Tag Archives: wealth

The Myth Of Saving Your Way To Retirement …

Posted on by
12

Quite a while ago, I published a post that took a look at the supposed ‘power’ of saving …

… if you didn’t read it then, now would be a good time to ask yourself if you really care that weekly contributions of $34 could potentially grow to over $76,000 in 20 years, as proudly proclaimed by Fidelity?

One reader, Concojones, thinks that I have underestimated the ‘power of savings’:

Let’s not dismiss too quickly the good old save-your-way-to-retirement advice. Saving $15k/year for 40 years yields an expected $2.5M in today’s dollars (for what it’s worth: $10+M in retirement dollars), assuming your investments go up 5-6% per year after inflation.

Let’s not dismiss it too quickly, indeed. Retiring with $10 million in your pocket (albeit, ‘only’ worth $2.5 million in today’s purchasing power) is none too shabby.

The only problem that I can see – actually, the only FOUR problems that I can see are:

1. You have to be happy (well, ‘happy’ is a relative term) to work for 40 years,

2. You have to save $15k per year – easy at the end of 40 years, very hard at the beginning … and, even harder in the middle when you might be earning ‘only’ $50k (before tax) and have to put away 15% to 30% of your salary “with four hungry children and a crop in the field” [AJC: if you’re old enough to remember that Kenny Rogers song]

3. You have to average 8% to 10% return on your type of investment – but it has to be one that lets you add $15k annual increments for 40 years (which ties you to ‘standard’ products like, CD’s, bonds, stocks, and mutual funds).

4. You MUST be disciplined enough to stick to this simple strategy for the entire 40 years WITHOUT WAVERING in up/down markets: the Dalbar Study [ http://www.canadiancapitalist.com/investors-behaving-badly/ ] says a firm NO to being able to achieve anything like this rate of return.

So, great on a spreadsheet, but I wouldn’t want to bet my life on it 😉

Is there any Power in Intention?

Posted on by
10

We have been examining every possible way to make $7 Million in 7 Years [or, insert: Your Number by Your Date], so why not look at the ‘power’ of Intention a là The Secret?

That’s why we undertook our own highly scientific study that seems to show that manifesting millions actually produces a far worse result than our control group of readers:

– Steve Pavlina’s volunteer team ‘manifested’ an average of $3,500 each over 12 months, but

– The $7million7year control group produced an average of $18,500 each over 12 months.

Our control group did more than 5 times better than the manifesters!

Of course, it wasn’t really a “highly scientific study” (then again, neither was Steve Pavlina’s), so it’s no surprise that we have for and against views; for example, Kate is clearly in the ‘for’ camp:

I am a firm believer in intentions, and I like this one. Intentions guide the thought process and help me look for opportunities.

Whether there is, or isn’t, any Power in The Secret, I can’t help wondering, Kate, if it’s the intent or the doing (in this case: ” look[ing] for opportunities”) that produces the outcome for you?

So, in defining our Life’s Purpose, are we hoping that the outcome will manifest, or are we guiding our thought processes, or are we simply wasting our time?

In truth, I have no idea!

I remember an Indian guru who once said that if you think back over your life to all of the times that you planned for something, you will find many examples of each of the following:

– You planned and it worked out pretty much as planned

– You planned but it didn’t work out very much as planned

– You didn’t plan but things worked out just fine, anyway

– You didn’t plan but (not surprisingly) things didn’t turn out very well

You get my point …

…. so, why bother to PLAN our Life’s Purpose, our Number and Date, and our Growth Engine?

Again, I have no idea, but it worked out just fine for me, so it may work out just fine for you, too 🙂

And, if it’s the ‘intent’ (in planning our Life’s Purpose etc.) that produces the outcome, then all power to The Secret and its followers.

Although, I can’t help wondering:

Why wouldn’t I intend to make $7 Billion rather than a measly $7 million … and, why wait 7 years? 😉

A question I’m not sure I should answer …

Posted on by
5

Sometimes, I’m posed a question that I’m not sure that I should answer.

Case in point: Drew asked a question about my 7 Million Dollar Journey :

What were the terms of your first $1.25 million building purchase in 2001? You mentioned you had been in debt and had been losing money in your business until sometime in 2000 when you began to turn a profit. You had to have had a lot of profits quickly to put together the down payment for the building and be approved for a loan in such a short time period after years of money losing operations.

A straight-forward question, but the answer isn’t straight-forward … there’s a question of ethics and also a question of giving my readers potentially dangerous strategies.

