How to become financially secure …

When I moved to the USA, I was surprised to see so many old people (old, in the sense that they seemed well over ‘retirement age’) working the checkouts at supermarkets.

I was told that it’s because they need the employer health benefits.

But, soon (if not already) it will simply be because they need the money.

Right now, according to Wells Fargo, 1 in 3 Americans between the ages of 25 and 75 believe that they will be working until they are 80 years old. Not because they want to, but because they believe they will need to.

And, they are correct.

Unless you can live on just 50% of your current paycheck, so that you can save at least 50% of your income for the next 17 years (or, save at least 25% of your income, if you’re happy relying on Social Security for the rest of your life), you will simply not be able to afford to retire.

And, there’s yet another problem with these ‘save your way to wealth’ strategies: they all assume that you’re actually happy living on your current after-savings income. Well, are you?

I didn’t think so 😉

That’s why I decided to fly in the face of commonly-accepted personal finance ‘wisdom’ and start blogging here …

I think that true personal financial planning starts with just two questions that you need to answer very, very honestly and carefully because they will set your whole Financial – indeed Life – Strategy from this point on:

1. How much income do you want when you begin life after work?

2. When do you want to begin life after work?

Together, these two answers will then direct you to everything else that you need to know:

How much do you need before you can retire?

This is called your Number, and is very easy to work out in two simple steps:

STEP 1 – Double your answer to the first question for every 20 years in your answer to the second question.

Let’s say that you decided that you want $25,000 a year income (in today’s dollars) in 30 years time. You would double that to account for the first 20 years ($50,000), and add another 50% for the next 10 years ($75,000).

This is simply to help you account for inflation …

If inflation averages just 4% for the next 30 years, you will need to earn $75,000 a year in retirement just to maintain the same spending power as $25,000 today!

[AJC: because everything will cost 3 times as much by 2032. Imagine: gas at $10.50 a gallon; $7.50 for a loaf of bread; etc.].

STEP 2 – Multiply by 20. Multiply your Step 1 answer by 20.

For example, if your inflated income goal was $75,000 p.a. in 30 years time, then your Number would be $1,500,000.

This is how much you would need to have saved up over 30 years, so that – in theory – you can retire on your own resources (for example, you would not need to rely on Social Security).

But, I’m guessing that even if you are earning $25,000 p.a. today, that this is not the amount you chose for Question 1.

I’m guessing that how much you really want to earn (i.e. the minimum amount that you feel would make you happy, healthy, and financially secure) is more … probably a lot more … than you are earning today.

Worse, you probably won’t want to wait 30 years to get there. I’m guessing that you want to stop needing to work (as opposed to having the financial flexibility to choose if/when you decide to work) sooner … probably a lot sooner.

[AJC: this is not true for everybody; there are plenty of people who enjoy what they’re doing so much that they cannot imagine doing anything else. This was me … until I did reach my Number and found out how much happier I could be choosing what I do – and don’t – want to work on each day.]

Plug your numbers into the above two steps and let me know (via the comments) what you come up with?

How will you get your Number?

To give you an example, I decided that my Number was $5 million and my Date (i.e. when I wanted to get there) was 5 years.

This was fairly simple to calculate: I decided that I needed $250,000 p.a. passive income (i.e. without needing to work). Since it was in just 5 years time, I didn’t bother adjusting for inflation (I could have added ~25%). Instead, I just multiplied by 20 … $5 million.

It’s pretty clear that I couldn’t save $5 million in just 5 years (after all, at that time I was still $30,000 in debt). And, it’s likely that you won’t be able to either.

[Hint: You would need to be able to save the entire amount of your desired income (Question 1.) each year for 17 years, earning at least 8% (after tax), in order to replace it in retirement.]

So, if you can’t save your way to wealth, what can you do?

It’s simple: you do two things:

1. Increase your income

There are lots of ways to do this: get a promotion; send your spouse back to work; get a second job; and so on. Necessity is the mother of invention … if you are really motivated, you will find a way.

However, my current favorite method is to start a part-time business. Why?

Well, it can grow in an unlimited fashion; it could even replace your primary income; it can create strong cashflow; if you pick the right kind of business, it can be started on your kitchen table.

My current favorite kind of part-time business is one that you can start online. Why?

