Tag Archives: wealth

The case FOR credit cards …

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I think, by now, we all agree:

Credit Cards = BAD

I mean, that’s pretty much Personal Finance Kindergarten, right?

Why pay 19%+ interest for something that just goes down in value (like that 3D TV)?

But, why do I pay all my bills – both work and personal – by credit card.

I’m sure the answer’s pretty obvious to all and sundry: it’s for the points, man!

Yes, even millionaires like to get free stuff …

…. and, Sugardaddy outlines on NetworthIQ exactly how he does it:

1) Assuming that you pay your bills on time, most of the time, put all routine expenses on your credit card…utilities, groceries, etc.

2) Set up an automatic bill payment plan from your checking account for the card online.

Result:

1) you get a 30-day free loan.
2) you get free credit card points that are worth real money.
3) you increase your credit score.
4) you consolidate all your bills in one payment
5) You will never have a late fee and the APR will never concern you.
6) You will always watch your checking account balance like a hawk as failure to have enough in the account IS NOT AN OPTION.

I have done this for 10 years and it works like a charm…I get all my video games for “free” from Best Buy, and beat the banks at their own game.

Life does not get any better than that.

But, there’s always a catch in Life, Sugardaddy 😉

The one, here, is that the credit card companies HOPE that you forget to pay your bill on time, then you get to pay interest from the date of purchase.

[AJC: actually, they’ve already made their $$$$ from the Merchant Fee – believe me, I understand this side of the business VERY well – but, that 19% they get from you is just sweeeetttttt]

So, I add a few more steps to this otherwise inspired plan:

7 ) See 6)
8 ) See 6)
9 ) See 6)
10) See 6)

Point made?

Great, because I, too, have been doing this for years.

My assistant puts all ‘work’ expenses through my personal credit card (needless to say I have a LARGE credit limit), and my wife does the same with our home expenses.

Both ensure payment in full each and EVERY month.

Having done that, later this year I’m traveling ’round the world first class [AJC: I’m told that First Class on the new A380 entitles me to my own/private room on the ‘plane!] … fully ‘paid’ by points.

Sweet 🙂

Speaking of Billionaires …

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Where I fear to tread, Bargaineering boldly ventures; proudly proclaiming The Billionaire Secret: Avoid Ordinary Income, Acquire Capital Gains.

I won’t presume to tell you anything about being a bil-yun-air until I are one, but that doesn’t stop others from trying; Bargaineering says:

The key to building wealth is to build or buy an asset that can appreciate in value and/or generates passive income. The key to building or buying an asset that can do that is to convert your labor into capital (money). This is why saving for retirement, saving for a home, and saving in general is such an important piece of your personal finance plan. This is the billionaire secret because this idea is well understood by people who are wealthy. They see that capital gains taxes are much lower than ordinary income, that’s why Warren Buffet pays lower tax rates than his secretary. Capital gains are taxed at 15% for 2010 while the 15% tax bracket is the second lowest federal tax bracket (for those earning up to $34,000). It’s a no brainer, you want to transition, as quickly as possible, from ordinary income to long term capital gains and dividend income.

Have you ever seen those magic shows where the magician pulls some random guy out of the audience and gets him to try and copy what the magician is doing?

Presto!

The magician accomplishes some amazing feat and the other guy (gal?) ends up looking like a shmuck …

Well, that’s kind’a like what’s happening here – in fact, with most PF authors who write ‘get rich’ stuff. They are working by what they THINK they see other (real millionaires and billionaires) doing.

And, they see Warren Buffett playing with capital and saving on taxes and … presto!

“Convert your labor into capital (money)” and “capital gains taxes are much lower than ordinary income”, so “it’s a no brainer, you want to transition, as quickly as possible, from ordinary income to long term capital gains and dividend income”.

So, it’s a no brainer that you do all this (because the Billionaires DO do all of this, I think) and you’ll be standing there in 5 to 10 years as a poor shmuck.

Why?

You’ve missed the point entirely: how the trick is done, because it’s done behind the scenes … Bargaineering can’t really see it and neither can you.

Not because these billionaires are hiding anything (well, they probably are hiding at least a little) – unlike the magician who can’t afford to tell, not even once – but, because they have much more important things to do than write books and blogs.

