Tag Archives: The Number

Why are you in business?

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For those of you who are in business (or aspire to be) let me ask you a straight-forward question:

Why are you (or why do you want to be) in business?

If your answer doesn’t at least include TO SELL OUT FOR $x [insert your favorite number greater than $1 million here] then you need to readjust your thinking.

You see, as Michael Gerber said in his famous (and required reading!) book The E-Myth Revisited your business should support your life … in other words, at some stage you probably want to get out of your business so that you can have your real life back (or, for the first time!).

The best way to get that life is to sell out (eventually) and retire (one day) … when and how are all subjects for future posts.

Or, you may decide to keep the business (perhaps running on autopilot, generating mountains of cash) but at least being CERTAIN that it COULD be sold anytime that you wanted for the amount that you needed to live the life of your dreams …

For now, it’s just sufficient to recognize that you should ALWAYS be thinking about your business in terms of “how much do I NEED to sell it for … and when”.

As I mentioned in a recent post, this will always be MORE than you think … and, sooner!

So, you had better get back to work!

Making Money 101 – Debt Free & Saving Money

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If making money is a journey, then it is one best broken up into three stages. The first stage is all about ‘getting your financial house in order’ …

… kind’a like packing your bags and getting everything ready for a long-journey before you even leave your house.

 This (first) stage happens to also be the one that is well covered by many books (Rich Dad Poor Dad, The Richest Man In Babylon, The Automatic Millionaire, and many more) and many blogs (I Will Teach You To Be Rich, Accumulating Wealth, The Simple Dollar, and many, many more).

I have read them all and I am sad to say that not one of these will actually teach you to be ‘rich’ … but, some will set the stage …

… and, this stage is really just about paying off debt and starting a sensible savings strategy. It’s also about learning the rules about what you should buy and when and how much you should spend and save.

It’s really about ‘clearing the decks’ to lay a solid foundation for future wealth; the earlier in your life that you start this stage the more ‘runway’ you will have for letting your financial wealth really take off later.

This stage is not fun!

The tools of this stage are debt repayment strategies, tricks to save a little extra money or earn a little extra income, paying yourself first, savings accounts, index funds, and dollar cost averaging … there ain’t no ‘rich’ going on here but, it’s a start …

Keep reading this blog as I will be sharing many of these rules and strategies for breezing through Making Money 101 in upcoming posts.

And, keep coming back to this post – I will be creating a special tab for it (and it’s future ‘sister’ posts, Making Money 201 and 301) on the home page.

Why does real-estate investing crush your 401k mutual funds?

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You know that you can’t just save your way to a fortune … right?!

So, what to do with that ‘extra’ cash that you manage to scrounge from time to time?

In a previous post , I pointed out that we are at a UNIQUE point in history.

For the FIRST TIME that I can recall BOTH money AND real-estate are cheap!!

If you save up a deposit (AFTER paying of any pesky credit card debt) and plonk it down on a rental property (or even your own house, if you ain’t got one yet) and LOCK IT IN for 30 years, how can you EVER go wrong?

If you do buy to live in it, eventually you will move on – just keep it as a rental FOR EVER.

I don’t know what will happen over the next year or so, but over 30 years it’s a no-brainer …

… your mortgage payments remain flat (you fixed them, remember?) …

… the value of the house doubles every 7 years or so (and, you will take advantage of this ‘spare’ equity, won’t you?) …

… and – here’s the kicker – your rents rise roughly in line with inflation … see how that compounds over 10, 20 or even 30 years to spin off income that will help you stop working!

And when you eventually do retire, the real-estate strategy STILL kicks your 401k’s butt …

This built-in inflation-protection makes real-estate a great adjunct or alternative to so-called safe retirement strategies such as the Grangaard Strategy and Worry-Free Investing (two of the best that I have come across).

Try doing any of that with your 401K or mutual fund!

Do you really care that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?

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I just received a hilarious e-mail in my in-box from Fidelity. It said: Did you know that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?*

*This hypothetical example assumes a participant earns $30,000 every year and defers 6% of his/her weekly pay ($34/week) at the beginning of every week for 20 years to a tax-deferred retirement account earning a 7% annual rate of return compounded weekly.”

Why is that funny? Well, in 20 years, $76,000 won’t even buy you a car!

That’s the problem with these “save your way to $1,000,000” advertisements (and, books) …

… while you certainly should put away at least 10% of your gross income (hopefully, it eventually comes to a lot more than $34 a week!), and

… while you may (and should try to at least) make it all the way to $1,000,000 in the bank (or CD’s or 401K) by the time you retire in 30 or 40 years:

(a) You will probably be too old and tired to enjoy it … hell, I’ve waited to 49 to retire and I already feel too old .. and

(b) $1,000,000 will buy you diddly squat because of a little thing called inflation.

