A very short vacation …

I’m still technically on vacation – half way around the globe from my usual abode as I write this – but, I did promise to share the ‘missing piece’ of the Formula for Wealth:

This formula – were it not for the one factor that I added – would fail on two counts:

1. Wealth being a function of Capital and Time is merely another way of confirming the so-called ‘power of compounding’, which is no great shakes as 1,000 others have already sung its praises and hardly justifies me adding my voice, and

2. It doesn’t explain The Bill Gates Effect: why Bill Gates (and, Steve Jobs, and Warren Buffett, and Mark Zuckerburg, and Oprah) is rich and the rest of us (present company excepted) are not.

That’s why I added the key: the X-Factor …

… which, in itself would be totally useless, if I couldn’t explain it so:

For the non-mathematically minded (and, you have to be, because as a strict formula this is nonsense), the first part of the ‘formula’ expresses the classic Risk (Ri) versus Reward (Re) tradeoff.

This is logical: “Bill Gates is richer because he takes bigger risks. I’m risk-averse so I cannot be rich. No problem, back to frugality and 401K’s …”

The good news is that Risk and Reward are related: for every financial activity there is a built-in level of risk. Choose one and you automatically choose the other.

To a greater or lesser extent, you can treat this Risk/Reward Tradeoff as a constant (actually, a curve, but there is a fixed point on the curve for whatever financial investment activity that you undertake).

In other words:

1. You choose the level of Wealth (W) that you want to achieve i.e this is your Number

2. You choose the Time (T) that you have available i.e. this is your Date

3. You have a set amount of Capital (C) that you start with i.e. this is your savings

4. You calculate the required Annual Compound Growth Rate, which tells you what financial activity you need to undertake (e.g. stocks, business, real-estate, etc.)

5. This automatically puts you on a set point of the Risk/Reward curve.

So, by selecting your Number and Date in advance, you have – in effect – taken away all decisions and the Wealth Formula works automatically for you.

You have only two levers to pull that will determine if you succeed – and how well (Bill Gates well, AJC well, work-for-40-years well, or hobo well):

Leverage (L) and Drag (D).

I’ll explain these in the New Year 🙂

Anatomy Of A Startup – Part I

Not strictly about personal finance, but building a startup is one (highly risky) way of making $7 million in 7 years!

It also happens to be one of my twin passions (the other, obviously, being personal finance) … and, one of the key components of my Number was a $500k ‘startup fund’.

I realized – before I even made my 7m7y – that I wanted (amongst other things) to become a ‘venture capitalist’, but I was well aware of the 7-2-1 formula, which goes something like this; for every 10 startups that a VC funds:

7 will lose money (probably the VC’s entire investment)

2 will break-even (maybe even returning the VC’s initial investment, but not much more)

1 will make the other 9 ‘failures’ all worth while!

Based on these numbers, to invest in the ‘bricks and mortar’ world would be simply too expensive … especially if the 9 failures came before the 1 success (obviously, the VC doesn’t know which one will be successful or she would never invest in the other 9), but not so the online world.

It’s not a stretch to see that several – or, even 10 – (potential) Facebooks and Twitters could be created with a $500k investment pool and some smart, committed cofounders. If FaceBook was started with $1,800 (or so the movie implied), then $50k should buy a whole lot for one online business … and, $500k should be enough for all 10 that it might require to find that single, wonderful success story.

So, it seems that I am on the way having met with my two cofounders today. Unusually, I didn’t know them before hand …

But, I’m getting away with myself: this isn’t my first recent such startup (obviously, my older B&M businesses were also startups in their day, eventually being sold for tidy sums). In fact, I have two complete, functional Web 2.0 (whatever that may mean!) sites sitting on a shelf, gathering dust.

With both of those, I made the mistake of building Kevin Costner’s Field of Dreams (because, I already had the relationships with the right IT build team) and thought if they build it THEY – the right cofounders – would come. But, they didn’t 🙁

So, this time, I decided to find my cofounders first (marketing and operations) before funding the IT build. Pretty obvious really … not sure why I didn’t see it at the time. I guess it was the case of having too much money burning a hole in my pocket – and, burn it did!

So, this time, I patented the idea (another waste of money, but more to make sure I wasn’t infringing on anybody else’s turf), put up a couple of ‘stealth-mode’ placeholder sites, and set out to find The Team.

I realized that I needed people with experience in the online space; so I cast a search for “social marketer [my city]” (there’s a neat little tool you can use: google) and found a meetup group that happened to have a ‘mail all members’ facility … so, I joined and spammed all the members with a “looking for partners” message.

