrying around a pencil and piece of paper for a whole month …

… and, writing down every single thing that we spent a penny or more on during that month, whether by cash, check, credit card, or electronic transfer.

At the end of the month, it was fairly easy to categorize the expenses and tally them up. Of course, we also needed to prorate in some expenses, such as insurance, that are paid one-time, and prorate out similar multi-month expenses that may have been paid during that month.

At the end of it, you should have a fairly accurate picture of what you are currently spending.

2. Create your ‘To Be’ Budget

After my earlier post, you should have a reasonable idea as to how to do a Top Down Approach To Investing analysis.

It consists of working out how much money you need in order to stop work (retire … early!) i.e. Your Number, and when you need it i.e. Your Date.

Then you can work backwards to find out how much compounding you need and what investment vehicles can get you there.

But, the missing step is working out how much starting capital you need …

… now, I can’t tell you that, as it depends upon what you have in mind.

But, the chances are – and, to me, this is the sole point of doing your budget anyway – you will need to find a way to increase your savings to build up that little investing war chest of yours.

And, the best way to do that, is to start by paying yourself twice!

[AJC: most of the ‘how to’ detail in this post has been covered in the earlier posts that I have listed, above … don’t be afraid … go click some links!]

Now, that’s how to do a personal budget 😉

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A dollar saved is a $100 earned …

A Dollar Saved

If you read this blog often enough, you may be forgiven if you leave with the impression that saving is not important.

Of course, you would be wrong!

It’s just that enough is written elsewhere about saving – too much – that little is left for me to say here.

So much, in fact, is written about saving, that you would also be forgiven for thinking that it’s the Holy Grail of Personal Finance.

It isn’t …

But, if your aim is to begin Life After Work (a.k.a. early full/part-retirement) as soon as possible, then every dollar that you save now has a far greater meaning than you may, at first think.

Firstly, though, you have to eradicate from your mind the idea that each dollar that you save is to be closeted in the warm confines of your bank, perhaps sitting shoulder to shoulder with your other dollars in a 5 year CD, locked up like sardines in a tin can waiting for the day that the lid will slowly curl back, only to be quickly consumed.

Equally, you have to eradicate from your mind that the “invisible dollars” scraped from the top of your paycheck and secreted in the mysterious 401k will somehow pop up just when needed to save your retirement, like an airbag in a crash …

No.

It’s clear – at least to me and my long-time readers – that if you need a Large Number / Soon Date (that means, retiring early with a large enough bankroll to happily sustain you until your family finally decides to park you in some nursing home for the remainder of your drool-filled days), then you need to actively manage your money.

Perhaps you need to start a business? Or, you should start rehabbing some houses to build your rental portfolio? Maybe, it’s time to plunge head-first back into that Blue Chip Lottery called the stock market?

Whatever your ‘investing poison’, it should be clear (perhaps with the aid of a few minutes and a simple online compound growth rate calculator) that you need to actively work to gain Very Large Compound Growth on your Net Worth.

So, the value of each dollar saved now is not the paltry 5% to 8% return that others expect, passively watching their CD’s and Index Funds match-racing with Inflation …

… rather, it’s the value of using those dollars to build a small war-chest (OK, a modest level of seed-capital, may be more apt for most of us) that allows you to get started on your business / real-estate / stock-based plan.

And, it is every dollar that you add, or reinvest instead of spending, that helps to fuel the flames of growth.

Once you start to see the value of saving though the spectacle of building a modest pool of funds-for-investing, you begin to realize that every dollar that you save today is really the same as $100 in a mere 10 years timeif invested in a business.

If you don’t believe me, here it is in black (well, blue) and white:

Screen Shot 2013-02-26 at 12.22.07 PM

So, slash those Coke Zero’s from your diet and start drinking tap water and, before you know it, you (too) will be a semi-retired multimillionaire, sitting on a beach in Maui …

Now, how do you feel about saving?
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