Tag Archives: wealth

Comfort kills!

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Yes, that is genius …

But, what does T Harv Eker mean by ‘comfort zone’? Here’s what he says in his book:

Comfort kills! If your goal in life is to be comfortable, I guarantee two things. First, you will never be rich. Second, you will never be happy. Happiness doesn’t come from living a lukewarm life, always wondering what could have been. Happiness comes as a result of being in our natural state of growth and living up to our fullest potential.

How ‘comfortable’ you want to live is up to you … but, I can help you convert that into a number: the amount of money that you need in the bank so that you can live your desired level of comfort (or, discomfort).

Then, I can help you get there!

You DO need $12 million to retire …

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Money Ning says that you don’t need $12 million to retire.

Except on Planet AJC, ‘Ning!

Money Ning says:

Can you imagine spending $11,250 per month every 30 days until you are 70? It would actually be fun for a while, but by the 24th month, I bet you’ll be tired of buying anything. And if you just leave some money left every month? Well, down goes the savings necessary.

These humongous retirement numbers may catch our attention, but they rarely speak the truth about reality. Plus, chasing a number is a never ending game, because there’s always a higher number to go after.

When I was still $30k in debt, and going nowhere fast, I calculated that I needed $5 million to ‘retire rich’:

– That was in 1998 dollars … in 2010 dollars, we’re up at around $7.5 million

– I under-estimated what I needed; and, so will you!

Right now, I ‘burn’ around $250k per year (land taxes, school fees, vacations; house upkeep; etc.) and don’t consider my spending anywhere near ‘Snoop Dog Lavish’, but it’s WAY over Money Ning’s “$11,250 per month” … and, I can’t EVER imagine spending that little per month. Really.

To that annual spend, I add my two houses (to be fair, I’m trying to get rid of the US one), and my two cars (and some associated expenses) … there’s $12 million, and I don’t live in New York!

Of course, that’s not what everybody needs … maybe not even what ANYBODY needs … but, it is (give – not take – a few million) what I decided that I needed.

But, when calculating YOUR ‘number’, don’t go for the money, do as Money Ning suggests:

Chasing a number is a never ending game, because there’s always a higher number to go after. If you want to feel rich, the more appropriate approach is to just make sure money is out of your way, out of your life decisions, and out of the list of things that you worry about.

That’s what I did … it’s hardly my fault if the answer pointed to $5 Million, nor is it my fault that I ended up cashing out for a whole lot more. And, it won’t even be my fault, if you do, too.  😉

Beat 80% of professional fund managers!

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I’m disappointed! I thought that 7million7years.com and it’s membership-site ‘cousin’ 7m7y.com were important enough to be hacked … but, they weren’t 🙁

Turns out that MANY GoDaddy-hosted WordPress sites have been similarly ‘hacked’ – with users seeing a [false] SECURITY WARNING ALERT!!! message. GoDaddy appears to be working on have fixed the issue, in the meantime, please read on for today’s un-hacked post ….

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Shawn at Watson Inc. outlines a sensible ‘system’ – one that I have spoken about before – that beats “80%-90%” of professional fund managers [my highlights]:

Some may ask what I mean by systematic investing. Peter Lynch (Fidelity), Warren Buffett (Berkshire), and even Dave Ramsey recommend a conservative and simple approach for the typical investor: rather than trying to outsmart the markets, use benchmarks to track the markets instead. For example, the Vanguard Index 500 fund has outperformed two-thirds of all mutual funds on a rather consistent basis (Cash Flow Quadrant, 1999). Usually over 10 years, these types of index funds yield a return exceeding 80-90% of returns of the “professional” mutual fund money managers (Motley Fool, 2007). Interestingly, the average millionaire is this type of investor (The Millionaire Next Door, 1996). Although there is no 100% guarantee, this method does dramatically decrease the risk over time and provides respectable returns. Provided that one starts early enough (i.e. before mid-forties), consistent investing over time can be the key to achieving a great deal of wealth.

Now, who wouldn’t kill for a system like that?

Well, me for one … and, I’m guessing, most of you!

You see, we (7m7y readers) have a very special filter that QUALIFIES us; it’s the title of this blog: “How to make $7 million in 7 years”.

Now, there’s no reason why you CAN’T read this blog if your target is, say, $1 million in 20 years … I can’t physically stop you … but, it’s ill-advised, because most of what I say would just be ‘noise’ to you …

… just confusing ‘chatter’ that sometimes runs totally counter to what you read elsewhere.

What I say here is ‘noise’ if you really do have very modest financial goals, or no real financial goals beyond saving and trying to become debt free.