You don’t get anywhere in life by being conventional 😉

Today, the three cofounders met (me and the two I found by cold-calling for partners) and agreed that we’re moving ahead with my new idea …

Mr Krabs is alive and well!

Eugene (Mr) Krabs is the Mr Scrooge of the modern age. Scrooge McDuck was there for a while, but the duck got bumped by the crab. Sorry, duck!

All of these misers got rich, not by being misers (I’m sure it helped … a little!) but, by having a business; Mr Krabs has a hamburger joint. Nice cashflow business that – perfect for providing the funds to invest in all sorts of stuff.

And, I bet he owns the building …

Mr Krabs has one other advantage over his predecessors: he reads personal finance blogs!

I know this, because “Eugene Krabs” left his secret formula for wealth in a seemingly innocuous comment on Free Money Finance’s blog:

I’ve boiled what I’ve read myself down to the following equation:

Wealth = Capital + Risk + Time

(To be clear, capital is the money you have right now to make more money with.)

Technically, any one of those factors can do it for you. For example, if you have a massive amount of capital, or if you take massive amounts of risk and beat the odds, or if you have a lot of time to build your wealth, then you can still become wealthy at the expense of the other two factors.

However, there are downsides to all of these individual factors.

Sensational stuff!

The formula itself needs a little tweaking, but ‘sensational’ nonetheless, for example it’s probably better written as:

Wealth = Capital x Risk x Time

Here’s how to make it work for you; if you are an:

– Ordinary person: do nothing … your wealth will not grow. In fact, it will decline in real terms, as inflation takes its toll. You can offset this, to a greater or lesser extent by cutting costs (including interest costs and living expenses). Whole legions of people swear by this approach.

– Reasonable person: limit your risk, and offset your limited capital by applying Time … lots of it (provided you are happy to work for 40+ years, don’t get sick or lose your job, etc., etc.), and pay yourself first to increase your capital by roughly 10% each year.

– Extraordinary person: you also make a 10% improvement, because that’s reasonable, achievable, sensible … but, you don’t make a 10% improvement in just one area, you do it – as Eugene Krabs suggests – across all three!

Look at what happens if you apply one unit of Capital, one unit of Risk, and one unit of Time: you gain one unit of Wealth.

But, what happens if you increase your:

1. Capital by 10% – let’s say by starting a business on the side and applying at least 50% of it’s net income to your investment capital?

2. Risk by 10% – let’s say by moving from investing in Mutual Funds to individual stocks (if you buy/hold one, you buy/hold the other)?

3. Time by 10% – let’s say you allow yourself 10% more time to get there?

Nobody would be too scared by making a 10% improvement in one are; so, what’s so hard about making it in three areas at the same time? If you do, you end up with 1.1 units of each of: Capital, Risk, and Time: 1.1 x 1.1 x 1.1 = 1.33 …

… your wealth doesn’t increase by just 10%, it increases by 33%.

Of course, you want to REDUCE time, not increase it, so play with a simple annual compound growth rate calculator and see what happens if you:

i) Double your Capital (increase your savings; reinvest 100% of your side business earnings; grow your side-business even more)

ii) Double your Risk (buy/sell your stocks; buy/rehab real-estate; start a ‘real’ business)

iii) Halve your Time

2 x 2 x 0.5 = 2 … how’s a 100% increase in your wealth suit you?

BTW: for the mathematicians out there, this simplistic formula is nonsense; for example, as your wealth increases over time, any ‘spare’ wealth (i.e. that you don’t spend) increases your Capital (thus compounding either/both until your Capital converges to your Wealth … but, never quite meets it), whereas Time is linear (as long as we don’t approach the Speed of Light), and Risk is certainly neither linear nor compounded.

But, that’s not important right now … 😉

Are you still relying on your mother?

At what age is it appropriate to take financial responsibility for your own life? Before college? During college? After college?

When is it appropriate to grow up, financially?

To help us explore this issue, here is a question that I received by e-mail from RichKidSmartKid:

I’m 29 presently in my first year of college where I used money from my inheritance that I had invested, sold and used to pay for college. I’m soon going to be broke and wont have an income and will be relying on my mother to help me financially though school.

I want to bounce back from this financial hell and increase my networth. Possibly even made some money by the time I complete univeristy. I was wondering what advice do you have?

Sounds like her name is where RKSK wants to be rather than where she is. It looks like she had money, but now it’s gone, and would like some again!