Well, you don’t need much money and you probably don’t need any staff (at least, to begin). And, an online business can be so cheap to start that if you fail (and, let’s face it, you probably will) you can quickly and easily start another, and another, and …

2. Invest it all

It’s all well and good to increase your income and save as much of it (and, your current income) as possible. But, if inflation is running at just 2% (the last time I checked, it was 1.99%), and all you can get on your CD’s is 1% (Bankrate points to rates around 1.05%), then you’ve lost the ‘inflation race’ even before you’ve started.

It should be clear that it’s not enough to earn more, and save more …

… you also need to earn more on the money you save.

How much more?

Well, that’s when you need to plug some numbers into an online ‘savings goal’ calculator:

Here’s how to make it work; plug in:

(i) How much money are you starting with?

Do you have any money in your current savings that you can tap into: CD’s; index funds; 401k; emergency fund; etc.)? In my example, even though I started $30,000 in debt, I plugged in $1,000 as the calculator doesn’t work very well with negative numbers. I could just as easily have plugged in $0, but I chose $1,000.

(ii) How much can you put aside to invest each month?

This is your current rate of savings outside of your 401k + the entire income from your side business.

This is difficult, because the amount that you might generate in monthly income will probably change over time. There’s not much you can do about this (without finding a much more sophisticated calculator or spreadsheet), so I just chose an average of $10,000 a month (or $120,000 a year) as a nice, round-figure estimate of my expected savings (driven largely by the expected profits of my part-time business).

(iii) What is your Date?

This is how long you have until you need to begin tapping into your money. I chose 5 years.

(iv) What is your Number?

This is how large your investment account needs to grow. So, I plugged in my Number of  $5,000,000 and my Date of 5 years (as my end date).

Then, here’s where it gets fun: I started playing with Interest Rates to find the rough point where the calculator said that I could reach my goal (i.e. 70%). If I plugged in any figure less than 70% the calculator showed a message that said: “Oops. Your savings plan goes into the red.” … so, this was just trial and error to find the lowest number that didn’t produce this message. For me (in 5% increments) the answer came to an annual ‘interest rate’ of 70% .

That’s it!

How do I know that this works? Well, I have the benefit of hindsight 😉

But, that’s not the point: the point is to show you:

a) Not only do you need to save (a lot) more than you ever thought reasonable, but

b) You also may need to earn (a lot) more on your investments than is possible with CD’s (<1% annual return, after tax) or index funds (<8% annual return, after tax).

So, this leads us to the last piece of the puzzle:

What should you invest in?

Most people invest in whatever gives them the greatest possible return (they are the risk-takers), whatever their family/friends/advisers recommend (they are the followers), or whatever they understand (they are people of habit).

Instead, I want you to consider a totally new way to choose your investments: invest in whatever investment produces the lowest rate of return that you require with the minimum risk.

This usually means comparing the ‘interest rate’ that you came up with when using the online calculator against this table:

[Source: 7 Years To 7 Figures by Michael Masterson]

So, at a 70% required interest rate, I had no choice but to start my own business (just as well, because I was already in one); but, I supplemented by heavily investing in real-estate and some stocks.

On the other hand, you may be lucky enough (because your Number is small enough; your date long enough; and/or the amount you can save monthly is large enough) to require a much lower interest rate …

… if that’s the case, you may be able to stick with your CD or Index Fund investing strategy. But, the chances are that you will need to push the envelope … a lot.

I promised in my last post that I would close this three-part series with my “strategies for real financial security”.

In this post, I showed you that the Number that means financial security is different for everybody, but I also showed you a very quick way to find yours.

That’s the starting point.

Then I showed you what kind of investment strategies you would need to follow, if you want to have any real chance of reaching your Number.

Now, it’s up to you to begin putting in place your plans to get there, starting with learning how to invest in stocks, real-estate, and/or small business.

For my part, I decided to start writing this blog (and, now my book) to help those whose required growth rate / interest rate is at the higher end of the spectrum, simply because most other blogs focus on those at the lower end.

If your required growth rate is high, as I suspect it may be, you have a huge job ahead of you

… but, if you don’t make the effort now, go back and read these three posts and you’ll quickly realize that you’ll have an even bigger problem later.

So, keep reading, keep commenting, and keep e-mailing me with questions [ajc AT 7million7years DOT com],  and I’ll do my very best to help!


Why cookie-cutter personal finance does not work

Marie (speaker, blogger, investor) agrees with my simple plan for wealth creation:

I have to go with your 2 step plan. All my years in PF it seem to work best than the cookie cutter approach.