So, from a multimillionaire’s perspective rather than a billionaire’s, let me share what I think is going on:

1. While you are trading hours for $$$ you lose

This is why I chose NOT to become a highly paid consultant, way back when I was a world expert (speaking tours and all) in my little niche. Don’t trade a limited commodity (time) for an unlimited one (money); you only have 40 to 60 hours a week to trade, no matter how much per hour you think you can pull, yet money is just bits of paper that Uncle Sam prints by the trillions.

Fortunately this one is simple: start a business; start investing … make your little bit of time and money work as hard as possible, until the money – on its own – starts to make more money for you. I think you can extrapolate?

2. Capital is better than income

But, it’s not for the tax-advantages … I don’t do anything BECAUSE of the tax advantages (for one, Uncle Sam loves to change those rules at the drop of a policy change); I simply take ’em when they come.

But capital is a tool for creating income; it’s a little like that time/money thing. The best you can do is create your perpetual money machine: use your income to buy a little capital (real-estate is nice) which generates more income (from rents, after mortgage and other costs) which you pump back into buying more ‘capital’; repeat until rich!

Finally, Bargaineering says:

While the 2% you can get at a high interest savings account isn’t going to set you for retirement, that income represents your money working for you. The problem with this approach, at least for the long term, is that interest income is considered ordinary income. It’s taxed at the higher rate, which makes it a bad idea.

Do I really need to explain why the problem here is the 2%, not the taxation rate?

None of this get rich(er) quick(er) stuff works, if you don’t get your annual compound growth rate to infinity and beyond … well, at least to 15%+++ 😉

What it takes to be a Billionaire ….

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I feel so privileged to be in the blogging company of a billionaire …

Guerrilla Billionaire [AJC: who, presumably is so humble that he doesn’t even pay $12 at GoDaddy for a real domain name, prefering to use: the free one provided by Typepad … so humble, it brings tears to my eyes] offers a course on How to Become A Billionaire.

Thankfully, he also provided a link to an article written by a guy who interviewed a REAL Chinese billionaire 5 or 6 times:

It seems that this Chinese Billionaire’s ‘secrets’ are along the lines of being humble (he started as a peasant boy), being nice to everybody (you never know when the next peasant will become your competitor, financier, or business partner), being scrupulously honest (apparently, there’s a way to be unscrupulously honest that, so far, I am blissfully unaware of), and to leave plenty of meat on the bone for others.

Of these, perhaps the last is the only ‘real’ secret that I can see in all of this (5 interviews and no secret business or money management techniques?!) … or, at least the only one (other than being honest) that I can relate to:

In my latest property development deal, I am sharing 25% of the project profit (plus a $200k fee) to my partner who is essentially doing nothing other than project management … he’s not putting a penny into these deals (I’m paying him $200k + 25% on each): I’m funding 100%.

I could hire an experienced building project manager for less than the $200k fee alone, yet I am potentially giving away millions to this guy.

Why?

Well, part’s the ‘honesty/ethics’ bit: he did find me one of the pieces of land that I aquired and pointed me towards the real multi-story condo development potential of the other (I had a much less lucrative project in mind); not to mention, he helped me with the rehab of my house.

But, that’s not quite the full story: while I don’t normally like partners – in fact, have never had one before – this is a whole new thing for me … I know nothing – nada – about property development, having always been a buy-and-hold guy. Again, I could have bought in the expertise, but that may not be the same as having somebody that I can (hopefully) trust who now has skin in the game.

We shall see if this strategy works; and – given how much I have already learned (property development is EASY) – whether I will go it alone on any future projects.

But, there’s a LOT to be said for not looking at how many beans are on the other guy’s plate: if you’re hungry, and you’re also eating beans, who cares?

Oh, as to the billionaire course, I won’t be taking it – even though I probably need an instructor for Making Money 401.

Fortunately for you, you already have a bona fide multimillionaire to guide you through MM101, 201 and 301 …

… even if I’m not very humble – at least as far as this blog, using my semi-anonymous AJC identity, goes,  😉

The Zero Dollar Emergency Fund!

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Last week I asked How many months do you have in your emergency fund?