So, in my “$7 million 7 year” context, I say “so what if I can beat 80%-90% of fund managers?” because the amount that I can make simply won’t be enough to help me reach my Number … certainly not if it’s one of my main financial strategies.

Instead of worrying about the pro’s and how the vast majority are simply butchering the mutual funds that they are supposed to be wisely managing, realize that investing in the ‘market’ (e.g. by investing in a low-cost index fund as sensibly suggested by Shawn) actually LIMITS your returns to that achieved by the market: 8% over 30 years in any market, 12% in ‘average’ times, and 0% (or worse) in recent times.

Try this:

a) Plug your starting Investment Net Worth (i.e. what you could scrape together to invest) into a compound growth rate calculator

b) Also, plug in how much you think you will be able to add each year

c) Include the number of investing years that you would like to have before you finally ‘stop work’ to live off the fruits of your investments

d) Plug in any number from 1% to 12% that YOU think an Index Fund will reasonably return over the number of years that you allowed, above

e) Halve the answer that the calculator gives you to (very roughly) allow for 4% inflation, for every 20 years (or prorate, if less than 20) that you chose, above.

f) Divide your final answer by 20: on a VERY GOOD DAY, that’s roughly (in today’s dollars) what you will have to live off, each year.

If that’s good enough for you, congratulations on two counts:

1. Thanks to Shawn, you’ve just found your Ideal Investment Strategy … and, it’s easy / low risk, to boot! And,

2. You’ve also saved 2 minutes a day, because this blog – for you – is just noise …. [crackle … and, out!]

But (!), if the answer is NOT good enough for you [AJC: it sure wasn’t good enough for me! But, it just might be good enough for you – be TOTALLY honest, this could be the financial ‘tipping point’ for you] … commiserations: your life just became a whole lot harder!

If so, keep reading … I’ll do what I can to soften the blow 😉

Paying down debt IS investing …

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Budgets Are Sexy [AJC: If J. Money really thinks so, I don’t want to be invited to his Stag Night!] poses an important question: “Should you invest or pay down debt?”

And, he provides these guidelines to help you decide the answer:

Whenever you have any extra money in your pocket, make sure to take care of these financial priorities, in this order, before you do anything else:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Accumulate a financial safety net. If you don’t have at least three to six month’s worth of your living expenses saved up in an accessible emergency fund, that’s the next place your extra money should go.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with double-digit interest rates, attack those financial burdens next.

If you’ve accomplished the above and still have excess money left over each month, you’re in a great position. Maybe you have an extra $100 and are struggling with whether to invest it in your Roth IRA or to use it to pay down your mortgage, for example. The answer to the dilemma is simple: Determine which option is more profitable for you. To do that, you have to figure out your after-tax return for each choice.

I agree with the first bullet point: you must pay down any delinquent debts. You have to keep your head above financial water.

As to the rest, well, I think that we’re in danger of forgetting a critical point:

Paying down debt is investing!

You’re investing in your own ‘debt instruments’, where the risk is low (in fact, by paying down the debt, you’re IMPROVING your risk profile) and the return can be low / mediocre / high depending upon the AFTER TAX cost of the interest and any other fees and charges.

Your student loans and mortgage debts are probably LOW interest, hence LOW return investments.

Your car loan and credit card debts probably HIGH interest, hence HIGH return investments.

… and, you may have some personal loans or other debts that fall somewhere between the two.

So, I would modify BAS’s guidelines as follows:

  1. Pay down any delinquent debts that could threaten your well-being or credit score, such as an overdue tax bill or legal judgment.
  2. Put in place a financial safety net. Put a HELOC in place; make sure that you can tap into your retirement accounts, or keep some spare loan facilities in place in case a financial emergency arises.
  3. Pay down high-interest debt. If you have credit cards, lines of credit, or auto loans, with high double-digit interest rates, you’re probably safe in attacking those financial burdens next.
  4. Find investments that can outperform your remaining debts. If you have 1st mortgages, student loans or other loans with low single-digit interest rates, let them ride PROVIDED that you instead invest somewhere where AFTER TAX returns should be expected to outperform these remaining loans by a comfortable margin.

Once you’ve made the mental leap that paying down debt IS investing, you’re in a MUCH BETTER position to decide how best to use your money … particularly if you have optimistic financial goals 🙂

Staring down as the ground rushes up to meet you!

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[click here to see movie]

I’m not a great fan of roller-coasters and thrill-rides, although I have ridden my fair share.

The most recent was at Disney World in Orlando, FL where I rode the The Disney World Rock ‘n’ Roller Coaster, mainly because I heard that it accelerated from a standing start as fast a Formula 1 race car, or something along those lines.