The ‘cookie cutter’ approach that Marie refers to are the approaches that I was talking about in my provocatively titled guest post at Budgets Are $exy: “Why Most Personal Finance Blogs Are B.S.“, and includes: paying off all debt; maintaining an emergency fund; frugality and expense-cutting; paying yourself first via max’ing out your 401k; and, so on.

[AJC: To be fair, I was asked to write something ‘feisty’ so you should head on over and read the article (and the comments) now …]

To prove any personal finance strategy you need to have an objective against which you must measure the outcome.

To me, that goal must be: financial freedom.

But, what does ‘financial freedom’ mean?

That depends entirely on you …

If your goal is to simply replace your income, say, within 20 years, and you can train yourself – through frugality – to live on a lower income than your peers then it is possible to save your way to wealth (simply defined as financial freedom, or having enough passive income to replace your then-current income from employment).

For example, MB writes about her 12 year plan to replacing her and her husband’s dual working income:

After a couple years of full-time work I started to wonder, how can anyone possibly tolerate doing this for 40 whole years?!

[Now] our number is somewhere in the $1-2M range depending on how many kids we end up having (if any). But, then again, we are saving >50% of our salaries.

By ‘training’ themselves to live on only 50% of their salaries – or 1/4 to a 1/2 less than their peers – MB and her husband accomplish two purposes:

1. They save a lot more than most people,

2. They live on a lot less than most people

So … they need a much smaller Number than most people and they’ll be able to reach that number much, much sooner than most people.

According to my calculations, if you start off earning, say, a combined $50k p.a. and are prepared to live off just $25k of that (assuming your combined salaries increase by 3% per year, and you get a very hefty 8% after-tax return on your savings) you will be able to retire on a combined $40k passive income in not the 12 years that MB is hoping for, but a still-healthy 17 years time.

The catch is that just 4% inflation would mean that you really have the earning power of a little less than $25k p.a. today.

In other words, to actually make this cookie cutter personal finance plan work, you need to be debt-free and be able to live on just half your current annual income for your whole life.

Is this you?

If not, I recommend that you spend a little time with an online retirement savings calculator and work out what income you would need in today’s dollars (i.e. assume you retire today) …

… then, leave a comment and – in my next post – I’ll explain what that means and what you need to do to get there.



How does being rich change your life?

Buying islands aside, how does being rich change your life?

Paul Graham, not depicted in the photo to the left, the founder of Y Combinator [AJC: the incubator for famous internet startups such as Drop Box and AirBnB …. if you have to ask what these are, you are over 30] says this (when asked “how did your life change after FU money?”):

There are some things that change. For example, you learn to distinguish problems that can be solved with money from those that can’t. You can buy your way out of a lot of schleps.

Life doesn’t get an order of magnitude more enjoyable, because you still can’t buy your way out of the most serious types of problems, but a lot of annoyances are removed.

The best part is what I thought would be the best part: not having to worry about money. Before Viaweb I’d been living pretty hand to mouth, doing occasional consulting. It felt like treading water, in the sense that while it wasn’t hard, I knew in the back of my mind that I’d drown if I stopped. Getting rich felt like reaching the shore.

One thing you learn when you get rich, though, is how few of your problems were caused by not being rich. When you can do whatever you want, you get a variant of the terror induced by the proverbial blank page. There are a lot of people who think the thing stopping them from writing that great novel they plan to write is the fact that their job takes up all their time. In fact what’s stopping 99% of them is that writing novels is hard. When the job goes away, they see how hard.

I can relate to this on a number of levels:

Firstly, you can buy yourself out of what Paul calls “schlepps” and what I will simply call “annoyances”.

The pool dirty? Call The Pool Guy.

Something broken around the house? Call the handyman.

Can’t be bothered cooking? Eat out … expensively. In fact, never eat a cheap steak again.

But, you can’t solve personal problems (of the really personal kind) or health problems with money … you, of course, can afford to treat them a little (or a lot) quicker/better than before.

But, what I’ve found is that your major problems become about money: how to stop losing it; how to make it last; how not to be cheated out of it; how to invest it … and, so on.

I’m not not sure if there’s a bigger Number, where even some of these problems go away …

… if there is, I’m guessing it’s well-north of $10m.

I can sympathize with Paul on the book thing: it’s hard to write and publish one. Just ask Debbie, my coauthor [AJC: ours is finally coming out … soon].

But, the question remains: what exactly is FU money?

Well, a LOT more than you think!

Here’s what David S Rose, a well-known ‘super’ angel investor in Silicon Valley, says:

Being a millionaire ain’t what it used to be :-).

