Tag Archives: Starting Out

A reader question …

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A reader asks:

… [I have] a question on your Blogpost “Advice for a new Multimillionaire” you stated something that grabbed me “Wealthy people spend capital. What they should be spending is income.”
My question is this… when you were first starting out how did you determine how much of your income to turn into capital and at what point did you decide to change that ratio.

This is an excellent question because it ties into the common notion of “paying yourself first” i.e. putting aside a set portion of your income into debt reduction and/or savings.

For a very long time, I didn’t save anything …

Then I discovered my Life’s Purpose (a very expensive one at that!) and realized that I would need to make $5 million in 5 years [AJC: I overachieved, although it took me a little longer than hoped, hence the title of this blog].

That made me rethink everything in my financial life, including starting to save.

So, I pumped as much as I could spare into buying mainly real-estate and a little in stocks and other investments … and, as my income increased, I pumped almost all of that increase into more investments.

Unfortunately, I didn’t have much of a strategy at that time beyond “save as much as I can”.

Now, I recommend that (if you are still earning income) you should pay yourself twice.

 

 

Strategy or Tactic?

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What’s the difference between a strategy and a tactic?

The obligatory post-padding dictionary definitions here and here 😉

But, let me give you a personal finance example or two to explain why it’s critical that you know the difference!

If you spend some time on google, you will find whole blogs dedicated to “financial strategies” such as:

– managing your credit cards,

– eliminating debt,

– paying yourself first,

– building an emergency fund,

… and, so on.

Each blogger (or author – there’s been whole books written on each subject) will explain how his financial strategy will turn your life around.

But, these are not strategies at all … they are tactics, a means to an unknown end.

I’ll explain why …

For each of these tactics (or any other), I can give you a perfectly valid argument for why you should do the exact opposite of what the author recommends!

Here are couple of examples:

– The False War On Debt: http://7million7years.com/2010/11/10/the-war-on-debt/

– The Zero Dollar Emergency Fund: http://7million7years.com/2010/08/08/the-zero-dollar-emergency-fund-2/

… and, if you go back through my blog [AJC: an easy way is to just search for the word “myth”] you will find counterpoints to all of these – and other – ‘recommended’ financial tactics.

The reason is that I have a personal financial strategic goal: I knew exactly where I wanted to be ($5 million), when I wanted to get there (5 years) and why.

[AJC: for an audacious goal, you need a very strong ‘why’ to help drive you there … it’s a very tough road, and you’ll need all the emotional ‘boost juice’ that you can get! This is one of my earliest posts; you should read it: http://7million7years.com/2008/03/07/fire-up-your-true-passion-hot-passion-drives-massive-action-massive-action-drives-incredible-results/].

With such a goal, I needed certain financial strategies to get there [AJC: I actually ended up with $7million in 7 years]; my strategy was:

– Increase my income dramatically (for me that was achieved by quickly growing my business),

– Invest as much of that income as possible in real-estate and stocks (instead of spending my business profits on bigger houses and faster cars).

Therefore, the tactics that I needed included:

– Take on as much debt as possible,

– Buy insurance and have lines of credit available (instead of having cash lying around idle) in case of emergency,

– Paying myself first, second, third and fourth (i.e. saving much more than 10% of my business-generated income),

– Obeying the 20% Rule.

So, next time you are looking for financial advice, take the trouble to understand your strategic goal: how much do you want? when do you want it? and, why?

If your goal is simply to retire with $1 million in 40 years, then go ahead and buy that Kindle and load it up with personal finance best-sellers!

However, if your goal is “large and soon” then you, too, will need to ignore most of the so-called “good financial advice” that is floating around so freely. That’s why I started writing this blog 🙂

 

 

Did I fail the Ultimate Money Test?

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Financial ‘personality tests’ are fun. I like doing them; you should try this one.

Unfortunately, the results don’t always speak for themselves:

[AJC: the star is my score; very average, as I am in (almost) all things in life. The $7m7y logo to the top-right is how my financial performance probably compares to 99%+ of the population]

Whilst this is a pretty good test – much better than many others that I have seen – it will only identify average performance and sub-/super-performance perhaps to one standard deviation (for those statisticians amongst you) …

… however, these tests can’t identify the factors that produce the outliers i.e. the ones (like me) who can make $7 million in 7 years.

If you want to produce (slightly) better than average financial performance over your lifetime, use this test – and others like it – to identify areas of weakness, typically:

– Not saving enough,

– Overspending,

– Credit Card Debt,

… and so on.