Earlier, my blogging friend JD Roth at get Rich Slowly (GRS) asked the same question of his readers, and this is what he found:

How many months do you have in your emergency fund?
GRS 7m7y
less than 3 months 38% 29%
3-6 months 26% 24%
7-12 months 13% 24%
more than 12 months 14% 16%

This shows that more 7m7y readers have 3+ months living expenses in their ’emergency funds’ than GRS readers, which means …

… I’ve done a terrible job 🙁

On the other hand, if you answered “what’s an emergency fund?” good for you, you’re already a step ahead of the pack … you see, not everybody – including me – thinks that you need to have an emergency fund at all!

[AJC: At least not until after you reach Your Number]

For instance, Liz Pulliam Weston writes at MSN Money that you should have a $0 emergency fund, replacing it with a concept that she calls ‘financial flexibility’:

The whole idea that everyone needs a big pile of cash, and needs it right now, should be rethought. In reality, the failure to have a fat emergency fund isn’t inevitably a crisis. At the same time, those who feel safe because they have three or even six months’ expenses saved up might be kidding themselves.

Let’s say your take-home pay is about $4,000 a month. Although you have been spending every dime, you make a concerted effort to trim your expenses by 10%. This not only frees up money for your emergency savings but lowers the total amount you need to save from $12,000 to $10,800.

Still, it will take you 27 months — more than two years — to scrape together your emergency fund. And that assumes nothing comes up that forces you to raid your cache.

Let’s explore this a litter further: JD Roth has $10,000 in his emergency fund, but that doesn’t just represent $10,000 today …

…. it represents the future value of $10,000:

Let’s say that you intend to retire in 20 years, if you earn 9% on your money (say, invested in Index Funds) then you are giving up, say, 2% bank interest (by having your emergency fund sit in an ordinary savings account for quick ’emergency’ access) to earn 9% – or, a net of 7%.

That extra 7% earned represents about $8k in extra interest/profit that you are giving up for the benefit of ‘peace of mind’ in an emergency. But, we aren’t investing our money in Index Funds, because we are on a mission: we want to reach $7 Million in just 7 Years!

To us – that is, those of us on a steep financial trajectory – this $10k pile of cash represents seed capital for your new business venture or next real-estate acquisition [AJC: and, don’t tell me that an extra $10k wouldn’t be a big help for either of these endeavors] …

… now, $10k ‘invested’ at:

  • 15% (stocks) grows to $35,000 after just 10 years
  • 30% (real-estate) grows to $106,000 after just 10 years
  • 50% (business) grows to $384,000 after just 10 years

… a slightly larger price to pay for peace of mind 🙂

… but, Will Smith isn’t (completely) happy

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So, the jury is IN: money does buy (at least some) happiness …

… then, why isn’t Will Smith (who has PLENTY of money) completely happy?!

First, let me backtrack a little:

One of the advantages of being rich – well, 7m7y kind of ‘rich’ – is that acquiring technology isn’t an issue.

That’s why we have a Slingbox, which sends live streaming video from our friend’s satellite TV in Atlanta right to my wife’s PC (or, our home theater) in Australia.

This means that she doesn’t need to miss out on the most current episode of Oprah, and neither do I … on the odd occasion that I happen to be in the same room when she’s watching.

As it happened, on this occasion my wife was catching up on some more recent episodes that she missed while we were busy moving house, and it was how I happened to catch a bit of Will Smith’s Oprah interview.

Will said a couple of things that intrigued me:

First, he said that no matter how much money he accumulates, he never stops worrying about money!

Well, that’s actually good news, because I can see that through every stage of my financial journey, I have never stopped worrying about money.

Good news, because if Will Smith – who must be an order of magnitude or two ahead of me, financially speaking – worries about money, then I can stop worrying about worrying about money.

And, so should you!

It appears that worrying about money is a normal part of the human condition 🙂

The second thing that Will said interested me even more: he’s not satisfied with his achievements to date … he can’t believe that he was put on earth merely to entertain people.

It seems that Will hasn’t found his Life’s Purpose!

Confirmation, to me, that fulfilment comes in three parts:

1. Discovering your Life’s Purpose, then

2. Working towards it, using whatever tools/talents you have been given, then

3. Finally, living your Life’s Purpose.

Step 2 is a means to an end (and, there’s no reason why you can’t bypass it if your Life’s Purpose doesn’t require the passing of time, or the accumulation of supporting assets).

But, don’t confuse Step 2. with Step 3. …

… Will Smith might be famous and known for his singing/acting talents, but (for him) it appears they are merely a means to an end.