In thinking about net worth, it’s helpful to consider everything using a common denominator, such as your potential annual income based on the return that the wealth could theoretically generate. (Because otherwise, if you start spending your principal, you won’t be a millionaire very long.)

So, for example, a million dollars put into the safest CD you could find, might, if you were lucky, generate 1.5% interest each year… which is $15,000!

Even if you had, say, $5 million, and were willing to take a fair bit of risk and put it all in the stock market where it might (with real luck) generate 4% annually, you’d still be making “only” $200,000 a year. Take out taxes (being generous, let’s use the 20% rate at which Obama paid) and you’re at $160k.

That’s enough to rent a nice apartment (or pay the mortgage on, say, a +/-$1m house), take a nice vacation each year, and probably pay private school tuition for one or two kids… but you’re certainly not going to be flying your own Gulfstream with only $5 million.

Next, if we skip over the run-of-the-mill deca-millionaires and jump to someone with $100 million in assets, NOW for the first time are we just getting to the point where you have a good bit of flexibility.

Assume that with this kind of cash you begin to have access to some good hedge and venture funds, so maybe you’ll be able to consistently get 8% on your money. And now that you’re in the privileged class, we’ll figure you can match Mitt Romney’s 13% tax rate. This means you’ll net out to about $7 million disposable income annually.

At this level you can do pretty much anything you’d reasonably want. Pay the mortgage on a $10m mansion as well as a $5m summer place in the Hamptons, put four kids through Ivy League colleges, fly first class anywhere you’d like, make half a dozen angel investments at $250K each, eat out every night at five star restaurants, vacation on the Riviera, and have a full-time cook, butler, nanny and chauffeur. I expect you’d even tithe $1m annually to good causes, which probably gets you named Man of the Year for a big local charity.

All in all, not a bad place to be! But still no Gulfstream, no $35 million penthouse in midtown Manhattan, no building named after you at your alma mater, no mega-yacht docked outside your Riviera estate, no getting Justin Bieber for your daughter’s quinceanera, no 24/7 security detail like the President, no executive-producer credit on Avengers 2, no invitation to the Allen & Co retreat, no mega-trophy-spouse.

All that needs to wait until you get your first billion and put it to work.

Here we’ll assume that with enough portfolio diversification you’ll finally hit a Google or LinkedIn, and be able to comfortably plan on >10% annual returns from your professionally-managed holdings. And since you’re now an oligarch, let’s say that your hardworking gnomes will figure out how you can limit your taxes to the same <10% that will likely surface once Mitt releases his older returns.

This means you’ll now have close to $100 million a year after taxes, and FINALLY you can afford all those things you’ve always dreamed of! While you might not be able to pull off in the same year BOTH the $85 million pièd a terre in Manhattan that Russian guy bought for his daughter, AND the $150 million megayacht of the Sultan of Dubai, you’ll be in pretty good shape.

However, those constraints DO make a difference when you’re playing in the big leagues, so figure that you’ll have to step up to the next category, before there really are NO practical limits to what you can do and how you can live.

Once you get above the $10 billion level, all is good, and you can both help change the world (viz. Bill Gates) AND indulge yourself in any way you desire (viz. Larry Ellison and various sultans). From this point on, it’s simply a matter of score-keeping in the great Monopoly Game of Life. You’ll need to decide for yourself how important your place on the Forbes list is, and whether you care about your standing relative to Mark Zuckerberg ($10 billion), Michael Bloomberg ($22 billion), David Koch ($25 billion) or Warren Buffett ($44 billion).

Some of David’s points are spot-on: for example, retiring today with $1m nets you $15k (to $40k, in case you’d rather believe the financial planners who advocate a 4% ‘safe’ withdrawal rate than David) …

… retiring in 20 years with $1m is poverty level (roughly halve whatever number you believed, above, because of the eroding effect of inflation).

And, I can’t talk about anything more than $7m.

But, at that level, I can certainly agree with David that it buys me a (very) nice house and I certainly can afford to “take a nice vacation [or two] each year, and [definitely] pay private school tuition for one or two kids”.

But, is that FU money?

I certainly don’t feel that way …

… I still have ‘money worries’ of the kinds that I listed, above.

But that just may be the syndrome that Spectrum (a Chicago-based consultancy that specializes in understanding the High Net Worth individual and family) found when they surveyed a number of people whose net worth was in the $1m, $5mill, and $25m+ ranges about how much money that they would need in order to feel wealthy.

Almost invariably, the answer was: “about double”.

