Monthly Archives: September 2010

Disability no object …

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I think that there are fewer ‘hold backs ‘ to getting what we want than we think …

Here, Lance shares his disability, but that’s NOT his hold-back … access to money is. But, I think that’s NOT his hold-back either, and it shouldn’t be yours:

I’m 32 years old and born completely deaf. I’ve worked twice as hard as my non-disabled peers to get to where I am now and am only 18 months away from being completely debt free including having my home paid off.

Meanwhile I am working full time and am trying to get a side business going that focuses on media services for the Deaf population. I strongly believe that my media business will someday replace my current income.

Now, I’m doing everything I can coming from low class family on both my side and my wife’s side to fund my way to success while watching friends from wealthier families getting much further ahead to their wealth than I am. Don’t get me wrong, it’s not a competition and I’m happy for them but I’m seeing that it takes money to make money and the road I’m taking with “self-made-funds” is taking forever. While I know my friend with a wealthy father in law wouldn’t be nearly as far as he is without his in-law’s fund I feel like in order to succeed you need to know someone wealthy, I see it all the time. My problem is I have absolutely no relatives who are wealthy, no friends with money enough to invest, or any kind of connection to people with money.

Being on the path to debt-free I really don’t want to borrow money either, I hate debt but at the same time I know it’s necessary as you call good debt. One of my next steps requires $35k – $50k, so I’m asking you where someone in my position can find that kind of money without having to save it over the next 5 years.

Now, Lance may have some advantages that some of these ‘wealthy-relatived others’ don’t have: for example, Lance is debt-free (almost)!

And, I have wealthy relatives, but would never have considered holding my hand out, anyway … some people have the ‘take gene’, but others don’t.

I don’t.

Lance could go to a bunch of non-wealthy friends and ask for a little from each … he might be surprised to find that 10 friends would be happy to cough up, say, $5k each. And, he may be able to tap into government grants to make up the difference, given his disability and the planed area for his business.

But, Lance’s best bet IMHO is to refinance his house. This is a good opportunity to lock in a very low interest rate line of funding for his business anyway by fixing at the current low home mortgage rates.

I know that this goes against Lance’s “pay off your home mortgage” mentality, but is his house any less valuable or livable because he does/doesn’t carry a mortgage?

Of course not!

If you also have a hot business idea, but have stalled for lack of money, maybe you should do the same?

But, you have to REALLY believe in your business …

The classic argument against real-estate …

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Wisebread publishes an article by Antar Salim (an MBA who teaches business at the Rasmussen College School of Business, MN) that mounts the classic argument against investing in residential real-estate:

Depending on your sources, the average home price in the U.S. at the beginning of the millennium was approximately $160,000. Today, that same home will sell for approximately $200,000. If we explore the change in home prices, the average home increased by $40,000, or 25% over the decade. If you do the math — considering present value, future value, and time — this equates to a 2.2% compound increase year over year. Congratulations, we’re now in the positive rates of return.

Just one moment. We haven’t considered the rate of inflation, which we know historically is greater than 2.2%. Not only that, we haven’t taken into account that it cost us approximately 5% to 6% a year to borrow the money to purchase the home.

Granted, we all have to have a roof over our head, and I’m not suggesting that real estate is a bad investment, but it is my personal opinion that if your home is your best and biggest investment, then you may be in trouble.

Now, I agree with Antar’s last point: if your home is your best and biggest investment, then you are in trouble.

Regardless, here are the basic errors in Antar’s thinking:

1. Let’s say that the 2.2% compound growth rate will hold true for the next decade; this is an across the entire country average. Can you think of some areas that will grow faster than others? Look at your own town: can you name some suburbs that you can be pretty sure will grow faster than average, and others that will do worse? Of course you can.

2. Are you going to invest the entire $200k required for the house or are you going to borrow 80% from the bank? You are going to invest just $40k and make more than 25% profit on the entire property; that’s $50k+ back (less closing costs) on your $40k investment! Over 10 years, that smells more like a 7++% compounded return to me.

3. You are going to pay 5% to 6% (less 20% for the portion of the house NOT financed i.e. your deposit) of that return to the bank in mortgage interest.

4. You are going to claim tax deductions on the mortgage interest.

5. Here’s an investment that makes money by saving you money … because you don’t have to spend on rent elsewhere!

Not only is this such a good deal for you, even taking into account that 2.2% is a really crappy ‘look ahead’ estimate for housing over the next 10 years, that you should not just do it once …

… you should do it (at least) twice, making the second one a true rental (and, if it’s new, you may even be able to claim some additional depreciation allowances on your purchase).

Time to go back to (business) school 😉

A great retirement plan executed badly …

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I have a good friend who had a successful business; while not exactly a retirement plan (as he still had the business), it would work as one:

He would buy a commercial property (e.g. office or warehouse) in a good near-downtown area, refurbish as necessary and put in place good tenants.

The next year he would buy another.

And, for the next three years after that he would buy another … until he had 5 such quality properties (purchase price around $1 million each).

Then he would do something pretty neat: he would sell the first (i.e. 5 year old property), taking about $1 million out to buy another property worth $1 million, and use the excess capital appreciation to fund his lifestyle.

Nice … except it didn’t make sense.

Because he was simply trading down one property (bought for $1 million 5 years ago so, hopefully, worth a little more now) for another (worth $1 million today), incurring all sorts of changeover costs and possibly even capital gains (unless he could qualify for a tax-free exchange).