After much uhmm’ing and aah’ing, I’ve decided that honesty is the best policy and to throw it to my readers to decide on the issues of ethics and danger:

As I mentioned, I had only recently become profitable, yet I managed to:

1. Stump up the 25% deposit on a $1.25 million commercial real-estate purchase,

2. Make the mortgage payments,

3. Make the additional lease payments on the $400k rehab and fit-out required.

Quite a tall order, so here’s how I managed it:

First, I made sure that I was profitable enough to:

i) Make the mortgage payments as and when due,

ii) Keep up with the lease payments,

iii) Pay back the deposit

Did you catch that?

Number (iii), I said: “Pay back the deposit”

You see, I actually borrowed 100%+ (i.e. the deposit, the mortgage set up fees, and the closing costs), but here is where the question of ethics and danger come into it …

… I borrowed the deposit and the closing costs from my customers!

And, here’s where ‘ethics’ come into the picture – my customers didn’t know!

You see, one of the easiest, best, but most dangerous ways to raise money, is to raise it from your customers.

How?

It’s actually quite simple: most businesses have large inventories (the goods that you hold in stock), accounts payable (money that you owe your suppliers) and accounts receivable (money that your customers owe you).

Any and all of these have value.

For example, it’s quite a normal/accepted practice to borrow against the value of your inventory; unfortunately, your bank may not want to take the risk, and your finance broker may only give you a little money at a high interest cost because of the perceived risk (after all, do they really know how to sell the inventory if you default?).

It’s also quite normal to leverage the value in your receivables by approaching a specialist finance company to ‘factor’ those debts: that means that instead of waiting 4 to 6 weeks for your customers to pay, the finance company may advance you up to 80% of the value of those debts (i.e. your total receivables). This is, in fact, one of the businesses that I still own.

But, there is a third method that requires no bank or finance company to get involved: it’s simply to pay your suppliers slower than your customers pay you!

My business, being a services business had no stock (so no inventory finance opportunity), and factoring can have the stigma of a weak business so I didn’t want to go that route with my ‘Fortune 500’ corporate clients.

But, I did have a very tight contract that saw my largest clients paying my invoices in just 7 days (really!), yet I was only obligated to pay my suppliers in 30 to 60 days. Further, my turnover was huge (compared to my fees) because of the nature of my business.

This meant, effectively, that I had a line of finance equal to 3 to 7 weeks of my sales/turnover!

That was more than enough to raise the deposit for the building.

OK, back to my initial reticence to share this with you:

1. In most businesses, the turnover isn’t large enough, and the negotiated spread between accounts payable/receivable large enough to raise very much cash,

2. I think it’s ethical to use these funds for your business (unless you have lead your customers to believe that these funds are to be, somehow, quarantined and/or held in trust), borderline to use them for the building that houses the business (for example is the building going to be bought in the name of the business, or in a separate entity as I would normally recommend?), and unethical to use them for personal use / purchases outside the business … but, ethics is in the eye of the beholder, so YOU tell me what you think?!

3. I think it’s dangerous because your business MUST have the necessary solvency (not just profitability) to not only keep up with the payments (both mortgage and lease) as well as to ‘buy back’ the deposit over a relatively short period of time (in my case, 12 to 18 months).

So, now you are armed with a powerful – and dangerous – business financing tool. Use it wisely … and, sparingly!

How much home should I buy?

Posted on by
3

A reader who works with RE, Whittier Homes, says:

I’m in the camp that you don’t leave too much equity tied up in the walls of a house. That being said there is a risk factor or a comfort zone that every investor has to know. The bottom line is you don’t want to get over leverage and get caught on the short end of a declining market.

Home equity is simply what your home is valued at (today) less what you still owe on it (today).

This leads me to think that I’ve never said … and, nobody’s ever asked: How much equity should I have in my own home?

Well, there’s a reason:

I have NOTHING to say about how much equity – as a % of your house value – and, EVERYTHING to say about how much equity – as a % of your Net Worth – you should have tied up in your own home.

In other words, your equity is a function of:

– How much your house costs to buy

– How much it increases in value over time

– How much deposit you have available now

– How much you choose to put in / take out of the value of your house over time

I have no advice as to how much you should spend on your house in the first place, that’s your business not mine 🙂

But, I do have some guidelines that pretty much help to answer the “how much home should I buy?” question (other than for your first home), albeit obliquely:

1. The 20% Rule ensures that you are always investing at least 75% of your entire Net Worth (after allowing for another 5% to be spent on ‘stuff’),

2. The 25% Income Rule ensures that if you do decide to borrow money to buy a home, that you do not overcommit your cashflow,

3. The Cash Cascade makes sure that if you do have a mortgage, that you don’t pay it off too quickly if better investing opportunities abound.