Hmmm …. 😉



An interview with AJC …

I’ve created a new Facebook Group called 7million7years

Feel free to join! It’s where all of us can ask and answer questions about personal finance … ask anything you like, and see who responds; sometimes, I’ll weigh in, as well!


Here’s an interview that I did a while back for the nice folks at Spectrem Group (a research company specializing in the ultra high net worth market). It was quite ironic that they asked me to do this interview, because I called their book the most dangerous idea in retirement planning that I have ever read!

Still, for new readers, this interview is a great overview of who I am and why I write this blog (as well as what you can expect, if you choose to stick with me):


What is your financial goal? Adrian J. Cartwood (a nom de plume) had one: $5 million in five years. He didn’t quite make it. But he did make $7 million in seven years and he writes about it in his blog of the same name. His is the sort of self-directed, out-of-debt story that makes for lively posts. Cartwood lives in Australia and he communicated via email with Millionaire Corner about his hard-earned success. What inspired you to start your blog?

Adrian J. Cartwood: I inherited a failing family business, and I was $30K in debt. During this time, in 1998, I found what I like to call my “Life’s Purpose,” or “Life after Work”. Others call this retirement, but who wants to wait until they’re 65 to start living their passion? So, I calculated my “number,” that is how much I would need in the bank to stop working in five years instead of 20 or 40. That number was a very scary $5 million.


Five million dollars in five years seems like an impossible target, especially when you’re starting $30k behind the 8-ball, so I started reading every single personal finance book that I could get my hands on. What I quickly realized is that they are mostly written by people who became rich because they wrote a book about how to get rich. Needless to say they were mostly full of rubbish. So, I found another one of my passions! It was, and remains, to be the first true multi-millionaire to write about personal finance, hence the blog.


MC: When did you launch your blog? How many visitors does it get?

AC: Three years ago. I don’t do any advertising, marketing, or promotion for my blog at all. I’m not even sure how you found me! Yet, in the time that I’ve been writing it, I’ve somehow built a dedicated audience in the thousands who seem to read it every day. I hope to never disappoint them.


MC: For whom is your blog intended?

AC: This is an excellent question because I often get comments from new readers who say “Well, my 401k is company matched, so it’s a great investment.” Sure it is, but it won’t make them rich. So my blog is specifically targeted to people like me who want to stop full-time work to pursue their passion, be it writing a novel, traveling, researching great wines, volunteering, whatever. The kicker is, when they calculate their own “number”- how much they will need in passive investments to support them, it’s inevitably something like $2 million in 6 years. If you run their starting position (say $100,000) through any simple online compound growth rate calculator, as I encourage my readers to do, they quickly see that they need to achieve a 65% compound growth on their investments. Given that their 401k can’t achieve more than 8% over 40 years, it’s clear that they need somebody to teach them how to become rich. That narrows down my readership to those who have done the same kind of self-reflection that I did seven years ago and realize that they actually need to become rich.


MC: What do most hope your readers get out of it?

AC: I hope that my new readers realize that they should evaluate their lives and see if what they are currently doing is going to truly satisfy them. If so, don’t change anything. But, for those who need more out of life, I hope that they walk away with the tools to evaluate what they truly want to do with their lives, how much money they will need (and by when), and the real personal financial steps that they need to take to bridge the gap … quickly. It’s not about getting rich quick. But it is about getting richer, quicker.


MC: For those unfamiliar with your blog, what are some representative posts?


I like this one, because it encourages you to start thinking externally rather than internally, which is the first step to financial freedom:

This one shows that where you invest your money is more important than how much you put aside each week or month:


MC:  Did you grow up in a financially literate household? Did your parents discuss money matters with you?

AC: I grew up in a poor household. The rest of my family grew up in a rich one. The trouble was it was the same house! You see, my father lived beyond his means, but I was the only other male in the family, so he only confided his true financial situation in me. Therefore I grew up paying for all of my own clothes, cars, and so on. The rest of my family still lives on handouts from richer relatives.


That knowledge taught me financial responsibility, but it didn’t teach me how to make money. That came from my $7 million/7 year journey. Naturally, I taught my own children about money. My son is a natural entrepreneur, my daughter is more social, but both know how to save and how to spend responsibly.


MC: What books or financial pundits, if any, influenced you/

AC: Rich Dad, Poor Dad by Robert Kiyosaki and The E-Myth Revisited by Michael Gerber. The first is about money and the second about business.


MC: How did you get started in investing?

