The Great Debt Repayment Fallacy … don't fall for it!

Posted on May 5, 2008 by Adrian

Everybody knows about ‘good debt’ and ‘bad debt’, right? And, we all know – and have committed to memory – Personal Finance Prime Directive # 1:

Eliminate All Bad Debt Now … Before Doing Anything Else!!!

This may be the current Personal Finance mantra, but, if you happen to subscribe to the same view, then read on because this post could be the most important piece of wealth-building advice that you will ever read!

But, first …

That simple and clear ‘PF Directive’ was the assumed premise behind a recent (and very good, I might add) post on The Simple Dollar that I want to delve into a little more deeply than usual because it brings out a critical wealth-building point that may not be obvious to all. In that post Trent said:

A reader wrote in recently:

I have kind of a weird situation with our 2 credit cards, and wanted to see what you thought. We have one card (Citi) with a total balance of $4,800. $3,800 of this is a balance transfer that is at 2.99% until paid off. The remaining $1,000 is at 13.49%. Of course, all principal payments are applied to the lower rate debt first. Our other card (Chase) has a balance of $5,700, and is at 0% until September 08, when it goes to 8.99%. Which card do you think is best to “attack” first?

After reading this email, I thought it would be a good time to take a more general look at comparing the debts you owe as well as how to construct a healthy debt repayment plan.

Trent then proceeded to outline a very good and pragmatic approach to dealing with these, and any other, debts … a plan that involved:

A few sheets of paper and a pen; the latest statement for every single debt; making the first list; ordering all of the debts by their current interest rate; looking for ways to reduce the rates, focusing most strongly on the highest current one; when you’ve reduced rates, making a new list reflecting the changes; dealing debts that are set to adjust in the future; directing all of your extra payments towards the top debt on the list; when a debt vanishes, crossing it off and feeling good about it; updating the list when you acquire a new debt; and, updating the list when one of your debts adjusts to a new rate

Before I weigh in on this, let me ask you a Very Important Question:

Do you really just want to be debt free or do you want to be rich?

I know that sounds self-evident, but stick with me … if you just want to be in the top 5% of the US population and retire on $1,000,000 in, say, 15 years then by all means, do the Dave Ramsey, Suze Orman, and/or Oprah ‘debt diets’:

That is, save and be debt free (including your own home) … whoohee! … by the time you ‘retire’ [read: work part-time in Costco handing out free food-samples until you’re 75], you’ll be living on the equivalent of $15,000 today and hoping to hell that the government can still afford to pay you social security!

It’s OK if you slavishly follow this thinking: it’s the Conventional Wisdom …

It’s just that if you want … nay, need … to be rich(er) and retire soon(er) then you’re going to need unconventionally large amounts of money in an unconventionally rapid timespan, and that’s going to take some Unconventional Wisdom!

You see, I believe that being debt free and being rich are [almost] mutually-exclusive!

This is a pretty controversial view, I should think … but, I will even go so far as to say that it is [almost] impossible to become rich without using debt: debt to fund your business (working capital finance and/or leases on equipment and/or leases on vehicles, etc.); debt to fund your real-estate investments (fixed interest mortgages and/or interest-only funding); debt to fund your stock purchases (margin lending); etc.

Hold on, all the Personal Finance writers/bloggers out there say:

We can put all of the above examples in the ‘good debt’ category and we already agree that they are OK …

Great!

But, then they always add:

… but, ‘bad debt’ is ‘consumer debt’ (credit cards, student loans, car loans, etc.) and we all know that our Number One Personal Finance Objective is to wipe Bad Debt out, right? After all, it’s not called ‘Bad’ for nothing! Right??!!

Well, not necessarily … sure you shouldn’t get yourself INTO any of this Bad Debt … but, once you have some (you naughty, failed human being, you), you need to mix it with your Good Debt and revisit Trent’s Plan with ALL of your debts in hand … both ‘Good’ and ‘Bad’.

Look at it this way, once you find yourself with a mix of both Good (appreciating and/or income-producing assets) and Bad (depreciating, consumer goods) Debts, the only things that matter are:

1. Paying off the Dollar Value of the Bad Debt as quickly as possible, and

[AJC: Here is the key … its in the “AND“]

2. Paying off the highest after-tax interest rate loan off first.

So here was my advice to the person who asked the question on Trent’s post:

Interestingly, in the reader’s case (if I read correctly) his ‘consolidated’ card is at a Combined Effective Rate of only 5.2% … because he can’t attack the 13% portion until he pays off the 2.99% portion I would do the following:

1. Pay off the other card first, then

2. Buy an investment using the money that he would have paid the 5.2% debt off with …

… after all 5.2% is a very low rate of interest!

To clarify: I would not pay either card when interest rates are under the standard variable mortgage rate … I would be financing new real-estate, or paying down the mortgage on my existing (IF I’m not breaking the 20% Rule). The plan I outlined above starts when the 0% period ends … until then, pay off NEITHER card IF you have a more productive use for the money!