Look, with $6k cash and going to college, the reality is that she is still probably $6.5k better off than most college kids, so here is my advice:

1. Talk to other college kids and see how they do (or intend to) get by – it’s amazing how much you can learn by listening to what other people have to say – then do the opposite 😉

2. Read this post, it’s probably my best advice for college-age kids:


Now, this doesn’t directly apply to RichKidSmartKid who is 29 – but, only in 1st year (good on her for finally thinking about her education, though) – but I have an issue with college kids calling themselves ‘kids’:

In most countries (other than those in the privileged west), by the time you reach college age you would be an adult, long married, with plentiful hungry children and a crop in the field.

In those countries, RichKidSmartKid would have been considered a self-supporting adult a LONG time ago!

Maybe it’s time to start thinking like one now?

Winners of the SECOND $700 in 7 Days Social Giveaway

Thanks to all of those who entered my SECOND $700 In 7 Days” Social Giveaway” … if you didn’t enter, or win a prize, then you MAY get one more chance: I’m thinking about running one more similar contest before Christmas.

I’ll tell you the reasons why in due course, but if you’re familiar with marketing, I’m kind of running some very expensive (for me) A/B split marketing tests for my ‘Top Secret Project’ …

Which brings me to our lucky five winners:

1st Prize of $350 cash (as selected by Random.org) goes to Marilyn (user name = mnihill) … congratulations!!

2nd Prize of $150 cash (for referring Marilyn to the contest) goes to Barbara (user name = barbara4)

3rd Prize of $100 cash (for referring Barbara to the contest) goes to Trisha (user name = twag700)

So, here’s how it worked: Trisha entered the contest after reading my announcement post and invited some friends to enter – and some of those friends invited their own friends. One of those ‘friends of friends’ was lucky enough to win the first prize, so Trisha won a 3rd prize for indirectly referring her. Barbara won second prize because she actually did refer the lucky winner!

Since that accounted for only $600 of the $700 that I promised, I did a separate draw for the $100 left, so here’s who won that:

4thPrize of $50 cash (as selected by Random.org) goes to Michael (user name = mdralph)

… since nobody referred Michael to the contest, I did one more random draw for the 5th – and, final – winner:

5th Prize of $50 cash (as selected by Random.org) goes to Marie (user name = lwarren26).

Congratulations to the winners: please contact me [ajc AT 7million7years DOT com], using the e-mails that you provided when you entered and either send me a PayPal invoice for the prize that you won (apparently, this is very easy to do and makes sure that I don’t make any mistakes and pay the wrong person!). If I don’t receive the required confirmations by the end of the week, your prize goes to charity!

Now, that you see how easy it is, I hope that you will enter the next contest, which – I promise – will be even easier next time (I just spent $270 to try yet another software contest package!)…


P.S. Looks like names beginning with ‘M’ scooped more than half the pool 🙂

Why climb Mt Everest?

Thanks to all of those who entered my SECOND $700 in 7 Days Giveaway; you still have a couple of hours to sneak in and submit your entry for what looks like a better than 1 in 30 chance to win the first prize of $350 in cash … that’s like $10 just for filling in a 2 second form!

If you refer friends, you will be in the running to win the second ($150), third ($50), and fourth prizes of ($50) CASH as well … right now, I’ll be struggling to give all of those prizes away, so that’s a pretty good hint. But, since you’re late to the party, you’ll have to find the entry form yourself. HINT: xxxx 😉
I wasn’t spanked by my readers nearly as much as I expected for sharing my happiness with my mansion purchase (actually, two mansions: one in US and one in Aus), then again the purpose wasn’t to brag but to counter the idea that spending is bad.

In fact, spending is only bad out of context … $7 million in 7 years kind of context … when not spending would be even more absurd.

Anyhow, Josh did pull me up:

What’s the point? Maybe I’m missing something. Maybe it’s because my assets are in the 7-figure range and not the 8-figure range. But why spend $X Million on a home?

I live debt-free in a home that cost $300K. I could have bought a $2M+ home, but it seems so impersonal, pretentious, and secluded. I want people to come over and feel comfortable drinking beer with their feet up on the coffee table, or to let their kiddos run around carefree after coming inside on a rainy day. Even now, some people feel uncomfortable in my house because it is “so nice” for the area in which we live.

Well, why do people climb Mt Everest? What’s the point?

Because (a) it’s there, and (b) they can!

So, I have a very simple rule on spending that has kept me in good stead – through poorer and richer:

I spend money when it doesn’t make sense NOT to!

I became rich because I wanted to travel spiritually (that’s free); mentally (that costs me in time and ‘venture’ capital); and physically (that much traveling costs me a LOT of time/money: hey, I retired at 49 so I WANT to travel Business Class and stay in at least 3/4/5-star hotels).