AC: My very first investment was an apartment that I bought soon after college because a friend of mine was buying one in the same block. I knew nothing other than to copy him. I sold it a couple of years later to pay for a trip overseas. It’s safe to say that was not the start of my financial journey. When my financial wake-up call arrived seven years ago, I made my first real real-estate investment. Like most people, I knew that I wanted to invest in real-estate but I had no idea how.


One day I was driving around my neighborhood and saw a ‘For Sale’ sign on a condo in an older block of 12. There was an auction just about to start.  I figured that not many people would know about it because the sign was by an out-of-town agent, so I stopped to check it out.


My next problem was that I had literally no idea of how much to pay. But, I saw a young guy in a tradesman’s outfit measuring doors and windows and so on. I guessed that he was planning to buy it for himself, fix it up and flip it. I decided to bid against him and pay $1 more. I figured that if he was looking to take a quick profit that he would be operating on a tight budget, and that I could then afford to pay just that little bit more to buy and hold.


And, that’s what happened. I found myself as the winning bidder for a property that I had never been in before. I had to call my wife (who was not pleased) to rush over with my checkbook. We still own that condo today and it has been a star performer.
MC: What are some of the defining lessons you learned when you first started out?

AC: You can’t save your way to wealth. Running some simple numbers through that online calculator quickly showed me that my 401(k) would never be able to fund my retirement even if I waited until 65. Investment returns from mutual funds are simply too low and fees are too high, not to mention inflation eats up half of everything every 20 years. I realized that I would need to create my own perpetual money machine by taking as much income as I could put aside and invest it in assets that I could borrow against (so that I could buy more), but still had enough income to cover the costs of owning those assets. Real-estate (and, to a lesser extent a small portfolio of hand-picked stocks) could fit the bill. I also learned that starting a business is the best way to increase income. More income means more investments and more investments means more real wealth.


MC: What are some of the most common mistakes investors make?

AC: The most common and costly mistake is confusing good and bad debt with cheap and expensive debt. Because so many people have trapped themselves into bad credit card debt, which they should pay off as quickly as possible because it’s just so expensive, they have been lead to believe by so many financial pundits that they should pay off all of their debt, including their mortgages. For most people, this is actually a mistake.


Instead they should pay off expensive debt (such as credit cards, and auto loans) as quickly as possible. But, as soon as their remaining loans are at a lower rate than the cost of an investment loan (such as you might get to buy an investment property), why pay it off just to take out a bigger, more expensive investment loan?


The second mistake is thinking that your house is an investment: it’s not. The chances are that you will never be able to sell that house, even when you retire. Retirees plan on selling their big houses but they rarely move into a small, two bedroom condo. They realize that they either don’t want to move, or they want to stay close to their children, or move into an expensive retirement community. That and the moving costs (plus, are you going to move old furniture into a nice, new condo?) mean that they pocket a lot less than they thought. Suddenly, there’s a huge hole in their retirement budget.


MC: What is the most common question you are asked?

AC: Mostly, people ask me how I became rich. I tell them on my blog because it’s something that anybody can do.


That’s the interview! What did you think?

A financial playbook for professional athletes …

A couple of weeks ago I wrote about the dismal financial track record of professional athletes:

78% of NFL players and 60% of NBA players are bankrupt within two years of leaving the game.

Before you jump to the stereotypical conclusion that sports people have had one too many hits to the head, realize that the IQ of professional athletes is no better or worse than yours or mine:

The l.Q. of superior athletes ranges on average from 96 to 107

That’s why I think the reason is simple and generic: anybody who gets money quickly loses it almost as quickly.

To prove my point, look at the financial longevity of lottery winners, who should represent a fair cross-section of society [AJC: setting aside that you must have a low IQ to want to enter the lottery]:

More than 1,900 winners of a Florida lottery who won between $50,000 and $150,000 went bankrupt within five years.

So, if making money too quickly is a sure indicator of later financial disaster, what do you do? Refuse the money?

Not likely!

But, the one advantage that pro-athletes have over the rest of the pupulation is their ability to follow a playbook …

… so, here is the $7 million 7 years playbook for dealing with Found Money (i.e. any large amount of money that suddenly falls into your lap):

If you’re lucky enough to receive such a windfall (e.g. win the lottery; land a professional sports contract; star in a major motion picture; get acquired by Google; etc.), you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work rather than luck).

But, the amount you spend should be a reflection of how much Found Money you have, up to a maximum of 50% of the amount that landed in your lap. For example:

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

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

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

… do spend $100 immediately (enjoy!)