Put these ‘rules’ into practice and you won’t go too far wrong, when it comes to your own home …

10 Paths To Wealth?

Posted on by
7

Ken Fisher is a well-known money manager – I know, because I’ve had to endure phone call after phone call when I stupidly signed up for one of his ‘free’ reports!

However, watching this video (and, maybe even buying his book) seems like a fairly non-threatening way to learn some of his wisdom.

Personally, I think you need to mix’n’match some of these methods to have a bats-chance-in-hades of making your Large Number / Soon Date.

On the other hand, I’m all for marrying into wealth, but who’d have me? 🙂

I’m Angry!

Posted on by
13

I have created a new Facebook ‘fan page’ for this blog; it would be GREAT if as many of my readers as can be bothered, clicked on this Facebook widget then clicked the “Like” button on the Welcome! page that it will direct you to.

Oh, you can also sign up for the new $7 Million 7 Years monthly newsletter … these two simple steps will keep you in touch with EVERYTHING that I am doing both on and off this blog AND give you access to lots of free stuff that I don’t get the space to cover on this blog.

Once you’ve done that, come back here to find out why I’m angry …
__________________________
It’s funny, I’m an enthusiastic-about-life-and-all-of-its-opportunities type of guy with a fun/happy demeanour …

… yet, apparently, I am angry.

In fact, I am angry … it’s just that I didn’t realize it!

Let me explain …

I’m exploring the options of publishing v self-publishing our first book (‘our’ as in me and Debbie, my co-author), and John T Reed (who makes a VERY good financial argument for self-publishing) says [emphasis per John T Reed’s original text]:

I once read that all good non-fiction books are written in anger. At first I was taken aback by that, then I realized it was true.

Think about it. There are generally already a bunch of books on any topic that you would choose. If the subject has been covered adequately and correctly, why write a book about it?

If you do write a book,you are implicitly saying that the world needs this book. Implicit in that is the accusation that the existing books are either incorrect or incomplete or both.

Think about it, indeed!

Look at how many books Amazon lists for the topics that I write about:

Finance – 23,637

Investing – 19,615

Personal Finance – 36,613

Real-Estate – 9,716

Small Business & Entrepreneurship – 23,172

That’s a helluvalottabooks 🙂

Now, take a look at how many personal finance blogs there are:

– Technorati lists 586 for finance, 163 for real-estate, and 1581 for small business

– DMOZ (the open directory project) lists 761 for personal finance, alone!

– But, I think the real number is in the tens of thousands, I just don’t know how to find them all!

My point being, why would I – of all people – write a personal finance book and blog? Remember, I don’t need the money!

When I read John T Reed’s comments, I knew he was right … I am angry!

I’m angry at all of those personal finance authors and bloggers who have absolutely no idea what they are talking about … particularly the ones who purport to tell you their methods to make you rich.

Their sub-text (weakly disguised as ‘advice’) really says: “start as poor as your audience, so start a blog, write a book and make millions for giving others advice on some THEORY of how to make millions”.

And, the frugal authors and bloggers of this world have a lot to answer for; convincing people to sign up to a life of self-imposed slavery for a retirement that’s only a little better than ‘do nothing’.

So, this does sound like I am angry …

… but, it doesn’t make me wrong 😉

What price security?

Posted on by
20

How do you put a price on security?

Well, in this post I’m going to try and do exactly that but, first MoneyMonk asks the question that all people have at the back of their minds:

As a woman, I just want to say that “to each it’s own” Women love security.

If you are not a person that love investing, and you have the cash to pay off your mortgage (considering that you plan to live their forever)

Adrian- not everyone is business oriented. Some just don’t have the business acumen to run a business. Therefore, that group SHOULD pay off the mortgage

This is the dream of home ownership: own your home outright and you have nothing to worry about.

But, do you?

Let’s say that you own a $150,000 home today … what will it be worth in 30 year’s time?

About the same as a $150,000 home today, but in future dollars!

So, let me ask you; when your kids grow up, move out, and you retire, what are you going to move into?

Probably the same, or another $150,000 home … a smaller condo or newer townhouse that will probably not give you too much change, if any, from $150,000, a retirement home that (with fees) will cost you far more than $150,000.

Your home is not your financial security; your realizable net worth is. Put it another way: you can’t live off your home, but you can live off your cash and investments.

True security comes from knowing that you can pay your monthly bills for the rest of your life, without needing to work or get handouts from friends, relatives, or the government, through up markets and down (war, pestilence, and other Acts of God aside).