But, the one that scared me the most was one that I rode at our local Luna Park in my late teens … it was called The Zipper: more a thrill-ride than a coaster [AJC: I was ‘thrilled’ to find the image/movie above … imagine it at high speed and the whole arm on which the cages are moving around ALSO orbits around a central hub with the effect of ‘throwing’ each cage towards the concrete ground!], as it consisted of a number of cages spinning on an orbital arm; the effect – at certain stages of the ride – was rushing face down towards the pavement … a nice way to pick up your heart and shove it firmly into your mouth!

This effect is also one of the main reasons that I’m not enamored with most of the so-called Safe Withdrawal Rate retirement strategies that abound.

Whereas the main differentiator of these plans is usually in the % that you can ‘safely’ withdraw each year from your retirement ‘nest egg’ (usually in the 3.5% – 5% range), they are usually based on some sort of mathematical calculation that takes into account:

1. Your current age

2. The Number of years you expect to live (usually 30 or 40 years post-retirement)

3. The amount that you retired with

4. The mix of cash, stocks, and bonds that you would be most comfortable with

5. The probability that you would be most comfortable with that your money will last as long as you do (usually 75%+)

The mathematical models used then try and take these various factors into account, along with the historical performance of the cash/bond/stock markets and calculate what % of your nest-egg that you can withdraw that will – within the % accuracy that you chose – ensure that you have at least $1 left to your name on the day that you predicted that you will die.

Now, if that doesn’t sound totally idiotic to you, let’s just imagine for a moment that you CAN predict that you will die pretty close to the date that you selected for the model to work AND that you are comfortable with something less than 100% certainty that your money will last as long a you do …

… I still can’t help thinking that for the latter years – when you are pretty old and absolutely powerless to do anything other than ‘hang on for the ride’ – you will have to endure the REALITY of your bank account rapidly depleting towards that ‘perfect’ $1 remainder (or, whatever remainder you selected).

And, I can’t help but picture myself – eyes ever widening in financial terror – wondering: “will I hit Ground Zero ($)?”

I still hate thrill rides 🙁

PS I’m glad that I didn’t read about the safety issues with the earlier version of the Zipper ride – likely the same model as the one that I rode – otherwise my ‘face rushing to meet the pavement” may have turned out to be real (!):

On September 7, 1977, the Consumer Product Safety Commission issued a public warning, urging carnival-goers not to ride the Zipper after four deaths occurred due to compartment doors opening mid-ride … the same scenario was repeated in July 2006 in Hinckley, Minnesota when two teenage girls were ejected from their compartment as the door swung open.

What are your financial flashpoints?

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OK, I was all set to tell JD Roth (at Get Rich Slowly) that wealth comes from your actions, not from some ‘magical millionaire mind-set’ when I clicked PLAY on this video by the author of a book that JD was reviewing on his site …

… the video actually hit home!

I remember some distinct financial flashpoints that helped to set me on my financial path … for better or worse:

1. My dad waking me up in the middle of the night to go and watch our shop burning down

2. My dad telling me our (bad) financial situation

… not one event, but a series with the common theme: we were living beyond our means.

This hit home, and I resolved never to be a financial burden on anybody …. never to hold my hand out … and, so on. From a young age, I held down after school jobs, bought my own clothes, saved up for my own cars, paid for my own trips, and so on.

This is not unusual; many – most – of you probably had to do the same. And, we were not totally ‘poor’ … my dad could eventually solve most of his financial problems by going to other, wealthier relatives for hand-outs.

But, what made it a little different for me was that my dad hid all of this from my mother and my sisters … THEY believed that we lived a ‘normal’ upper-middle-class lifestyle. I actually lived in a different ‘financial house’ to the one in which they lived, even though we shared the same 4 walls!

No doubt, these experiences go a long way to explain why I am independently / self-made wealthy today, and to this day, the females in my family still live off hand-outs.

Yes, there are financial flashpoints that help to explain my ‘wealth motivation’, maybe you would like to share yours?

Now, this is a clever post …

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Maybe it’s only because I recently compared personal finance to Vegemite, but I like this guy: he has the gumption [AJC: don’t think this is the right word; any ideas?] to compare soccer to personal finance, then actually make it make sense!

Not to mention, it’s just plain good advice:

Spain is Soccer World Cup 2010 Champion. Analysts say that is because of their mental strength, their wily forwards, a strong defence and the hardworking midfield.

Apart from the mental strength, which is invisible, what’s visible on the field are three important components.
1. Forwards, to score the goals.
2. Midfielders, to control the game.
3. Defenders, to save, not leak goals.