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

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you suddenly come across:

[HINT: For the money that you do want to spend, still apply The Power Of 10-1-1-1-1, but reward yourself with a little from each box e.g. spend $10 today; $100 tomorrow; and, so on (in total) up to your spending limit from the table above.]

If you find yourself toward the high end of this table (e.g spending $1,000 or more), spend it on something – or, some things – that you will remember for a long time.

Oh, and if you’re not a professional athlete … well, you can still follow a playbook as simple as this one, can’t you?

How to guarantee a higher return on real-estate …

About 10 years ago, my wife’s two nephews came to visit their “Uncle Adrian” to discuss potential investments.

They had decided to buy two apartments (in the USA, called ‘condominiums’) together – I advised them to buy one each, but they decided to go 50/50 on one, then another one a short while later.

I remember being quite proud of them, because they were both still in their early-to-mid-twenties at the time and were already investing in real-estate rather than taking the easy options of either not investing at all or speculating on stocks.

My wife’s nephews have since each married, and they each have two children under the age of 5 …

… and, they still own the two condo’s together.

I was taking one of my grand-nieces [AJC: makes me seem VERY old; I’m 53, which is only SLIGHTLY old] swimming this morning, and we got to discussing how the apartments are going.

My nephew-in-law said: “we’ve made a profit, but I don’t think they’ve been a very good investment”

Let’s examine this in a bit more detail, because I think it explains my last post quite well …

He (and, his brother) bought 2 apartments for about $200k each about 10 years ago; they are now worth about $400k each (they were worth as much as $500k each about 12 months ago, but prices have pulled back from their peak).

The apartments are still generating a small loss on a monthly income v costs basis, but he’s comfortable with a small level of negative gearing … and, he has an interest-only loan, so has not paid off ANY principal in the ~10 years that he’s owned 50% of each apartment.

He has calculated his return as about 7% (before tax) compounded, which I feel is pretty good but he feels that “opportunity costs” are such that he could have done a little better, elsewhere.

All in all, it doesn’t sound impressive …

… to him.

To me, the return is outstanding and explains what my last post is all about!

You see, I asked him how much (a) his loan is, and (b) how much cash he has put in so far (since the property has been making a small loss each month for 10 years).

He says that he put in a 25% initial deposit (interest-only loan), and has put (including the deposit), about $100k in cash (before tax costs/benefits).

This is how I think it breaks down (these numbers are now approximate):

– Property purchased for $200,000 (let’s assume this includes closing costs) with a 25% (i.e. $50k) deposit.

– Loan is interest only, so still stands at $150,000

– Total cash put in to date is $100,000 (made up of the $50k deposit plus another ~$50k negative-gearing losses over 10 years)

Now, let’s look at the analysis:

Cost to my Nephew-in-law:

1. $50k deposit

2. $50k losses

Profit if property sold today:

3. Property is worth $400k

4. Property purchased for $200k

5. Loan to pay off is $150k

Total Return:

6. Cash OUT is: 1. + 2. = $100k

7. Cash IN is: 3. – 5. = $250k

[AJC: notice that the price that he paid for the property doesn’t even figure – directly – into the equation; all that matters is what he owns (current value) less what he owes (current loan + the cash he puts in)]

This is no different to putting $100k in the bank (or some other investment) and getting $250k back after 10 years.

Using a compound growth rate calculator, this is  a 9.5% annual compound return, not 7% as first thought!

You see, he was making the common mistake of thinking that the apartment ‘only’ doubled in value in 10 years (from $200k to $400k, which is a still amazing 7% return in today’s depressed investment climate).

But, you simply need to look at how much cash you put in, against how much cash you get back out when you eventually sell (or, you can still do this calculation on the likely selling price, if you want to keep the investment) to find your real return …

… i.e. the less cash you put in, the greater the return.

It’s usually as simple as that!


How to manage your life with just $19 Billion …

After the recent Facebook float, how did Mark Zuckerberg fare, and – more to the point – how is he going to live?

According to the online business media:

The founder sold 30.2 million shares out of his entire holding, leaving him with a $US1.1 billion payout. It’s a huge amount of money, even after taxes, but it doesn’t come close to his final stake, somewhere in the region of $US19 billion.

So, the answer to the “how is he going to live?” question is: very well, thankyou!