All valid reasons why you may be in financial trouble today, but certainly not highly relevant to your chances of retiring rich and retiring soon.

If you do want extraordinary financial performance, keep reading read this blog 😉

How to increase sales …

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If you’ve chosen ‘business’ as your primary vehicle to reach your own $7 million in 7years, then it’s best that you focus on increasing the amount of profit that you get to take home each day, week, month, and year.

To non-business readers this may sound like obvious advice, but you would be amazed at how many business owners focus on two numbers:

1. Sales Volume – usually expressed as “my business turned over $2.3 million last year”, and

2. Profit Margin – usually expressed as “my business makes 7% net profit, before tax”.

These may be key numbers for a large business – particularly if listed on a stock exchange, because the market punishes stocks that don’t grow their sales (sales $) fast enough, with comfortable margins (profit %) – however, for a small business …

… these are simply ‘vanity metrics’.

The only number that really counts is:

3. Net Profit After Tax – usually expressed as “Last year I took home from my business $738,000 in my pocket”

This is the number that you get to spend and / or invest (preferably the latter) each year, and the one number that you want to grow year-over-year.

So, when aspiring or new business owners ask me:

What is the best way to increase sales volume for a small business?

I say:

According to Jay Abraham (master marketer), there are only three ways to increase sales volume:

1. More customers (customer acquisition e.g. marketing, advertising, referrals),

2. Higher sales per customer (up-selling and cross-selling e.g. bundled offers),

3. More sales per customer (customer retention e.g. backend products)

You only need small improvements in each to make major improvements in your overall sales volume i.e. a 10% improvement in each area means a 33% increase in sales volume, overall.

An example strategy (for, say, an eCommerce site) that encompasses all three elements might be to:

1. Improve your Google search rankings and run some Adwords and FaceBook ad campaigns to bring in some new customers.

2. Create some bundled packages and add some special checkout offers to entice some of your customers to increase the size of their order.

3. Capture their e-mail addresses and send out special offers once every 6 weeks to encourage some repeat sales.

If you are very successful with your bundled, checkout, and e-mail discount offers, you might find that your % profit margin slips slightly, but that your overall sales volume increases significantly.

More importantly, the amount of net profit – i.e. cash that you get to take home in your pocket – goes up dramatically, meaning that you have a lot more cash available to invest in stocks and real-estate.

Then, it won’t be long before that $7 million in 7 years starts to look pretty achievable.

Before you can find the answer …

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Yes. Before you can find the right answer, you need to know the right question.

So it is with personal finance: most pf bloggers will answer a whole variety of questions:

– How can I become debt free?

– How can I pay off my credit cards?

– How can I save for retirement?

– How can I be more frugal?

BUT, these are not the questions that you need to be asking … at least, not at first.

No, there are only TWO questions that you need to ask. The first is in two parts, and it simply asks:

a) How much money do I need to support the life that I truly want to live? And, b) when do I want to begin?

I have a hypothesis about the typical answer to these questions, but the truth is that for every human being on this planet there is a different answer:

For some, it may be that they are happy doing what they are doing today, and are happy to keep doing it until they drop. For, them personal finance begins with maintaining their current lifestyle (which probably revolves around maintaining their employment) and staying healthy.

It probably also means learning all the lessons about personal finance that the blogosphere has to share: living below your means, eliminating debt, cutting up your credit cards, paying off your home, setting aside an emergency fund …

My second question – which I’ll come to in a moment – is moot for these lucky, satisfied, job-secure, working-class few.

But, my hypothesis is that most people are not satisfied with their current lifestyle … that you are not satisfied with your current lifestyle … that you:

– Want more time with your family,

– Want to indulge your hobbies and interests,

– Want to travel more,

– Want to be more relaxed and healthier,

… and, the list goes on.

And, I’ll wager that the limiting factor for you, right now, is money.

But, I’ll also bet that with a little thinking, you could come up with a salary that if a rich uncle were to pay it to you, would allow you to stop working full-time (or, altogether) and fund your ideal lifestyle.

I’ll also take a stab that ‘salary’ would bear little resemblance to your current salary.

But, if you can take an educated guess at what that ‘salary’ would need to be, I can tell you what your Number is (the answer to the first half of my first question) simply by telling you to multiply that amount by 20.

Let’s now assume that you have no rich uncle and have to amass this amount yourself …

How long will you give yourself to reach your goal so that you can begin to live the life you really want to live before you are too old to enjoy it?

I gave myself just 5 years to reach my Number of $5 million; in the end, I made $7 million in 7 years, starting $30k in debt.