I hope that you see my point …

So, let’s look at two scenarios for a $150,000 house that you just bought and locked in a 30 year fixed rate loan at 6% (a bit higher than today’s actual rates, which are still between 5% and 5.5%):

1. You pay off your mortgage early

Note: We will assume that you are allowed to pay off as little / much as you like on your loan (not the case with some fixed rate loans in the USA, and certainly not the case with most fixed rate loans in most other countries!) because it makes the math simpler.

This is great, because you ‘earn’ 6% on your money [AJC: remember, a dollar saved – in interest – is the same as a dollar earned], better yet:

– The amount you ‘earn’ is guaranteed; every year that you are no longer paying that 6% loan, you are in effect earning 6% … simple and guaranteed!

– Unlike an investment that pays you 6%, there is no tax to be paid on the 6% mortgage that you save (although, there can be a negative benefit of losing the tax deduction on your home loan interest … but, I’m trying to keep this simple), so it’s more like earning 7.5% – 8.5% (depending on your tax rate) in any other investment.

– Let’s say that you plonk the entire $150k down in one hit, you save the entire $175k INTEREST (yes, a house that you buy for $150k in 2010 will have cost you $325k, just in principal and interest, by the time you have paid off the 30 year loan in 2040).

2. You do not pay off your mortgage early

Note: Paying the loan off slower will, naturally, save you something greater than $0 and less than $175,000 … but, is too hard to calculate, here, so we will continue to use the assumption that somehow, you were able to pay that entire $150k loan off in one hit.

Well, it’s a fairly simple calculation then, isn’t it: what can you invest $150,000 in that will return more than $175,000? Let’s run some numbers and see:

Business: If Michael Masterson is right, and we gain 50% (or more) from our own business, then after 30 years you would have earned $29 Billion on your $150k ‘seed capital’.

But, MoneyMonk is right: there is extreme risk and skill involved in being successful in business … just a shame the potential reward is so low 😉

[AJC: just a tad more than the $175k interest that you would have saved if you used the money to pay off your mortgage instead of starting a business]

Real-Estate and Stocks: Again, if Michael Masterson is right, and we gain 30% by investing in a mixture of buy/hold real-estate and stocks (naturally, continually reinvesting the rents and dividends), then after 30 years you would have $392 million …

… if that sounds a lot, remember that Warren Buffett built up a $40 Billion+ fortune over 40 years at not much more than 21% compounded.

Stocks: I agree with Michael Masterson, that if you buy stock in just a few good businesses when they are are going cheap (as the market does from time to time) and wait 30 years, you should have no trouble getting a 15% compounded (pre-tax) return so, after 30 years you would have nearly 10 million.

But, all of this has some risk / skill associated with it … so, maybe paying off the mortgage and snaffling that $175k is still the way to go for all of those risk averse people [AJC: Like me. True!] out there?

But, wait, what if we just do the ‘no brainer’ thing and plonk that entire $150k in a set-and-forget-low-cost-Index-Fund?

Here’s the good news: paying off your mortgage is a 30 year investment (you have forgone 30 years of being locked in to a loan and paying 6% interest year in, year out), so it’s only fair that we buy $150k of Index Fund units and don’t even look at our portfolio for 30 years, right?

Well, that’s an ideal strategy – THE ideal strategy – for Boglehead set-and-forget investors! So …

Index Funds: Over 30 years, the markets (hence the lowest cost Index Funds) have averaged something more than 12% – set and forget (!) – so, after 30 years you would still gain close to $3.5 million!

But, wait … we’re all about security here: you can’t live off averages, right? What happens if there’s another crash like 1929 and 2008 the day after I plonk my entire $150k into an Index Fund?

Well, you lose half your money immediately 🙁

But, we don’t care what happens immediately, this is a 30 year set-and-forget plan … and, there has been NO 30 year period where the stock market hasn’t returned AT LEAST 8%.

Now, isn’t 8% (since we have to pay tax on it) exactly the same as the equivalent after-tax 6% mortgage (give or take 0.5%)?

Yes!

The lowest possible return that we can get with any reasonable investment strategy that we can come up with is exactly the same as the best possible return that we can get by paying off our mortgage early.

Now, isn’t that interesting?

Home Business Success?

Posted on by
5

Andee Sellman, friend and occasional $7million7years contributor, refers to the Small Business Success Index study saying:

There are about 6.6 million home based businesses that generate at least 50% of the owner’s household income.

Now, assuming that home based businesses have either no – or very few – staff, I think that means that there are about 18 million home based businesses that are generating less then half the owner’s household income.

Now, think about this: the chances are that the whole household has a maximum of two full-time salaries – IF the owner of the small business runs it purely after hours …

… so, most home based businesses are making less than one full-time salary.