Instead, let’s take a look at a hypothetical Internet business owner whose company IPO’d for mere millions in value, instead of Zuckerberg’s billions:

Let’s say that our hypothetical founder sold 30.2 million shares out of his entire holding, leaving him with a $US1.1 million payout. It’s a lot of money (let’s pretend that it’s after taxes), but it doesn’t come close to his remaining stake in his company, somewhere in the region of $US19 million.

How is our founder to live?

It would be tempting to say that he has $20 million, so a typical ‘safe withdrawal rate’ of 4% [AJC: which could be achieved through a combination of dividends and selling down small amounts of stock each year] would suggest that he has a massive $800k disposable income each year.

But, spending anywhere near $800k – even spending anything more than 25% of this amount p.a. – would be a huge mistake.

You see, the bulk of his money is in stock … and, risky stock at that: 5% of his net worth in cash and 95% in one relatively small, ‘hi tech’ company …

… and, we know what happens in tech: it can be boom/bust [AJC: remember MySpace, anyone?].

This is no different to an athlete trading off his contract, and spending money like it’s forever … except when it isn’t, which is why 78% of NFL players and 60% of NBA players are bankrupt within two years of leaving the game.

The second – less aggressive – temptation, then, would be to live off the dividends from the stock held …

…. let’s say that the company pays 2% dividends [AJC: which would not be unusual for a tech. company seeking to reinvest in itself, or acquire other companies, even though many – such as Apple – would pay zero dividends], which would deliver $400k per year.

But, again, what happens if the company stops paying dividends?

Instead, what our founder needs to do is realize that he is merely potentially very rich, but right now is a very valuable employee (and, controlling shareholder) of a company that is rewarding him with (a lot of) stock that may – or may not – one day convert to cash.

So, what our founder needs to do is count his blessings … I mean, assets:

1. He probably has a very healthy $400k+ annual salary, he should live off no more than 50% of this (indexed for inflation) and invest the rest.

2. He probably receives $400k in annual dividends; he should add 100% of these to his nest egg.

3. He has a starting nest egg of $1.1 million, which he should invest in ‘passive’ income-producing investments [AJC: real-estate is ideal for this]

As he starts to convert more stock to cash (i.e. through sale of small amounts of stock each year, as the law & his board may allow, and/or dividends) eventually, his nest-egg will grow to $4 million …

… which is his lifestyle break-even point i.e. the Rule of 20 says that your nest-egg should be 20 times your required annual living expense, which is currently $200k.

The good news is that anything converted to cash – hence, into passive investments – over $4,000,000 allows our founder to increase his annual living expense.

You’ll find that if you follow this system:

a) Sure, you’ll be living well below your ‘paper means’, but once you realize that your wealth is merely on paper, you’ll get over it, and

b) You’ll slowly-but-surely be transferring your ‘paper wealth’ into real wealth (i.e. passive investments), and

c) If you choose income-producing real-estate as your vehicle for holding your ‘real wealth’, you’ll pretty quickly find that you are able to support an even more quickly-increasing standard of living, no matter what happens to your tech company, and sooner than you may think.

This is how to bullet-proof your future …

… unless you’re Mark Zuckerberg, who can probably already survive on 4% p.a. of $1.1 billion 😉



Would you take financial advice from this man?

Here’s an article about some guy who’s lost his house:

Sad, yes, you say … but, not to be rude, you also say … so have hundreds of thousands of others during this global financial crisis 🙁

But, if you look closely, you’ll see a small difference between this guy and the rest: this guy should have known better.

You see, he’s a financial advisor …

… and, not just any financial advisor, he’s a New York Times financial columnist/blogger!

What’s even more interesting is that he’s prepared to use his own tale of woe (as is Consumerism Commentary in his follow up piece to the original NYT article):

to explain how people continue to behave irrationally about money even when they know better. It’s a good indication of why a healthy approach to your finances requires much more than knowing, “spend less than you earn.” We’d like to think that building wealth is as simple as that, but if that were true, anyone who could do simple arithmetic would be financially secure over time.


Doesn’t anybody see what’s really wrong with this picture?

Consumerism Commentary tells us:

Carl Richards is one of today’s best writers focusing on personal finance

This is after Carl admitted to the world that he lost his house because he “behaved irrationally about money” …

If the BEST financial advisors can lose their houses … how have the average ones mismanaged their’s … and, how badly can the worst ones screw up your life?

And, would you have known about Carl’s screw-up if he didn’t come forward and tell us?

Who are you seeking financial advice from? And, how can you really be sure … ? 😉

Did I fail the Ultimate Money Test?

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 😉

Before you can find the answer …

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?