So I set out to make my $7 million in 7 years to allow me to begin the life that I wanted to live (without needing to work) and was fortunate enough to succeed …

… and, one of the side benefits of that financial success is that I have plenty of cash for cars and houses, and vacations and bling. And, for charitable gifts and deeds 🙂

I write this blog because I wish the same for all of you …


PS a big house doesn’t need to be pretentious; ours is homely and welcoming and people love it because they get to hang with us, play tennis, watch movies, and swim 🙂

What’s the best financial move that you’ve made?

Michael asks What was the best financial move you’ve made so far? and then tells this story about his car:

I’ve concluded my best financial move to date has been my decision to keep cars for very long periods of time. I drove my first car for over seven years before it died. My second car just passed 100,000 miles this last weekend and is over nine years old.  So, here I am in my late thirties and I’m still on my second car.

Having no car payment during 9 of the last 14 years has allowed me to spend more in other areas of my life where I value such spending while still permitting me to save substantially for my future.

What an excellent question!

I’ll tell you my best financial move, then perhaps you can share yours?

I have a few ‘best financial move’ candidates (including moving to the USA, selling out just before the Great Recession, and others that I will tell you about some other time), but I can pin my ‘best’ financial move – not my biggest, but my best from a pure financial strategy point of view – down to one:

My accountant talked me into buying my own building (I had a small’ish call center operation but was renting office space at the time).

Making the purchase was very tight, financially, as the business wasn’t making a lot of money (there was a bit of juggling to come up with the cash for the deposit and making the monthly payments!). I really sweated as I was making the bids at the onsite auction (that’s how most properties are sold in my home town).

[AJC: Property valuation technique # 1: Q: How did I know how much to pay? A: I didn’t! But, I did know who I was bidding against (very important to know who your ‘opposition’ is) … a property developer. Logic told me that he would not buy for more that true current value, because it would be reasonable to expect him to buy-rehab-sell or buy-rebuild-sell. If – on the other hand – I intended to buy/use/hold, then it stands to reason that I could afford to pay AT LEAST as much as him. So, I just kept bidding until he stopped, and ended up paying just $1,000 more than his highest bid.]

To backtrack a little, I had already decided that I would buy prime real-estate in prime location, instead of buying a cheap building in an industrial area (typical for call centers, to keep costs low).

So, instead of spending, say $500k or so on a cheap industrial-area building, that’s how I found myself spending $1.35 mill up front at that auction and another $500k (100% financed) on the rehab and fitout, once I closed on the deal.


Well, I saw two major benefits:

1. It was a show-case building that I thought would be my ‘shop front’ for our ‘Fortune 500’-type corporate clients, making them think we were bigger (therefore better/safer to deal with than our opposition) than we really were, and

2. I guessed that it would have great resale or redevelopment value down the line.

As things would turn out, this was one of those rare occasions when I was right … on both fronts!

Our business grew substantially in that building with many a deal completed in our own board room.

[AJC: Once the Internet era arrived circa 2000, we created a fully web-enabled system – way ahead of its time – at which point it became advantageous for us to make our sales at our clients own premises. Once they saw the drop-dead gorgeous – by 2000 standards – web-enabled charts and graphs, they virtually signed our standard contract on the spot! Our office could have been in a garbage dump then, and it would no longer have mattered. Oh, good times … good times!]

In doing so, I avoided 5 years of rent, reduced my taxes by $500k (because of the rehab), paid down about $500k of the principal, and eventually sold the  building for $2.4 million.

Once business picked up (again, partly because of the marketing / credibility benefits of such a professionally fitted out building in such a prime location) I barely noticed the payments, and probably would simply have raised my personal spending had some of the profits not gone into the mortgage and rehab repayments.

Instead, after 5 years of mostly tax-deductible ‘forced savings’ I walked away with what felt like an extra $1.5 million in my pocket. Not my grandest move, as things would turn out, but certainly my (financially) most astute …

… I encourage every business owner to do the same!

So, what’s your best – not necessarily your grandest – financial move?

Speaking of the ‘more bug’ I want MORE people to enter my latest contest … so far, I have given away $1,300 in cash and gift cards as I test a new project that I’m working on.

My financial pain is your cash gain 😉

It’s a new kind of contest and I’m running this as an experiment. NEW because not only do you get a chance to win the $350 First Prize (that’s CASH, transfered straight to your PayPal account), but …

Once you have entered, simply let your friends know the User Name that you chose, and when they enter (using your user name) and win a prize, so do you!