He did this until I pointed out the obvious; I said: “Instead of selling one to buy another, why don’t you simply refinance the oldest property each year to release the capital appreciation, tax free?”

Oh!

And, that’s what he did from then on …

People often come up with great, innovative ways to do things … but, it doesn’t mean that they’re the right way.

For example, in our former family finance company, my Dad used to give our clients a check for the full face value of their loan, and ask for a check back to cover our up-front commission.

His reasoning was that we would have the commission money in our hand and earn extra interest on it. Neat, until I pointed out that it was exactly the same as giving the client the net amount (i.e. face value of loan MINUS our commission): One check. Sensible.

Needless to say, that’s exactly what we did from then on.

Always evaluate what you are doing and how you are doing it, even if you are successful … you may be leaving (a lot) of money on the table.

BTW: I’m wondering if you picked it? There seems to be another flaw in the retirement plan executed by my friend and promoted my many a financial spruiker that I have listened to …

These real-estate investment ‘gurus’ say: “Buy lots of real-estate and when you retire you will have a LOT of equity available to fund your own retirement … simply take out a loan against this property every time that you need more money. Because it’s a loan and not income, you pay NO INCOME TAX on it, so it’s worth more to you than taking the money as rent; and, the excess rents will cover the mortgage payments. Of course, because it’s an investment loan, it’s tax deductible.”

Now, there’s so  many things wrong with this strategy that I wouldn’t even know where to start (how about vacancies, as one example?), yet I have been to at least half a dozen seminars where this exact strategy and tax-effectiveness argument was put forth.

However, I take issue with the last statement:

Just because a loan is taken out on an investment property, does NOT necessarily make it tax deductible.

In many countries, the real test is “what’s the PURPOSE of the money that you are borrowing?”

If it’s to refurbish the property to increase rents (hence, so that you can pay the IRS more tax … you win, they win!), more power to you!

But, in this case, it’s not to derive more investment income … it’s so that you can go out and have a good time!

Q: Why would a government want to subsidize your personal spending habits?

A: They probably wouldn’t!

Find a good tax advisor before implementing this strategy … oh, and take what you hear from financial spruikers with a kilo-grain of salt 😉

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!

He’s not THAT JD Roth

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The ‘well known’ JD Roth was a game show host (and, now producer of the hit “The Biggest Loser”), but our JD Roth is a different guy, and the name behind the über-successful personal finance blog: Get Rich Slowly.

It’s a great Making Money 101 blog, and better than mine for that stage of your own personal financial journey …

Because of the name confusion, ‘our’ JD sometimes gets invited to audition for movie parts (you can read his latest such exploit here … it’s really quite funny):

Here’s the thing: I’m not that J.D. Roth. If I were that J.D. Roth, I’d be rich! I wouldn’t have to write about building wealth.

But, that’s what gets me … the TV-famous JD actually IS qualified to write about wealth because he presumably is … well … ‘wealthy’.

Whilst blogging-JD Roth DID pay off copious quantities of debt, and did make himself financially-free of a boss (maybe, not yet free of his blog, which probably generates a decent chunk of his income), I’m not really sure that qualifies JD to actually “write about building wealth”. Reducing debt … yes. Building income … yes. Building wealth … hmmmm.

On the other hand, Ramit Sethi is either already rich, or well on the path with his entrepreneurial side-ventures (eg PBwiki.com), so he just may be able to say – hand on heart – “I will teach you to be rich” …

… I know I can. And, will! 🙂

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.  😉

Is greed good?

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That is the question posted by Gordon Gekko (Michael Douglas) in the newly released Wall Street movie sequel which, by the way, is abysmal.

One of the pivotal moments in the movie (IMHO) is when the least-sharky of the Wall Street sharks (played incredibly badly by insipid Shia LaBeouf) asks the über-shark (played much better Josh Brolin) what his ‘walk away Number’ is.

Über-Shark answers: “More!”

If you don’t see the problem with this, then you haven’t been reading this blog.

But, my main issue with the movie, aside from the bad acting/characterization/plot-lines is the central premise:

Gordon Gekko has come out of 8 years in jail, with $100 million salted away in some Swiss Bank Account, but held in trust for his since-estranged daughter. Totally believable, so far … except that there are so many tax avoidance issues that no father would put their daughter in that much danger.

But, that’s not my issue with the plot.

The daughter indicates that she knew that there may be SOME money SOMEWHERE for her, but she didn’t care and was planning to give it all away (a plan that she eventually has a chance to execute, but we’ll come to that). Now, nobody in their right minds would give all their money away to charity: a little, some, most … maybe … but, not all!

But, that’s not my issue with the plot.

It’s in the execution of the ‘give away plan’: her fiance, and soon to be father of her child, talks her into ‘donating’ all $100 million to some new company experimenting with a new form of clean energy (lots of fancy diagrams, light beams, serious-but-kindly-and-honest-looking-scientists, high-tech-futuristic-energy-orbs, and so on).

Now, what form of young-and-brilliant-but-disillusioned (don’t forget the “brilliant” part) Wall Street type would put $100 million of his own money (well, he’s about to marry the chick, isn’t he?!), which represents about $99 million more than his entire current net worth (and, that’s only because he just received a $1.5 million bonus check), in a collapsing market into ONE INVESTMENT?

None of my readers, I hope!

And, even if he was stupid enough to bet the entire $100 million, would he bet it on a speculative company that had NEVER made a single cent in profit?

That, my friends, is financial suicide. Don’t do it, because greed is NEVER good 🙁

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.