[AJC: keep in mind that the longer you allow to reach your Number, the larger it will need to be because of the effects of inflation. For example, whatever Number you come up with today, you will need to add 50% if you aim to reach it in 10 years, and you will need to double it if you are prepared to wait 20 years … just to keep up with inflation.]

Which brings us to the second most important question in personal finance:

How am I going to get there?

For example, in order for me to reach a $5 million target in 5 years from a virtual standing start:

– I had to learn how to invest (I had no investments and no idea HOW to invest or WHAT to invest in)

– I had to turn my business around (it was breaking even, at best)

– I (more importantly, my family) had to sacrifice our existing life: we had to move overseas, my wife gave up her career, my children their friends, we all gave up our families for the 5 years we were away from home.

But, we all agreed that it would be worth it, because we had already answered the first question (both parts).

How about you?

 

Are polar bears left-handed?

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polar bear

Here’s some interesting ‘information’ that I picked up:

Apparently, all Polar Bears are left-handed.

Well, it seems that there are two types of people in this world: those who will now run off and propagate this ‘fact’ at trivia and pub nights, and those who will go and check their sources.

I’m in the latter … now, I’m not obsessive about it, so this information ‘seems’ right, but I’ll let a polarbearophile prove me right or wrong with these Polar Bear Myths:

– A hunting bear will cover its black nose while lying in wait for a seal.

Canadian biologist Ian Stirling has spent several thousand hours watching polar bears hunt. He has never seen one hide its nose, nor have other scientists.

– The great white bears are left-pawed.

Scientists observing the animals haven’t noticed a preference. In fact, polar bears seem to use their right and left paws equally.

– Polar bears use tools, including blocks of ice to kill their prey.

Scientist Ian Stirling believes that this assertion can be traced to unsuccessful hunts. After failing to catch a seal, a frustrated and angry polar bear may kick the snow, slap the ground — or hurl chunks of ice.

– A polar bear’s hollow hairs conduct ultraviolet light to its black skin, thus capturing energy.

This theory was tested—and disproved—by physicist Daniel Koon.

– The polar bear has a symbiotic relationship with the arctic fox, sharing its food in exchange for the fox’s warning system.

Not only is the bear-fox relationship not symbiotic, the little foxes often annoy the bears. An arctic fox will sometimes tease a bear by darting in to nip at its heels and will sometimes try to drive a bear off its prey.

– Orca whales prey on polar bears.

This has never been observed.

– Polar bears live at both poles.

Polar bears, of course, live only in the circumpolar North. They never encounter penguins, which do not live in the same regions as polar bears.

[AJC: Polar bears = Arctic and Greenland; Penguins = Antarctic, Australia and New Zealand. Get it??!!]

Source: http://www.polarbearsinternational.org/bear-facts/myths-and-misconceptions/

So?

Well, if this is how many myths polar bears can generate, imagine how many there are about our favorite subject: personal finance?!

Here are just some that I have tried to dispel on this site:

– The myth that entrepreneurs are driven by greed

– The myth that a high income equates to wealth

– The myth that diversification is one of the most important personal finance tools around

– The myth that retirement planning centers around replacing your income

… and, I have written many, many more (just type the word ‘myth’ into the search box at the top of this page).

What myths (personal finance or otherwise) have you recently had cause to question?

 

One man’s lean …

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I don’t know if you follow the startup scene, but you will see a huge movement to the concept of ‘lean startups’ as championed by Steve Blank and Eric Ries.

However, one man’s lean is just another man’s bootstrap.

That’s not exactly correct: bootstrapping a company generally means starting it without much / any outside finance and launching it on the smell of an oily rag.

For example, Guy Kawasaki famously started Truemors with just $12,107.09 …

… if you know Guy [AJC: he’s an early Apple employee; founder of garage.com one of the original Silicon Valley angel investing firms; and, author of a number of ‘must read’ business best-sellers including ‘Art Of The Start’] he could certainly afford to pay more to start his business … a lot more … he just chose not to 😉

On the other hand, creating a Lean Startup is more about talking to customers before spending money than simply looking for ways to cut costs. But, there’s nothing new in this … it ‘s just – or should be – common sense.

Let me explain with an example from my own business life …

When I first came up with the idea for my business – the one that I eventually ran in the USA, Australia, and New Zealand and subsequently sold for many millions – I had NO experience in the field.

It was just an idea that I got from working in a slightly-related industry (via my other business that I still own today).

However, rather than jump out and launch it, first I did a few things:

1. I found a business in the USA that had the same idea and had been ‘doing it’ for at least 10 years. I tracked them down and flew to the USA and met with the founder. He happily helped me understand the business.