I know you have this idea that I would be comparing soccer with Personal Finance. Here it is.

Personal Finance has three important components too.
1. Investing, to get more bang on your money.
2. Maximizing your income, to control the game of money.
3. Frugality, to save and not leak money.

And yes, you also need to have that mental strength not to be dragged down by “fear and greed”. And keep coming back even after failure.

Now, I haven’t given the whole game away [pun intended!], because Ranjan goes on to talk about the three types of investors … but, you’ll have to read his post to find out 🙂

Financial advice for an 18 year old …

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My blogging friend JD Roth (at Get Rich Slowly) offers some advice to an 18 y.o. who asks:

Are there any other resources you would recommend to a financially clueless 18 year-old?

JD gives some of his usual good advice:

Maybe it’s because of my own experience racking up debt during college, but I think it’s important for young adults to learn the fundamental law of personal finance: To build wealth, you must spend less than you earn. There’s more to it than that, of course. The less you spend, the more flexibility you have.

… but, I really want to be able to tell this kid:

After teaching ‘kids’ to save some / spend some (to understand that there needs to be a balance), and all those other wonderful things that JD suggests in his post, I would strongly advise any young reader to get some ‘business experience’ on the side.

Fortunately, with the internet, that is SO easy these days:

1. Start a ‘for money’ blog. Stuck for a topic?

Try this: write a blog aimed at other high school / college kids chronicling your attempts to improve your own financial situation … worst case, it could read as comedy.

2. Sell stuff on eBay; even better, find stuff in China and then sell it on eBay.

Try not to get ripped off AND make a profit. Write about it on your blog … it will DEFINITELY be funny!

3. Start a web-site selling anything; OK it may not make money (or, it COULD become the next Facebook), but you will learn heaps.

Better yet; try all three!

What financial advice would YOU like to give this 18 year old?

View your 401k as insurance!

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I agree with Financial Samurai’s basic sentiment, which is to effectively ‘write off’ your 401k and Social Security:

Every month I contribute $1,375 to my 401K so that by the end of the year, the 401K is maxed out at $16,500.  Unfortunately, $16,500 a year is a ridiculously low amount of money to save for retirement if you really do the math.  After 10 years, you might have $200,000, and after 30 years you might have $600,000 to $1 million depending on the markets and your employer’s match.  Whatever the case may be, the 401K is simply not enough money to retire on, especially since you need to pay tax upon distribution.

CNN Money and other advisers showcased super savers who to my surprise include 401K and IRA contributions as part of their percentage savings calculations.  In other words, if you make $100,000 a year, save $4,000 a year in cash, and contribute $16,000 in your 401K, you are considered by financial advisers as saving 20% of your gross income.  Your $20,000 in “savings” is woefully light because in reality, you are only saving $4,000 a year. With the stock market implosion of 2008,  your 401K has proven itself to be totally unreliable.  Like Social Security, contribute to it like any good citizen should, but in no way depend on Social Security or your 401K to retire a comfortable life.  I

Depending on Social Security is depending on the government doing the right thing.  There’s no way that’s going to happen.  Depending on your 401K is depending on people choosing the right stocks consistently over the long run, which isn’t going to happen either.

Because Social Security is a burden on governments and society, it’s always at risk of being watered down or eliminated … this is less of a risk the older your are (hence closer to receiving the payments).

But, not so your 401k: while governments can (and, probably will) water down – instead of increase – the contributions and benefits of your retirement program, the money that you contribute (and, your employer match) is still yours!

I don’t think you’ll ever lose what you contribute + whatever gains the flawed investment choices available may bring.

I look at my retirement plan (which I haven’t contributed to in years!) as insurance: if all else fails, when I reach whatever age the government of the time lets me access MY money, I’ll have something to keep me one step away from homeless … just.

So, I agree with Financial Samurai’s closing advice:

The only person you can depend on is yourself.  This is why you must save that minimum 20% of your gross income every year on top of contributing to your 401K and IRA if you can.

You’ve heard of Paying Yourself Once? Well, I think you need to Pay Yourself Twice™ … once inside your 401k (there’s your ‘insurance policy premium’), and once outside of your 401k.

It’s the money that you can put aside OUTSIDE of your 401k that will drive your wealth, because you can put it to MUCH BETTER USE (e.g. investing in business, real-estate, value stocks, etc.) than that money locked away inside your 401k and in the hands of grossly under-performing, fee-driven mutual fund managers 🙂

Managing your life through the rear-view mirror …

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Not many people are rich, so following COMMON financial wisdom can’t be all that it’s cracked up to be, can it?

Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on 😉