What does this mean for the rest of us?

i) Don’t get INTO Bad/Consumer Debt … save and pay cash for any ‘stuff’ (cars, vacations, furniture, ipods, computers, etc.) that you want.

ii) Once you do get INTO Bad/Consumer Debt … don’t be in such a hurry to get out of it; compare the cost of your Student Loans; Ultra-Low-Honeymood-Rate credit-cards; Super-Low-Suck-You-Into-Buying-More-Car-Than-You-Can-Afford Interest Rate car loans; etc. against the after-tax cost of the mortgage that you have on your house and/or investment properties (or the interest rate on your Margin Loans for your Stocks; or your Working Capital Finance for your Business; etc.).

iii) Work out a repayment plan as though you were going to pay INTO that Bad/Consumer Debt … instead, pay an equivalent amount off against your highest after-tax interest rate loan across your entire Good/Bad Debt portfolio.

iv) Reevaluate at the earlier of Quarterly (i.e. every 3 months) OR when one of the interest rates on ANY of your loans changes OR [yay!] when you have paid one of your loans off.

v) If you don’t want to (or can’t) get out of a higher-interest loan early using (iii) then compare the cost of the lowest-interest loans that you have (regardless of whether they are Good/Bad) against the current FIXED interest rates for new loan on a new investment … if LESS, buy new instead of pay off old.

Remember: The Object of Personal Finance is to end up with MORE money … the object isn’t to SAVE money, PAY off debt, BUY a house, START a business … they are all just all steps along the way.

If you want to get Rich(er) Soon(er) never, ever confuse A Means To An End with The End …

… now, let the flames begin!

_______________________________________________________________________________________________

Last days for ‘pre-applications’ to become one of my 7 Millionaires … In Training! Click here to find out more …

The most dangerous idea in retirement planning that I have ever read!

Posted on May 2, 2008 by Adrian

Double Dose of 7million7years! Please check out my FIRST EVER Guest Post … it’s at BripBlap, a blog that should be on your DAILY READING list: http://www.bripblap.com/2008/guest-post-education-a-curse-or-a-cushion/

In a few weeks, I was planning an ‘expose’ of a book that I read , but just came across a related post by an innovative thinker who calls himself Gryffindor (presumably, named after one of the Hogwarts Houses in Harry Potter) so I can’t resist but to weigh in now …

And, I’m going in boots and all!

First, here is what Gryffindor had to say – which I actually like because it is innovative and a little controversial:

So if an investor has 2 million at the age of 55, what does the conventional wisdom say? He could invest it and with a safe withdrawal rate of 4% count on $80,000 a year. 2 million of savings – with that all you get is a 80k a year. No wonder most people are depressed about retirement.

Now what if the investor takes a million of his nest egg and buys [a] business? She gets $200k of cash flow a year that is growing at 3% to match inflation. She can also reinvest the additional earnings from the other $1 million. She also gets some additional tax benefits of owning the business and can have some productive part-time hobby / business and not just spend her time on the golf course. It sounds all good to me.

And, here is part of my response that I posted on his blog post:

This is such an important topic that I am going to post a response on my blog [which you are now reading!] … I would really like to set up some debate on this because it is a very useful – but, potentially highly dangerous – retirement strategy that really needs to be well thought through before anybody implements.

Rightly or wrongly, some people just see me as a guy who ‘got lucky lucky in business’ (AJC: most of my $7m7y Net Worth actually came from investments … my leter/additional Net Worth came from selling some businesses), so it might seem natural when I say that Gyffindor actually appears to be onto something that is one of the central ideas in a recent book called Get Rich, Stay Rich, Pass It On.

The principle is that rich people keep their money for generations ONLY if they split their assets roughly one-third in a business, one-third in paper (stocks, bonds, mutual funds, etc.) and one-third in real-estate (incl. their own home):

Then, you might be surprised when I say that this is “the most dangerous idea in retirement planning that I have read”!?

What the book is recommending, that I find so damn dangerous for retirees, is this:

The authors of Get Rich, Stay Rich, Pass It On suggest that you need to invest, and keep invested forever, 25% – 35% of your Total Household Assets into ‘continually innovative enterprise/s’:

What we mean here by a continually innovative enterprise is one that either offers a product or service that breaks new ground or changes a traditional product or service so much that it becomes virtually new.

Now, that is something that you do before you retire so that you can retire rich … you take risks, you innovate, then you sit back and reap the profits (or sell) …

… it is not something that you get into in order to preserve wealth, which is exactly what the authors suggest:

At the lowest level of personal involvement, you might invest in a limited partnership, private equity plan, or venture capital program in which the actual management of the enterprise – possibly even the choice of the enterprise to invest in – is beyond your reach and outside your control.