That’s when I undertook my first ‘pivot’.

A pivot is another one of those sexy, new-fangled terms for something that every startup founder who eventually succeeds fully understands (and, those who fail have never worked out for themselves) that says: your first idea sucks.

It’s only once you TALK to clients and competitors that you will KNOW what to build. And, my original idea was not IT.

2. Aside from a new perspective on how to build my business idea, the second thing that I got from the US business’ founder was some industry data. But, it was for the USA.

Being an analytical type of guy, I decided to find out what these numbers would look like for Australia. Basically, they were to support our marketing message by providing backup industry data. Since there wasn’t any in Australia, I set out to adapt the US version by doing my own research.

Once I had this research in hand, I decided to try my hand at writing my own press release (I couldn’t afford a PR agency) and sent the 4 page report that I wrote out to a couple of business magazines.

By some miracle, I ended up with a full page article (including photo of a very young-looking AJC) in Australia’s most prestigious business weekly (think Forbes for Australia). I was quoted as “Australia’s Expert”, yet I hadn’t even handled one single transaction!

3. On the back of that article I was approached to produce a 2-day course on the subject matter of my report. The company was affiliated with a major Australian university (people attending my course received credits towards their professional accreditation) and I was paid $1,000 per course to deliver it! Yet, I still hadn’t handled even one transaction.

Those things not only proved that my idea – and, unique approach (as taught by my new US colleagues) would work in Australia, and that there was definitely market demand … it also brought me my first 5 ‘Fortune 500’ customers!

So, I had found an idea, researched the best way to implement the idea, promoted the idea, sought market feedback (i.e. was somebody prepared to pay money to learn about and/or use the idea), and signed up my first customers …

… only THEN did I set about to build the actual business: hire staff, build software, etc., etc..

Now, that is what Lean Startup really means 🙂

For new readers ….

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Every so often I like to do a post for new readers, because this isn’t your ordinary personal finance blog.

How so?

Well, the first thing you’ll notice is that there’s no advertising. In fact, no obvious way of monetizing the blog at all …

That’s an important clue. It either means: (a) I have no readers to bother monetizing, (b) I have no idea how to monetize a blog, (c) or I don’t need to monetize.

Given the title, it should be obvious that (c) is the correct answer.

In fact, the lack of monetization is one way that I try and ‘prove’ the basic premise of this blog … and, therein lies its greatest differentiator:

I am one of the vey few self-made multimillionaires to write about finance … and, one of a tiny group that actually made their money before they started writing.

For example, in one of Robert Kiyosaki’s books he states that his passive income from real-estate was about $100k per year when he wrote Rich Dad, Poor Dad (or, produced his game “cashflow quadrant”, whichever came first: book or game).

To be fair, let’s just take that to mean ‘net income’ … assuming that his net-income was between 5% and 10% of his real-estate portfolio, that made him a millionaire once – perhaps twice. Certainly impressive, but hardly enough to retire on.

On the other hand, I started $30k in debt and made $7 million in 7 years.

In fact, the highest cash balance that I had in my bank account before I started to write this blog was $10 million. And, that was on top of the other assets that I owned.

This makes my perspective very different to most personal finance bloggers who are all about frugality, debt reduction, paying yourself first …

… all admirable, even necessary, but none will make you rich.

And, herein lies the unique nature of this blog: I believe that you need to become relatively rich in order to retire reasonably well (and, early) these days. I believe that you need to build up a nest-egg of $x million in y years, where x > 2 and y < 10.

I filter my readers by the title of this blog: How To Make $7 Million In 7 Years.

So, when new readers, like Emily tell me:

Some people really don’t care about riches. Our neighbor and handyman loves being able to work at his own pace and not deal with employees. He will occasionally have a nephew or brother help him with a job, but he has no desire to rack up a ton of money and looks forward to continuing his trade until he dies.

I say:

True.

But, pushing aside obvious issues such as what does he do if he gets too sick to work (or, simply too sick OF work), my blog is aimed solely at those who DO want riches. ;)

 

The right time to speak to a professional …

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I have previously gone out on a limb to say that it’s very difficult (actually, I said impossible) to pay to get good commercial / investing advice.

Why?

Unlike a doctor, accountant, or attorney who can only give themselves so much self-help [AJC: unless the doctor’s a hypochondriac; the accountant’s an embezzler; or, the attorney’s a criminal]  …

… any “investment / business advisor” really worth listening to is probably making too much money for themselves to waste their time advising you on how to make money.