Let’s look at the most successful 6 million of these businesses: what are the chances that many of them are doing much better than “50% of the owner’s household income” – or, a maximum of one full-time wage (but, probably, much less!)?

Not much, I would think.

Now, there are exceptions: if you say that Facebook was a home-based business when it started … or, Apple … or, Google. But, most are just small online/offline concerns … low cost, low revenue, low return.

Chances are, you aren’t going to earn a lot from it, or sell it for a lot.

So, what’s the value of starting a home based business?

Well, unless you’re one of the very lucky ones, it’s in what you do with:

1. What you earn: this is extra income (assuming that you just haven’t thrown your old job in until it replaces your income … plus more) that you SHOULD be investing 100% of (some back into the business … some into outside investments, RE is ideal because the extra business cashflow can help fund any shortfall in the first few years), and

2. What you learn: there is no better way to learn about business than by running a business (preferably, with the resources of sites like Andee’s to help you); sure, my son made a couple of grand between the ages of 12 and 14 running his little eBay business from home … but, the lessons that he learned – not just business lessons, but Life lessons – will become priceless!

No, Michael Masterson’s 50%+ compound growth rate is reserved for businesses that can grow rapidly, have intellectual property that is both desired and protected, and have owners who are inspired by their Life’s Purpose to reach extraordinary heights …

… but, even the most humble home-based business can be a huge turning point in your financial life.

I highly recommend that you give it a go … and, keep trying until you find The One that helps you reach your Number 🙂

When is cheap debt expensive?

Posted on by
10

Dave Ramsey says to use Gazelle Intensity to pay down all debt, before even thinking about investing. Yet, would he consider running his (rather large) business without an overdraft, or leased cars, equipment, and/or furniture?

I doubt it … he needs to preserve his capital, and put it to better use by growing his business investment (more stock; better marketing; more staff; more training; etc.; etc.)

So, why should personal finance be any different?!

But, Dave Ramsey would argue to pay off all debt, whether it is ‘good’ (e.g. produces income) or ‘bad’ (e.g. credit card loans for consumer goods, like that LCD TV that you just bought).

If you are a regular reader of this blog, by now you will know that my view differs markedly; I say:

Once the debt is incurred, it is no longer ‘good’ or ‘bad’ … it becomes either ‘cheap’ or ‘expensive’.

And, as I mentioned in a previous post …

You should only pay off your ‘expensive’ debt!

What makes a debt ‘cheap’ or ‘expensive’? What is the yardstick interest rate? 2%? 5%? 11%? 19%?

Any, all, or none of the above. You see, it’s relative:

– Debt only becomes ‘cheap’ when you have something that produces a better after-tax return [AJC: probably, a MUCH better return to account for the fact that paying off the debt is a GUARANTEED return].

– Otherwise, by default, all debt becomes ‘expensive’ and you should do as Dave Ramsey suggests.

Fortunately, finding suitable investments to offset the need to pay off relatively low-cost debts such as student loans and home mortgages is as easy as finding some great value stocks, a cashflow positive real-estate investment or three, or a small business to buy or begin …

… provided that these are things that you are:

1. Passionate about,

2. Educated in, and

3. Convinced are needed in order to achieve your Required Annual Compound Growth Rate to reach your Number.

I recommend that – if you are pursuing a Large Number / Soon Date – you must pursue your investments with Cheetah Focus … a great example is provided by Eric [AJC: emphasis added]:

I graduated college 2008 from the University of Texas. worked at an oil and gas company in Houston named Flour Daniels. they had massive lay offs in 2009. I worked for a year and managed to save well over 50% of my pay. I reinvested it all into the stock market. I set up a regular investment account and a Roth IRA.

To date my Reg. Stock account is up 30%+ and my Roth IRA is up over 60%. and I still have another month to increase my yearly gains for it

I have had no prior experience with investing/trading. I played safer stocks/ETFs .. Bought on dips and sold when it would pop.

Oh and I also took out a loan from Citi bank.. who sent me a 10,000 loan offer in the mail with a 2% interest for the life of the loan. LOL.. I had to take it. I threw that into stocks also.

Any how my point is. If i had focused on paying off my $28,000 college debt I would have missed all of last year gains. I just made it a goal to beat my debt interest. and I did!

Currently I have enough money to pay off all my debt. but of course i’m not going to do it. I took out 2K from my portfolio to invest in an online woman’s clothing site. We have great style at affordable prices. we are not making huge profits.. but we are selling and that is encouraging.

Did you notice in the image (above) why the gazelle has such intensity?

It’s because the cheetah is coming up fast and furious on his tail 😉