Now, here comes the twist: when they enter they will be able to invite their own friends, not only will they win a prize if one of their friends wins a prize, but SO WILL YOU.

Your chances of winning a prize (of $50, $150, or even the $350 first prize … all in cash) can easily be 7, 15, 27, 56, … or MORE than in any other type of giveaway contest!

Instructions: Choose a short User Name (eg “Steve12”) for yourself and enter AJC42 as the user name for the person who referred you (unless you already have a user name from a friend who referred you) then send this link http://7million7years.com/contest/ (+ your User Name instead of mine) to all of your friends (via e-mail, Twitter, and FaceBook) and let the fun begin!

Win $700 In 7 Days!
Join our second $700 in 7 Days Contest + refer friends for EVEN more chances to win! You win prizes if ANY of your friends win a prize!
Your Email *
Your First Name *
Choose A User Name *
Who Referred You? (Type Their User name) *
* Required Field

[See http://7million7years.com/contest/ for full contest details]

Beating the ‘more’ bug!

Do you have the ‘more’ bug?

I certainly do, and I think that most of us do … in fact, I’m so sure of it, because I see hundreds of blogs and books solely aimed at eradicating the disease with drastic remedies such as self-flagellating frugality and anorexic debt diets.

Kind of reminds me of how we used to treat ourselves with blood-letting, hole-in-head-drilling, and leeching – actually, all still legitimate remedies in a tiny minority of real-world cases – because we didn’t know any better.

In those days, a ‘real’ doctor, prescribing a drug that they had discovered would have been seen as a heretic or master of the ‘black arts’ (Louis Pasteur, anybody?).

But, I’m getting ahead of myself … first, here’s how Scott (a doctor, plenty of disposable income, so he’s a prime candidate) describes the symptoms:

I think a big dragon that we all face is that human nature of wanting more. We all seem to do it to some degree or another. We’ll live in a 150k-200k house(which was probably an amazing home to our grandparents standards) and while there, we imagine that million dollar pad. Once we get that, we need a 5 million dollar one, etc..etc..and our number continues to climb with the chronic discontent and needing more.

As Scott says, it’s not such much a ‘bug’ as a human condition: to always want more.

To get a little metaphysical: if you were the Ultimate Higher Power and you wanted to design an environment with endless conflict (all the way up from a personal level to a global level), you would fill it with little creatures that you ‘program’ to always want ‘more’. And, you would give them the tools (opposable thumbs, a modicum of intelligence, and inventiveness) to ensure that they create an endless stream of upscaled ‘stuff’ to constantly fuel that desire.

What Eternal fun! 😉

Assuming that the ‘more’ bug is curable … or at least manageable … how do you deal with this seemingly insatiable desire for ‘more’?

Well, if it really is a disease or condition, then I’m not sure how easy it is to switch off the ‘more’ switch; maybe a 12 Step Program for Wants (might be a great online/offline business here for any psychologists who have a side interest in personal finance)?

But, if it is real – and, manageable – then another strategy might be to build in gradual spending/lifestyle increases into your budget. Allow the ‘disease’, but control it …

For example, I drive a BMW M3 Convertible (in Australia, this is a USD$200k car, due to low volumes, importation costs, and exorbitant luxury vehicle taxes) but I really WANT a Ferrari ($500k++).

So, I have given myself a target:

Develop and/or cash out (for a certain amount over purchase price) on my development sites and I ‘reward’ myself with the Ferrari (not as simple as that: I will also need a day-to-day car, so figure a $150k Audi S6 or Maserati Quattroporte, in addition to the Ferrari … repeat every 5 to 8 years). I think that some of the Sudden Money strategies that I posted about recently are ideal for managing this.

Another way to deal with this was suggested by Robert Kiyosaki: he said that he, too, wanted a Ferrari. His wife said that he could only buy one if he generated the income to cover it. So, he bought a self-storage business and used the income to fund the payments on the car … I’m OK with this: even though he’s funding the car, rather than paying cash, the capital is in an income-producing asset – one that really should increase in value over time.

And, it’s not a ‘real’ business, in that it won’t need a lot of ‘hands on’ management … of course, it’s not a real passive investment either. Other candidates could be automated / no staff car-washes; ‘coin’ laundries (the new kind that use cards instead of cash); and, some of the absentee-owner franchises.

[AJC: Just be warned, you probably can’t tax-deduct much – if any – of the vehicle payments. Contrary to what the financial spruikers and shysters will tell you, the IRS is not stupid: why do you need a Ferrari to help the self-storage business / car-wash / coin-laundry produce an income?!]

But, now that Scott mentions it, I do have a hankering for an island ;)