On the other hand, on rare occasions, you can find such high-quality advice:

– You can find a mentor; somebody who’s been there / done that and is willing to counsel you one-on-one

– You can buy stock in a company owned by such a person e.g. Berkshire Hathaway; by investing in BH (for example) you are ‘paying’ Warren Buffett to look after your wealth as a by-product of looking after his own.

WARNING: if you ever receive a bill from either of these types of people … run for the hills! They are not whom they seem 😉

But, there is a time when you DO need to seek – and, pay for – financial advice; to illustrate, here is an e-mail that I recently received:

Heh Adrian, do you think you can help and ole lady, who has been swindled more time that you can count, now unemployed (forced retirement), drowning in debt with but 1.1 million in property assets and 80K in bank that I am using to live off but it will only last 11 months with what I am paying out? I am 66 my husband (also retired) is 68.

It was our two financial advisors that got us into some of this trouble. We Lost our retirement investment through their recommendations. Even our other real estate investment (2 raw land and 1 condo) are now worth less than the remaining mortgages.

[My last] $80k is not just spending money; it is also supporting those mortgages, which I can’t sell due to the market.

You see, the time to pay for GOOD financial advice is when you think you might be in financial trouble (even if it was BAD financial advice that got you there, in the first place).

That’s why I don’t like to seek advice about WHERE to put my money.

But, this reader DEFINITELY needs to seek urgent professional financial advice!

She should get a recommendation from a friend to a fee-based advisor and/or accountant and just ask them to help her make some immediate decisions about her current structure: e.g. should she (can she) walk away from her mortgages? How much can she budget for the next 12 months in living expenses, and so on?

Then she’ll need to start learning (reading this blog is a good start) how to make real money, all over again …

What would you do in her situation?

You don’t need to become a barber to become rich …

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Darwin’s Money shares a story about his barber that shows how anybody can become rich; here’s a trimmed down version of Darwin’s assessment of how his barber became rich:

  • Real Estate Mogul – He owns multiple rental properties.  He started off small and kept rolling his profits into more and larger properties.
  • Business Savvy… and Patient – He knows the real estate market very well and he waits for deals to come around.  He’s patient.
  • Frugal – Just through some casual observations, it’s evident he’s a frugal guy.  He dresses modestly, he doesn’t take extravagant vacations, and he doesn’t drive a fancy car.  The combination of multiple streams of income and frugality make for a huge net worth in your later years.
  • Small Business Owner– Like all smart business owners, he gets other people to work for him and generate income and offset his costs.  Rather than just running a one man barbershop, he has a couple other barbers working there.

This looks likes an great observational report … I’m not certain that Darwin actually asked his barber how much money he has or how he made it?

I’ll do the reverse; I’ll tell you how I made my money … it’s much the same as the barber, but I think it’s the order that’s critical:

Business Savvy, Impatient, Small Business Owner – I started by becoming a small business owner, then trying to become business savvy. But, it was a slow path. When I finally hit rock bottom (business-wise) and found my Life’s Purpose, hence my Number, I suddenly became impatient. In fact, this was the turning point for me: as I accelerated my business growth, I accelerated my income, which is the first key to becoming rich.

Frugal – Now, this is where most high income earners go wrong: as their income increases, they become looser with their money. It should be quite the reverse: in dollar terms it’s OK to (in fact, you should) reward yourself by increasing your expenditure [slightly] in $ terms. But, and this is the secret, you should be decreasing your expenditure in % terms. While it’s fine and dandy to be frugal while you are still on a low and/or fixed income (i.e. job), it’s actually critical to become more frugal in relative terms as your income increases.

… and Patient Real-Estate Mogul – What to do with the rapidly increasing bank balance? Well, you could put it in mutual funds (but the fees are too high and/or the returns are too slow), stocks (but, they are not leveraged enough), or other businesses (but, you run the risk of spreading yourself too thin). For me, the best compromise between the leverage of a true business and a passive investment is – and remains – investment-grade real-estate. This is where being patient finally kicks in, because buy/hold real-estate is subject to the vagaries of the market. But, I had a primary source of growing income, so I didn’t need to touch my real-estate investment income until I finally began Life After Work.

So, my assessment is that Darwin is right, but the order is wrong.

Oh, I also think that you can substitute small business ownership for any high income potential (e.g. highly-paid professional; CxO-level employee; consultant; etc.) with the only catch being that you miss out on the potential capital gains that owning a business may offer – on the other hand, you may be able to negotiate yourself a nice golden parachute …

How well do you think this simple strategy could work for you?