Inflation is the thing that causes a  sixteen ounce loaf of bread to cost $0.19 in 1950 and $2.10 in 2008!

You don’t have to look too far to see this inflation-effect taken to it’s extreme: in Zimbabwe raging inflation is the thing that means even Z$750,000 isn’t enough to buy that $2 loaf of bread!

What does this mean if inflation averages, say, just 3%?

Let’s say that you are 25 years old today, aiming to save $1,000,000 by the time you retire … by the time you reach 65 and cash in your $1,000,000 ‘retirement check’ that would be the same as your grandfather retiring today on just $315,000 savings!

Does that sound like a lot? Let’s see …

$315,000 would give your grandfather just $15,000 a year to live on (allowing for small yearly ‘pay increases’ after 65, so that he could also keep up with inflation).

Would you want to retire on just $15,000 a year?

No?

Then the only choice that you have left is to try and get rich … quickly, slowly, any legal, safe and ethical way that you can …

Stick with me, and I’ll show you how! Really.

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Who needs more than $1,000,000?

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Almost everybody will need more than $1,000,000 to retire on … most a lot more!

Look at this excerpt from an excellent report (that I would highly recommend you spend the $5 bucks on) from Retire Early:

” Perhaps the most troubling aspect of safe withdrawal rates is that very few folks will have the financial assets required to [even bother] … While we’re blessed to live in a rich and prosperous country, only a tiny sliver of the US population can comfortably retire on their savings alone. “

In 1998 the median family income in the US was $38,885 so using a fairly safe inflation-adjusted withdrawal rate of 4% would require nearly $1 million in assets.

Since most folks acquire a bit more wealth as they age, about 5% of the 47-year-olds could boast $1 million nest eggs in 1998. “

That’s why the Retire Early report goes on to say:

” More worrisome, is the fact that few people with million dollar portfolios would be comfortable living on $40,000 per year. Most feel that level of wealth should support a more expansive lifestyle…

… it doesn’t, at least not safely.

There’s an old adage in wealth building, “The first million is the hardest. The second million usually comes a lot easier and quicker.”

Why?

To fund even a modest retirement, you’ll need a significant wad of cash. Prudent folks will begin saving aggressively today! “

Good advice indeed!

Are you Rich, yet?

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I like reading, and sometimes commenting on, other people’s blogs.

There are some really good ones out there (check out the Blogroll in the sidebar) … especially helpful to people still in the saving/debt cycle.

 One that I read is Pinyo’s very open blog; in one post he says:

 “From The Millionaire Next Door by Thomas Stanley and William Danko, you net worth should be:

Net worth (or Assets – Liabilities) = your age X your pre-tax income / 10

If you have twice that, you are indeed on your way to become wealthy! Stanley and Danko call them Prodigious Accumulator of Wealth or PAW

I did a quick calculation yesterday in my beat up 98 Ford Contour, and our net worth should be about $345,000 according to the formula. Right now, we have about $730,000 including home equity. This mean we are a pair of PAW!”

 That got me thinking … when was the last time that I actually bothered calculating my own Net Worth?

 Why even bother? 

You see, the problem with all these external measures is just that … they are external.

If that’s what you want, Networth IQ has a free tool that helps you measure your own Net Worth … and then compare it to others.

But, the real definition of wealth is how much YOU need to live off each year (indexed with inflation) for the ‘life of your dreams’ …

… your real dreams (hint: for most people that does not require a Ferrari and a Lear Jet).

Multiply that annual amount by 20 – 40 (to be 99% sure your money will last as long as you do) … if you already have that, congratulations, you are RICH!

Simple and accurate … for you.

Where do you stand?

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In a recent post, I shared one view (not mine) on what it takes to be considered rich …

…it’s $5 million !

Now, here is an article by Bankrate that brings that number right down to the other end of the scale …

Check out this table showing the spread of annual income:

Income level (percentile)

 Median income (rounded)
Level VI (90 to 100) $170,000
Level V (80 to 89.9) $99,000
Level IV (60 to 79.9) $65,000
Level III (40 to 59.9) $40,000
Level II (20 to 39.9) $24,000
Level I (less than 20) $10,000

Source: Before-Tax Family Income, 2001 Federal Reserve Board Survey 

First, let’s see where you stand in relation to this table?

If you aren’t in the top brackets (although, many of our readers are), it might be comforting to note (according to the Bankrate article): “if you are bringing in $40,000 a year, you’re doing better than half the households in America. Or, as a Washington think tank recently pointed out: If you’re a teacher married to a policeman, your combined household income puts you in the top 25 percent of all households in the nation.”

What intersted me most, was the relatively low income that it takes to be at the absolute middle of the top 10% of all income earners in the USA … ‘only’ $170,000.

This amount seems to correlate with a New York Times survey that said the ‘rich’ were bringing in between $100,000 and $200,000 per year …

… and, if you are like most Americans – earning less than $40,000 – this sounds like a king’s ransom … but, it’s not.