Put simply: this recommendation is crazy …

… in my opinion, it unfortunately totally discredits an otherwise fine book written by authors who are respected consultants who assess the wealth habits of America’s mega-rich for the financial planing industry.

to me it seems that they are confusing the Making Money 201 wealth-building practices that rely partially on risk-taking strategies that may include a business – or, at least look a lot like a business (e.g. rehabbing/flipping real-estate; trading stocks/options etc.) …

… with the Making Money 301 wealth-preserving (i.e. retirement) practices that move you away from risk towards passive income!

So, is there a place for owning a business in a wealth-preservation strategy?

Absolutely!

I think that I speak with some authority on this: I have owned, operated, and successfully sold a number of businesses across a number of countries, many of which I owned at the same time!

I was an active owner in some and am still a passive owner in others …

Now that I am retired before 50, I am giving one part of a business away to my partner, converting another part into a ‘licence annuity’ that I will keep, and I am also keeping one other operating business as a semi-passive entity.

This last one is interesting, as it appears to support the thesis in Gryffindor’s post and the book that I mentioned:

This business is still in another country … it’s a finance company that turns over $40,000,000 per year with a only staff of 4 and nets me a cool $250k per year with about an hour’s work a month from me … I control it (through various legal entities) 100%!

Even so, here is the fundamental truth:

There’s no such thing as a PASSIVE business – as long as you own a business, you:

1. Will lose sleep every so often until it is sold or closes down, and

2. You will NEVER be truly retired.

As long as you can accept this level of semi-retirement worry and activity (which may actually HELP to keep you young!) then the Gyffindor Strategy could work for you, BUT:

i) I could accept owning in retirement: Big Name Franchises; Self-storage facilities; Mobile-home parks; Car-Washes; Your own well-established business that you are now ‘winding back on’.

ii) I would be a lot more concerned about: auto-repair and other skill-based businesses OR ‘vanity businesses’ – you know, the types that celebrities like to own (e.g. restaurants, bars, etc.).

iii) You would need to set out to have the business/es that you select run without you from the very beginning.

If you like the idea of owning a business in ‘retirement’, here’s a hint:

This strategy could hold a lot more attraction for you if you can also own the real-estate that the business operates from!

Why?

A. It assures the rental stream,

B. It assures at least some capital growth,

C. It hedges your bets against business failure (particularly if you plow excess cash generated by the business into the mortgage),

D. It provides a partial exit stream i.e. sell or give the business to management or a buyer under the condition of a long-favorable lease with upward-only ratchet clauses (rents increase at least with inflation).

A final thought:

I mentioned that I will continue to own at least one business now that I am fully retired:

– I founded this business and have owned it since 1991 … it has successfully run without my direct involvement for more than 5 years.

– I tried to sell it anyway, but it was only worth 3 times annual Net Profit before Tax … for that I will keep it for three years and take my chances!

– If I do happen to find a buyer who will pay me 5 or 6 times annual Net Profit before Tax, I will sell it.

– I do not count this business’s income towards my retirement portfolio’s ‘safe withdrawal rate’ because anything can happen with a business at any time … rather, I use the profit to build my portfolio’s total value, and spend the passive income from that.

If I do eventually sell it, THEN I will increase my portfolio’s withdrawal rate because I will have converted the business into a passive investment (cash, stocks, or real-estate).

Phew! This is one of my longest posts … so, now it’s your turn to comment!

Thinking of buying something on credit?

Posted on April 27, 2008 by Adrian

‘Need’ a plasma TV? Perhaps you ‘just’ need a new car?

There’s ALWAYS a way to find the money that you need WITHOUT putting yourself further in debt … just ask Mr Bean :

http://youtube.com/watch?v=42AHISKy2Kk

Mr Bean (a.k.a. Rowan Atkinson … played the priest in 4 Weddings and a Funeral) is not as well known in the US as he is overseas … he’s one of my favorite comedians and comedic actors.

Anyhow, I hope that you enjoyed this short clip for today’s installment of our Video on Sunday’s series as much as I did?!

AJC.

My $7 Million Dollar Journey …

Posted on April 25, 2008 by Adrian

I am a little shy, which is one of the reasons why I write semi-anonymously. It’s also so that I can share specific (and, highly personal) financial information, so that you can travel a similar road, if you are so inclined …

But, some of you want to know where I came from? How is it that I could amass such a large amount ($7 million) in such a short time (7 years)?

Fair questions.

So it is for YOU that I humbly outline my $7million7year journey …

… I count my 7 years as starting in 1998:

By then I had resurrected a defunct family business as a sole proprietorship (I was $30k in debt and living off $50k a year) and started a new one that had real potential but was draining all the cash from the first business (and then some … combined the businesses were losing about $5k a month).

We owned our own home (well, the bank owned most of it) but had zero other investments.

I was what you would call “broke … with prospects”.

1998

Since I had no idea how to fix the situation, I did what any self-respecting person would do: I lucked upon a book!