Discover your ‘end’, and the ‘means’ – even if not as exciting, profitable, and/or high-profile as Will Smith’s – becomes much more palatable.

What do you think?

I’ve received an award!

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Top Saving Money Blog
Online MBA

I’m not sure who Awarding the Web are, but they have kindly just listed $7million7years as one of their ‘Top 40″ Business Blogs in the “Saving Money” category.

This is kind of ironic as I am keeping company with the likes of Frugal For Life, Bargain Briana, Bitter Wallet, and FruGal [AJC: I love puns … unfortunately for those around me, the more groan-inducing, the better] …

… but, this blog is about as un-saving money as you can get (!):

http://7million7years.com/2009/05/02/save-your-way-to-wealth/

Yet, we do spend a lot of time in Making Money 101 on saving tips:

The reason: habit.

While I stick to my guns and say that you can’t save your way to any reasonably large Number by any reasonably soon Date [AJC: Pick any Number north of $1 million, and any Date south of 15 years and see what you come up with, inflation adjusted], the reason why you should still save/save/save is twofold:

1. You create the seed capital that you might need for your first real-estate purchase and/or business venture … it’s these that will create your Number/Date, and

2. You create the habits that will stop you from spending your wealth once you get it.

Saving money is kind’a like the bookends to your financial life …

… but, true wealth building is in the bits you do in between that really have nothing at all to do with saving.

Well, not directly 😉

Money does buy happiness …

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… but, not for long.

I have become obsessed with lotteries!

Not in participating … I don’t: I recently refused to buy a $7 ticket to a $20 million+ lottery; the vendor thought that I was crazy, but he was crazy.

[AJC: Actually, I used to participate in my office lottery syndicate as a form of ‘insurance’: if my staff won, they might leave en masse, at least my lottery winning would help cushion the blow … this is really how I think!]

There are government-sponsored anti-gambling ads running on Australian television right now that show that you have around twenty times the chance of a number one record as you do to win the biggest jackpot on a slot machine … lotteries are worse, much worse.

Yet, I can understand the temptation because the prizes are so large.

My interest actually has to do with my ‘easy come, easy go’ thesis: I believe that in order to keep a large sum of money, you have to make it slowly (so that you can learn the necessary financial lessons along the way) … by slowly, I mean years – say, 7 – not days.

When I heard that 80% of lottery winners lose their winnings within 5 years, I became very interested to find out more. Unfortunately, stats are hard to find:

Nora Moon, validations supervisor with the Virginia Lottery, has dealt with almost every lottery winner since the lottery began. Estimating how many Lotto winners have gotten into financial trouble is impossible, she said.

Documents submitted to the Supreme Court of Texas by the Attorney General state:

Steve Danish, a Virginia Commonwealth University psychology professor who has counseled Virginia Lottery winners, said one-third of about 40 winners he talked to in a seminar several years ago asked questions indicating they were in financial trouble.

But, I think the most interesting source comes from the lottery itself: Camelot Group Plc, who is the operator of The UK National Lottery. Camelot commissioned Ipsos MORI (a leading UK research house); in a good news / bad news survey, they found:

More than half the Lottery winners are happier now than they were before their win (55%). Most of the other winners claim that winning the Lottery has not affected their level of happiness, largely due to the fact that they were happy before their win. Only 2% of winners were less happy. The happiness of the winner is not affected by the size of his or her win.

Of the winners who are happier (55%) around two thirds claim one of the reasons is improved financial security and fewer worries (65%). A further 23% either stated that they can buy what they want now or that life is generally a lot easier.

The large majority of Lottery winners have not experienced any negative effects on family life or friendships.

That’s the good news … surprisingly (after all, the research was sponsored by the operators of the lottery!), there was some terribly bad news in a one-liner buried in the body of the report; money does buy happiness … but, that money (and, presumably, the happiness) is short-lived:

On average, the winners have so far spent 44% of their winnings …

Whoa!

I forgot to mention that this survey carried out in 1999 by MORI, marked the 5th birthday of The National Lottery and the findings “represent the most complete snapshot of the generation of Lottery winners who have emerged since the first draw on 19 November 1994”.

That’s a 44% depletion of winnings during a 5 year period or, on average, after just 2.5 years!