You see, there’s a big difference between what you might bring in as income and what some people call sustainable retirement income .

Take a look at what the Bankrate article tells us how much these same people currently have as their Net Worth:

Net worth (percentile)

 Median net worth (rounded)
Level VI (90 to 100) $833,600
Level V (80 to 89.9) $263,100
Level IV (60 to 79.9) $141,500
Level III (40 to 59.9) $62,500
Level II (20 to 39.9) $37,200
Level I (less than 20) $7,900

Source: Family Net Worth, 2001 Federal Reserve Board Survey 

Look at the top level, the same ‘rich’ people who earned $170,000 a year in the first table, only have a median net worth of $833,000 according to the second table.

Now, if you take this $833,000 and apply the ‘safe’ annual withdrawal rate of 4% as advocated by most misinformed financial advisors (for me, the safe withdrawal rate is more like 2.5% p.a.), it seems like these so-called ‘rich guys’ can only afford to spin off $33,000 a year.

Now, that’s less than the teacher and the fireman! So, what’s wrong?

Well, for a start there are actually very few really Rich people in this country – so few that there should be another category in BOTH of the above tables: the top 1% of the USA population by Net Worth and Annual Income. 

Secondly, the so-called ‘rich guys’ earning $170,000 are just like the rest of the working population working at a JOB … Just Over Broke.

When their job stops, they stop being ‘rich’ … period.

So, where do you stand?

Deal or No Deal

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Howie Mandel - Deal or No Deal 

Who would have thought that you could learn so much just by watching television? Maybe, my kids are right? … In their dreams!

A few nights ago I watched NBC’s Deal or No Deal, the Howie Mandel tour de force. It basically works by having people select one suitcase out of 26 offered then accepting or (usually) rejecting larger and larger offers by a mysterious ‘banker’ (just some guy in the control booth punching out a simple computer algorithm) as they eliminate suitcases.

If the contestant stays right to the end, they get keep whatever is in ‘their’ suitcase … a 1-in-26 chance of being $1,000,000, but, much more likely an amount from$0.01 to $500,000.

 Ho hum …. usually …

But, the episode I was lucky enough to witness was a SPECIAL episode, because they put out TEN (10) suitcases containing $1,000,000 (with the other 13 suitcases having smaller amounts … the largest suitcase without $1,000,000 in it now held just $10,000. In other words it was a close to 1.3 : 1 chance of winning a million for the contestant, in theory.

Why was this so special … besides the obvious?

Well, it allowed two or three chances to really see

(a) How the ‘banker’ stiffs the contestants on the ‘offers’, and

(b) How the clueless contestants make their decisions.

 Usually, it is very hard to work out the correct ‘odds’ when the ‘banker’ makes his offer and Howie sells a hill of beans to our hapless hero (i.e. the contestant) … just try this online version of the game to see what I mean …

But, last night, because there were so many $1,000,000 suitcases left at the end, there was (all approximately) one 1-in-4 chance offer, one 1-in-3 offer, and TWO 50/50 offers that even Blind Freddy could see.

Here were the odds and the ‘banker’ offers on each (now, these are approximate because I didn’t write them down and I didn’t record the show):

Offer 1: $170,000 for an (approx.) 25% chance of $1,000,000 being the chosen suitcase

Offer 2: $240,000 for an (approx.) 33% chance of $1,000,000 being the chosen suitcase

Offer 3: $330,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Offer 4: $380,000 for an (approx.) 50% chance of $1,000,000 being the chosen suitcase

Would you have accepted any of these offers?

To me, and my maths is probably off, but 33 cents in the dollar on a 50/50 chance sounds a bit light … and, I would not have accepted ANY of these offers.

Anybody who regularly chases 50% chances with only a potential 33% payout will VERY QUICKLY go broke!

What did the contestant do??? She ….

…. rejected the offers [big anticlimax here].

But, I think that she should have accepted ANY ONE of these offers … in fact, I was shocked when she didn’t accept offer 3. or 4. on my table above!

Why?

Because, we haven’t considered her investment and return. You see, she invested NOTHING (except some time) in the ‘deal’ yet was offered hugely large amounts to simply pick up and go home …

… life changing amounts … possibly more money that she is likely to save in her entire lifetime …definitely, 2, 3, or even 4 times the Net Worth of the typical American family!

What does all of this mean?

If you are investing relatively small amounts of your portfolio on investments, gambling, game shows – basically anything where you are chasing a commensurate return –  then pay close attention to the ‘odds’ (otherwise known as risk/reward).

But, if you are making the occasional BIG BETS – those all or nothing, bet the farm-type of gambles (such as changing careers, starting a business, etc.) – then you had better have a clear idea of how life changing the outcome will be.

… then, go for broke!