The book was called The E-Myth Revisited by Michael Gerber and I bought it to help me get out of the hole that I was in …

… not, the financial hole – I had NO idea that the book (or any book!) could help me with that – rather the personal hole (more like hell) that I was going through working in my businesses rather than on them.

[AJC: This will be the subject for another post, but I was the classic control-freak entrepreneur (I sure as hell didn’t feel like an ‘entreprenuer’ … I was just a guy seemingly out of his depth) trying to do EVERYTHING myself … therefore, achieving NOTHING]

No, the epiphany came when I did the very first exercise in that book (and, that’s why I suggest that EVERYBODY reads it … just for that chapter) and learned the most important lesson of my financial life:

My life wasn’t about my business (or my money) … my business was there to support my life.

You have NO idea how important that was to read … and, how scary it was when the book then went on to show me how to cost that life.

You see, I realized that for the life that I wanted … actually, needed … I had to be ‘wealthy’ [AJC: damn, why couldn’t I just ‘need’ to live on a kibbutz?!].

The problem was, I had no idea how to calculate wealthy.

Fortunately, soon after I happened to go to my first ever financial seminar, and the presenter told me two things (that I simply took on face value at the time) that changed my whole life’s financial outlook:

1. To live ‘wealthy’ (nice house, cars, schools, lots of travel … no work) you need at least $250,000 a year (1998 dollars) in passive income, and

2. You need to multily that number by 20 to determine the size of your nest egg.

There you have it … $5 million … my new (first!) goal … oh sh*t!

First, the problems:

i) My businesses were small / niche businesses with limited growth potential; I calculated that I would need almost 100% penetration of the largest business prospects available in order to achieve my new goal

ii) I had just LOST my second largest client, so now I was losing $300k a year!

iii) Year 2000 was approaching and my software was no longer supported nor was it Y2K compliant.

2000

I got over the last problem by rewriting my software, which gave me the opportunity to fully internet-enable it … this enabled me to totally change by business model, and we (accidentally) ended up with one of the world’s first complete eLogistics systems.

All of a sudden, the business that was losing money MADE money and we added new clients (thus getting over the second-last problem) and soon became profitable.

2001

However, as soon as we became profitable, I bought a building for over $1.25 million, on the advice of my accountant of all people … this was very scary because:

Business 1 + Business 2 + Building 1 = break-even again!

However, the businesses (now, both) started growing and soon became reasonably profitable … $10k – $20k a month by 2002 … I still only took $50k a year in salary.

Our Net Worth was now the equity we had built up in our home and office property, plus whatever residual value our businesses had; probably $1 mill. to $2 mill. In fact, an overseas listed company made us a $2 million offer for Business 2, but we rejected it (at that time) … so, our Net Worth could have been as high as $3 Million if we sold, or if somebody else would ever offer us the same.

When it comes to businesses, do you ever know your true Net Worth until you sell?

2003

We made it all the way to $7 million over the period of 2003 to 2005 simply by:

1. Repeating the process: generating profits in the business, and

2. Retaining as much of the businesses’ profits as required to maintain the businesses and grow, and

3. Ploughing as much as possible into real-estate, and

4. Keeping a lid on personal spending and maintaining zero-personal (i.e. consumer) debt other than the house [AJC: which, as I mentioned before, we eventually paid off … not that I would recommend this strategy any more … see an upcoming post for more on this].

But, we did pump as much as we could back into the business and bought a number of smaller, residential investment properties (one condo @ bought 2003 for $145k now worth about $300k, one quadruplex bought 2005 for $1 million now worth $1.75 million, and paid off our own home eventually sold for $800k, plus the office building recently sold for $2.5 million).

If you think about it, these are the EXACT SAME STEPS that every PF blogger writes about (debt free, save, reinvest) … I just multiplied the scale and was VERY CLEAR on my cashout $ and time.

But what about my opening comment:

I deliberately chose a provocative title for my blog … whilst partially true, I chose it … well … because it sounded good!

Why only “partially true”?

Well, I did make it to $7 million in the seven years between 1998 and 2005 – and, by then, my other assets probably had Net Equity of: Business # 1 ($2 million … $1.5 million in cash + whatever value the business could sell for); Home # 1 ($650k); Office ($1.25 million); Residential investments ($1 million).

So, that period sets the scene for our [more than] $7 million 7 year journey, made the good old fashioned way (grow an income stream or two, live frugally within reason, and invest, invest, invest) … and, provides many of the lessons that I had to learn the hard way, but you no longer need to.

But, ‘partially true’ because my journey has an unexpected (but, pleasantly surprising) postscript …

2006 – 2008

I had totally miscalculated the earning potential of my two existing businesses [AJC: actually, three, by then I had started a small training company with a partner, Business # 3]: post year-2000 reengineering, Business # 2 on its own was now capable of producing (and did) $1,000,000 a year net earnings (2006), almost all reinvested in some unexpected new ‘opportunities’:

You see, way back in 2002 I still didn’t know the potential of the new eLogistics-driven business model, yet I still had a $5 million bird to catch …

… so I had already put in train a parallel set of actions that saw me close a deal in 2004 to open two overseas offices (commencing in 2005) – both as ‘no money down’ joint ventures – unfortunately, there went my profits (yet again):

Business # 1 + Business # 2 + Business # 3 + Business # 4 + Business # 5 + Properties # 1 thru’ 4 = Break-Even again!