All of a sudden the ‘80% of lottery winners are broke after 5 years’ myth is not so ‘mythical’ after all; here’s the lottery winner’s life cycle:

Happy => Rich => Happy => Spend => Broke => Happy or Devastated … you decide?

In either case, my ‘easy come, easy go’ thesis is looking better all the time 🙁

What’s better: a satisified mind or money?

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Sadly, not too long (less than 5 years) after this performance of the great Red Hayes song (covered by everybody from Johnny Cash to Bob Dylan, and even The Byrds), Jeff Buckley died; that makes TWO great reasons to find your Life’s Purpose … the other being in the opening lyrics to this great song:

How many times have you heard someone say: “If I had money, I would do things my way.”

But little they know, that it’s so hard to find one rich man in ten, with a satisfied mind.
Money can’t buy back all your youth when you’re old, a friend when you’re lonely, or peace to your soul.
The wealthiest person, is a pauper at times compared to the man with a satisfied mind.

Find your Life’s Purpose, then the money will mean something: Your Number will be the financial enabler of Your Life’s Purpose!

After all, there’s no other good reason to be wealthy, is there?

The much maligned Robert Kiyosaki

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Robert Kiyosaki is famous (or infamous, depending on your viewpoint) for his break-out book: Rich Dad, Poor Dad.

Whichever way you happen to lean on this subject (and, please feel free to share!), I think that he deserves to be congratulated for thrusting personal finance back into the spotlight, and he equally deserves to be admired for his ability to parlay that first success into a personal finance publishing empire that includes 10 to 20 books, a few games, and so on.

In fact, RDPD is one of the very first books on personal finance that I ever read, and is certainly the book that inspired me to look into the field very deeply.

It’s unfortunate, then, that Robert Kiyosaki has managed to build up both a cult following and a cult anti-following (?!), neither of which I ascribe to.

Jake says, somewhat, tongue in cheek:

Ahh, so you will now renounce your belief that Kiyosaki is not a quack? :)

Abandon the dark side…

Actually, Jake, I’ve never commented on RK’s quackiness of lack thereof 😛

All I’ve said is:

1.  His book – at the time – inspired me to look into the field of personal finance a LOT further.

2. I like RK’s definition of liability v asset (albeit, not technically correct, he says an ‘asset puts money in your pocket, and a liability takes money out’. Neat!).

3. I think that RK became rich because of his book, and was worth ‘only’ circa $1.5 mill. (give or take $500k) before.

I base this last assessment purely on a statement he made in RDPD (or one of his later books, perhaps Cashflow Quadrant? … I’m working from memory, here, as I have filed his book away somewhere) that he ‘retired’ to write that first book (or was it to create his board game?) on passive income of $100k p.a., driven primarily by real-estate.

That’s pretty much it!

But, and this is important, realizing that a lot of these personal finance gurus – whether well-meaning and genuine in their belief or out-and-out scammers, scoundrels, and liars – actually made their real wealth, if at all, AFTER (or because) they wrote their books …

… I firmly resolved that I would study the field of personal finance, apply what I learned, and (hopefully!) become rich in the process, THEN write about it from the standpoint of a REAL self-made, multi-millionaire entrepreneur and investor.

This blog is the result 🙂

Where does the money go?

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If it takes an average of just 2-and-a-half years for UK lottery winners to blow 44% of their winnings, where does the money go?

Well, Camelot (the operators of the UK lottery) commissioned a follow-up report in 2002:

A third of winners (34%) buy a car straightaway, while one in 10 (11%) buy new clothes or new jewelery. For around four in five (77%) the most expensive single purchase is a house, followed by a car (14%). A quarter of winners give up to 10% of their winnings to their family, while nearly a half more (45%) give family eleven to thirty percent. Almost three in five give up to 10% to friends, while two thirds give up to 10% to charity.

Why do these winners figuratively throw their money out the window?

I think I’ve stumbled on a clue; they think that they can just win it all back again:

As to doing the Lotto, four in five jackpot winners (82%) still play every week — and one in five (21%) is very confident of winning again.

And, I think that in here is a very important lesson for those of you lucky enough to become successful with your Making Money 201 (Wealth Acceleration) activities:

Don’t spend your money as though you can just keep on making it all over again … you take on huge (hopefully, calculated) risks to reach your Number by your Date.

But, once you get there, switch to Making Money 301 (Protecting Your Wealth) because you just may not be so lucky the next time around 😉