I was still only taking a $50k salary … my wife still had to work … don’t I EVER get to spend anything??!!

Finally, I sold something: Business # 2 in 2006 for more than 3 times what I was offered in 2002.

… and, the next 3 years sets the scene for an unbelieveable set of negotiations, opportunities, and manoueverings tied to Business # 4 and Business # 5 (which was the reason why we moved to the USA) selling both after only 2 years of operation, more than doubling our net worth again …

… and, funding properties # 4 ($2 mill … paid cash) and # 5 ($4mill. … churned #4 + paid cash) as well as now being able to fund my retirement at age 49.

I kept Business # 1 as well as Business # 5 (although, I soon plan to ‘gift’ my share in that one to my hard-working partner): they both run well and profitably in another country, with separate staff in separate locations, and without me … Michael Gerber taught me how – and why – to do that, too!

But, this period is not the subject of this blog:

Whilst entertaining – and, it might teach you a trick or two about negotiating (I sure as hell learned something!) and/or running a business ‘hands free’ – it hardly counts as Personal Finance, so I might just save the details of that story for ‘the one-day book’ 🙂

Fire your boss before he fires you … the 50% solution!

Posted on April 8, 2008 by Adrian

There is a cycle of life in the workplace … it begins when you get your first job, and hopefully it ends when you retire.

At least, it used to, when people worked their way up from the shop floor to the executive penthouse by working hard and staying with the same company.

By saving as they could, and relying on a good company pension plan (indexed at a reasonably high percentage of their ‘ending salary’) these loyal, hard-working folk could look forward to a reasonably relaxed retirement at the age of 65.

Not so any more …

A U.S. Department of Labor – Bureau of Labor Statistics news release published in August 2006 examined the number of jobs that people born in the years 1957 to 1964 held from age 18 to age 40.

According to this report, these younger baby boomers held an average of 10.5 jobs from ages 18 to 40 (In this report, a job is defined as an uninterrupted period of work with a particular employer).

Sometimes, this is because of new/better employment opportunities – or simply due to a change in life circumstance – but, all too often, it is due to being laid off.

This brings me to a recent post on Get Rich Slowly that asked “What To Do If You’re Laid Off?” … I’ll let you read the post and the comments, but I can’t help thinking that you need to put in place a ‘backup’ plan (something a little more meaty than the usual “save up a 3 month savings buffer“).

And, I think that the whole process should begin as soon as you get your first job …

… so, I was pleased to see this really cool post on The Simple Dollar, for all you college kids or school drop-outs out there [AJC: this is an equal opportunity ‘get rich(er) quick(er)’ site!].

The article was called About To Enter The Workplace For The First Time? Try The 50% Solution which really boils down to:

– We all know that Paying Yourself First 10% – 20% of your gross salary is a really cool thing, so

– Starting your very first job by Paying Yourself First 50% of your gross salary must be a really, really, really cool thing?

Read the post for more details, but TSD is absolutely right … why?

A. If you’re used to living on NOTHING, then living on 50% of SOMETHING has gotta be a snap 😉

B. If 10% of your gross salary compounded for, say, 40 years can give you $730,000 then 50% compounded for the same 40 years should give you $3,700,000 [AJC: It won’t be WORTH $3.7 mill. but that’s another story!].

But, as some of that post’s commenters pointed out, it can be very hard to start saving 50% of your starting salary, even if you lived on nothing before, because now you need to buy: food, shelter, transport, and so on.

But, the principle of setting your target much higher (TSD suggests 60/40 … spend 60% save 40%) when you start out and trying to maintain your momentum holds water.

Here is what I think that everybody who is still working for a living should do, regardless of source and amount of income, or their age:

1. Use this post, and the others that I have referred to, as a wake-up call that your job is NOT secure … therefore, your life is NOT secure until you take your future security into your OWN hands.

2. Once you realize that you are taking a financial risk every day at work, it becomes much easier to think about ways to break free. Start by putting as much behind you as quickly as possible, in case the ‘worst’ happens:

i). Commit to an maintain a Pay Yourself First mentality that may be as little as 10% of your current salary or as much as 50% – anything less is not enough … anything more and you are a miser 😉

ii). For any future increase in salary – commit to saving 50% of the increase and putting it to work in your Investment Plan

iii). For any future ‘found money’ including bonuses, tax refund checks, overtime payment, spouse back to work, etc. – commit to saving 50% of the increase and putting it to work in your Investment Plan

iv). Start a part time business – or find another way to increase your income – commit to saving 50% of the increase and putting it to work in your Investment Plan.

Take these actions with the eventual aim of firing your boss before he fires you!

How your hobby can set you financially free!

Posted on April 7, 2008 by Adrian

The path to financial freedom usually comes from accelerating your investment plan – which usually starts by accelerating your INCOME.

Why?

Because, you usually can’t just save your way to your dream retirement.

There are many ways to increase your income (e.g. ask for a pay-rise, work longer hours, get a second job, send your spouse back to work, etc.) but the rewards are generally limited to the number of hours that you can put in … and simply working longer/harder can sap your emotional and physical energy.

There can be a better way!

For example, if you have a hobby – something that you willingly and happily spend time on anyway – why not look at ways to make some extra money from it?

Look at it this way: if you can earn at least some money from your hobby, rather than simply spending money on it, aren’t you already well ahead of the game?

Early Retirement Extreme writes on his blog about his hobby, which happens to be blogging!

It all started with the observation that all my expensive hobbies were a major drain on my finances …Let us consider personal finance blogging or maybe just personal finances in general. This is a valuable hobby (from the perspective of financial freedom). Even in its most passive form it does not cost much. In fact one may avoid a few mistakes.At slightly higher levels, one learns to do one’s own taxes and perhaps to invest for market returns without having to pay fund fees. (This is where I am).Getting slightly more active one can start a blog. Commit an hour a day to write a post and one can pick up an extra income within a month or two. This can be a very valuable hobby. Some bloggers have even replaced their day jobs e.g. Lazy Man and Money, Get Rich Slowly, The Simple Dollar.

Now, I’m not sure that blogging (except for the few … those who started early and treat it as a ‘serious business’) can earn all that much money for the average blogger, but I don’t advertise, so I can’t be certain.

But, the principle of earning money from your hobby is a wise one, indeed …

Here’s an example that I really like, courtesy of the Internet Marketing Center.

It’s about an ordinary guy who was able to turn his hobby of making wire-sculpture jewellery into a $600,000 a year online business!

Preston Reuther of Wire-Sculpture.com has overcome incredible odds to build and grow not just one profitable Internet business… but three of them!

Preston overcame his mental illness and went on to start his very own Internet business selling wire sculpture jewelry tools, growing it to an impressive $50,000 in on-line sales… per MONTH! (To save you from running for your calculator, that’s over $600,000 a year.)

I have a friend who has a similar hobby, she designs interesting jewellery that is very quick, easy, and relatively cheap to make. A bit like beading, but her designs are unique and quicker/easier to make.

She has turned her hobby into a very small business, selling jewellery that she makes to friends and even to one or two stores.

She also lists some on her own home page and on craft-oriented web-sites like etsy.com.

Now, I can’t let an opportunity like this go begging, so this is what I have suggested to her:

1. Buy a video camera and film herself making (and, explaining how to make) some of her designs. Package these videos as an ‘eCourse’ for download off her web-site for $49 each.

2. Buy wholesale lots of the tools and bits and pieces that she uses, to create a Jewellery Start Up Kit that she can package with her videos and sell the combined ‘advanced start-up package’ at $149 each from her web-site.

3. Create / photograph (and/or video) new designs and sell these (with the bits required to make them as kits on her web-site from $9.95 each to $29.95 each.

Now, she may do some, none, or all of these things … that’s the wonderful thing about hobby/businesses – you enjoy doing them anyway, so an improved financial outcome is a bonus!

For example, I’ve mentioned my 13 y.o. son’s hobby before: he has taken a liking to everything-eBay.

Now, he sells products on eBay, which he packages and ships himself (every day, there’s a parcel of two sitting on the front door-step for the mailman to collect and deliver) and makes a cool $30/week.

The moral: you don’t have to be big to benefit …

So, if you have a hobby, think about how you can use your creativity to move you closer to your financial dreams:

i) If you can EARN money from your hobby instead of just SPENDING it, you are twice as well off than you are today

ii) If you commit to saving at least 50% of the excess income that the hobby produces, then you can accelerate your Investment Plan

iii) If you are extremely lucky … and work very hard at it … the ‘hobby’ could eventually become a fully-fledged business, perhaps even allowing you to quit your day job.

Let me know how you plan on turning your hobby into cash?!

It's a musical life?

Posted on April 6, 2008 by Adrian

[AJC: Since I wrote this, I notice at least two other blogs posting the same video … oh well, I guess it’s worth another look]

Occasionally, I lapse into the philosophical rather than the purely practical.

For example, I wrote a post fairly recently about the importance of The Journey … money is the result, not the object … yada yada yada.

While true, this Allan Watts video, produced by the South Park Boys (Trey Parker and Matt Stone) says it SO much better … enjoy.

Please!

http://www.youtube.com/watch?v=ERbvKrH-GC4

AJC.

STOP PRESS: Investor Finds Bank-Owned Bargains Galore!

Posted on April 3, 2008 by Adrian

I am (temporarily) shelving today’s post because a very interesting e-mail arrived in my in-box last night.

It was an e-mail newsletter from a foreclosure and real-estate listing service that I use, called RealtyTrac.

This particular article caught my eye, because I love anything that shows that real money is made when you ignore conventional wisdom; the headline read:

Investor Finds Bank-Owned Bargains Galore

“I just bought two brand new homes as REO from the bank,” said a Tennessee-based investor [Kirk Leipzig] in December. “I am buying five more new homes next week from the bank. I am buying $750,000 homes for $450,000 … This is the time to buy, and to make a killing out there,” continued Leipzig, who’s been a RealtyTrac subscriber for about nine months. “But you need to totally understand your market and educate yourself daily on your market. Then go buy, buy, buy.”

What’s most surprising about Leipzig is that he is not buying and holding – as many experts recommend in a down market – but buying and flipping.Now this really goes against conventional wisdom i.e. “housing prices are low … they can only go down … nobody is buying … you will be stuck with real-estate” …Maybe all true … maybe not … who knows? But, this guy has an answer for all of that:

“All the properties I currently buy are for flipping only,” he said, acknowledging that he always has a backup plan because of the difficulty selling in the current market. “I always buy a property now to flip, but in the back of my mind I know I can lease-option it, or rent it if it does not sell as quickly as I would like.”

I have to admit that ‘flipping’ real-estate is not in my particular comfort zone – I have never flipped anything (unless you call ‘buying’ majority share in a business for $0 down and ‘flipping’ it 18 months later for $6 million … but, that’s another story) …

However, for those of you looking to take some risk in what I would call The Business of Flipping Homes” as a somewhat risky way to make money in the short term (i.e. with a possible very large reward if you can replicate what this guy is doing) in order to then INVEST the excess proceeds into your long-term INVESTING (i.e. buy and hold) strategy, this just may be worth considering?

Whether you try and replicate what this guy does, in your own market, or try something else entirely different in the real-estate field “you need to totally understand your market and educate yourself daily on your market” …

… then, don’t just sit on your thumbs along with the rest of the herd … do as this successful business person does: go buy, buy, buy!

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Maybe Dale Carnegie was on to something?

Posted on April 1, 2008 by Adrian

In his famous book, How to Win Friends and Influence People (first published in 1936), Dale Carnegie – the great public speaker, personal improvement trainer, and prolific author – showed that success very much hinges on your ability to ‘influence people’.

In fact, as I think back, my greatest successes have been with people who have liked and admired me … and my greatest challenges have been with those who haven’t.

You can invent the greatest mouse-trap in the world, but nobody will beat a path to your door if they smell a rat 😉

This is Dale Carnegie’s summary of his own book; apply some of these ideas and you will succeed in life.

Remember, no matter what you do other people are the key to your success:

Part One

Fundamental Techniques in Handling People

Don't criticize, condemn or complain. Give honest and sincere appreciation. Arouse in the other person an eager want.

Part Two

Six ways to make people like you

Become genuinely interested in other people. Smile. Remember that a person's name is to that person the sweetest and most important sound in any language. Be a good listener. Encourage others to talk about themselves. Talk in terms of the other person's interests. Make the other person feel important - and do it sincerely.

Part Three

Win people to your way of thinking

The only way to get the best of an argument is to avoid it. Show respect for the other person's opinions. Never say, "You're wrong." If you are wrong, admit it quickly and emphatically. Begin in a friendly way. Get the other person saying "yes, yes" immediately. Let the other person do a great deal of the talking. Let the other person feel that the idea is his or hers. Try honestly to see things from the other person's point of view. Be sympathetic with the other person's ideas and desires. Appeal to the nobler motives. Dramatize your ideas. Throw down a challenge.

Part Four

Be a Leader: How to Change People Without Giving Offense or Arousing Resentment

A leader’s job often includes changing your people’s attitudes and behavior. Some suggestions to accomplish this:

Begin with praise and honest appreciation. Call attention to people's mistakes indirectly. Talk about your own mistakes before criticizing the other person. Ask questions instead of giving direct orders. Let the other person save face. Praise the slightest improvement and praise every improvement. Be "hearty in your approbation and lavish in your praise." Give the other person a fine reputation to live up to. Use encouragement. Make the fault seem easy to correct. Make the other person happy about doing the thing you suggest. Sound advice from one of the 'soundest advisors' of all time ... just wish I had paid attention sooner ... I would have been sitting on the beach, sipping pina-coladas 10 years earlier! AJC.

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"I noticed you have incredible traffic for a 3 month old blog!"

Posted on March 31, 2008 by Adrian

This was a comment that I just received from a fellow blogger …

I didn’t know I had any ‘fellow bloggers’, but bloggers seem to have an ‘unofficial’ fraternity … so, I guess it’s kind’a nice to be part of a ‘group’ even if I didn’t set out to do so.

I have been communicating off-and-on with one particular fellow blogger that I only know as the mysterious blogrdoc (that’s him in the picture!) ever since he left me a rather ‘flattering’ comment on one of my earlier posts:

I’m sorry, but if you made $7M, you would *NOT* be running a blog.

I immediately knew that I would like this guy!

After we got to ‘know each other a little better’ through a series of comments and e-mails, blogrdoc asked me a question that I thought I should share with you all:

I wanted to get your opinion on something. I’d *like* to make 7M in 7 years. Do I *necessarily* need to assume a lot of financial risk to do this?

No … blogrdoc … you just need an awful lot of luck 😉

You also need to take at least some risk and put in an awful lot of sweat … it’s just that the risk doesn’t need to be financial, and the sweat can be a little less or a lot more depending upon how quick you want to become rich (and how much ‘rich’ means to you) …

Let’s look at it this way:

If you want to make $1,000,000 in 20 years, just buy a house and keep up the payments and … wait.

Guaranteed millionaire!

If you want to make $7,000,000 in 7 years you need massive passion/action – and, a little (or a lot!) of luck – to get it …

But, if you want to end up somewhere between the two, then we can talk turkey.

First, here is blogrdoc‘s plan:

My Strategy is a multi-layered approach and will include: 1. Blog/Ad based revenue (for starters, I am aware that this is extremely difficult to monetize. Particularly for me since I don’t have too many connections. 2. Several product based revenue ideas. May file for a patent then license. 3. ???

Blogrdoc has hit the nail on the head … these are excellent Making Money 201 strategies:

1. Blogging may not make much money, but it may bring in some (at least 50% of which should go towards your Investment Plan) … the more money it brings in, the shorter the time to the ‘end game’.

2. But, blogging also brings those ‘connections’ that you need to make your life a success … this is just a new twist to an old game called ‘networking’ … it’s not what you know, but who you know that counts.

3. Product based ideas become businesses … businesses (with a lot of hard work, and a little luck) become income … income becomes fuel for your Investment Strategy and we are back to 1. … the more money these businesses bring in, the shorter the time to the ‘end game’.

Now, here is where I think the people who have taken the time to read this whole post get their reward:

In none of these cases am I anticipating putting more than $10k or so at risk. My main concern is that I’ve got a family and I just don’t have the stomach to put too much at risk. I can’t just leave my day job or anything like that. Do I have a chance? Am I looking at this all wrong?

No, my friendly-neighborhood-bloggerman, you are doing this all RIGHT!

Even THE Guy Kawasaki (Apple co-founder; founder/ceo of Angel Investing firm) started his last two successfull online ventures (including Alltop) on something like $10k each … I am into three right now, with a max. of $50k committed to each.

Here’s the low-risk (but, not no-risk) way to reach your financial goals … for any blogger and/or just-starting-out business person out there:

… I can’t promise that this simple plan will make you $7 million in 7 years (first, you have to really need it to get it … just wanting it won’t cut it), but it has a better-than-even chance to make you more money than you ever thought possible:

i) Maintain your Making Money 101 habits: pay yourself first (you know, that “10% into your 401k” thing); pay down your consumer debts (car loans, c/cards, etc.); buy your own house (better yet, buy a rental).

ii) Accelerate your income: Use any excess cash from your job, your side ventures (e.g. ‘starbucks experiment’), tax refund checks, anything that helps you to build up little pots of investment capital.

Hint: that does NOT include anything in (i) … never ‘gamble’ with anything you cannot afford to lose … and you cannot afford to lose your savings or investments … ever!

iii) If you want to get rich slower, simply add these ‘pots’ from ii) to your Investment Plan … if you want to ‘roll the dice’ and take, really, only a little extra risk to (maybe) get rich quicker, use these little pots of investment capital to fund your ‘product based revenue ideas’ and fund those patents.

Warning: this money has to come from somewhere … it will probably be the same money that you used to use for vacations, new sunglasses, baseball tickets, fancy dinners … you know. ‘stuff’ that you couldn’t possibly begin to do without 😉

iv) Starting more than one venture part-time (not necessarily more than one at a time, though) is exactly the kind of ‘controlled risk’ thinking that I like … just make sure that you have your ‘end game’ in mind right from the start (who are you going to licence those patents to? Who is going to buy those ‘micro businesses’ that you spin off).

v) Until the income from one of these ‘side ventures’ makes it seem stupid for you to do otherwise (you will know when this time comes), by all means: keep your day job and keep feeding your family!

vi) If you work hard, delay gratification, stay innovative, keep investing, get lucky, and keep those Step (i) Money Making 101 habits in place the whole way through, you probably won’t need $7 million to do whatever it is that is in your Life’s Dream … but 7 years should be just about enough time to get there.

Good luck to blogrdoc and all of the other Personal Finance (and other) bloggers out there …

… indeed, good luck to anybody who is reading this in order to break out of the pack. Hopefully, by following the advice in this post and others, you’ll need a little less of it (luck) to succeed!

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7million7years

How to make 7 million in 7 years …

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