The perfect side business?

Posted on May 31, 2011 by Adrian

My good blogging friend, Kevin, mounts a good case for – naturally – taking on blogging as a side business.

Because I don’t monetize my blog at all, nor do I expend any effort on promoting it or driving traffic to it, I can’t really comment.

But, I can say that for my audience it’s probably not the right type of business for you.

Well, let’s backtrack a little; as I once said: “you can’t save your way to wealth“!

So, the only reason for starting a side business is so that you can build up an investing war-chest to use elsewhere.

[AJC: another perfectly valid reason might be so that you can grow it to one day replace your day job. Another reason might be to gain experience in business. All valid reasons, but not directly in the context of getting you to $7m7y]

If you do that, then you’re essentially beefing up your Pay It Twice strategy, so I have little more to add here.

But, if you do want to reach $7m7y (or some other large number / soon date), then I do have the perfect side-business for you:

If you are a programmer, go find a friend with some online marketing experience (here’s where a blogger can come in real handy!) … if you’re a fellow blogger, go find a great programmer who also likes to burn the midnight oil.

Then go and build your own startup!

If you come up with a cool idea aimed at small businesses or the self-employed, then you can build up a neat revenue stream and end up with something quite salable.

Just like the guy/s at Freckle (an online time accounting tool) who took their site from $1k/mth revenue to $20k/mth in just two years.

Firstly: SaaS (Software as a service, which just means tools that run online without needing to download software) companies typically operate on high gross margins (70% – 90%) and ‘in the cloud’ (which means that they don’t need to run or maintain their own hardware or operating systems) using ‘open source’ software (which usually means they’re free).

This means the owners make good income, with few (if any) fixed overheads, be it full-time or part-time.

Secondly: Unlike blogs, eBay businesses and many other types of online/offline ‘side businesses’, these types of internet businesses can scale; that means the sky’s the limit as to how much income they can generate.

Thirdly: They can be financed (by angel investors and, later, venture capitalists) for expansion.

Lastly: They can be sold … for a lot!

Just ask the guys who are financing Airbnb (started by just three regular guys) or Groupon what they think those businesses are worth 😉

[AJC: actually, these are not examples of SaaS businesses, but they also generate revenue, so there’s nothing wrong with going down that path, either, but you really need to be lucky to find the right ‘slam dunk’ niche]

Now, you may not be as successful as any of these guys …

… but, I submit to you, that you are just as likely to be successful in a true / salable online business as you are in any other kind of part-time business (including blogging) and that it takes just as much work.

So, why wouldn’t you try the one that has a chance of getting you to your – shall we say, audacious – financial goal?

The Pay Yourself Twice Wealth Strategy!

Posted on May 26, 2011 by Adrian

As you have no doubt worked out for yourself paying yourself twice is in itself just a stepping stone to financial success.

Let’s just quickly recap for new readers:

The likes of David Bach (The Automatic Millionaire) like to tell you that you needn’t do much more than ‘pay yourself first’ (i.e. save) 10% – 12.5% of your gross salary in order to live an idyllic life (well, at least retire well) … going so far as to call this “A Powerful One-Step Plan to Live and Finish Rich”.

The reality is that this is actually a dangerous financial strategy to pin your financial future on.

Whilst the idea of saving money is to be commended – in fact, saving is absolutely necessary – the sad reality is that you would need to pay yourself first 75% of your gross income, starting now and continuing for the next 20 years, just to maintain your current standard of living in retirement.

Clearly, my solution – which is to Pay Yourself Twice 15% of your gross salary – does little to bridge the gap.

Of course, it’s what you do with the money that counts:

I assume that your current ‘pay yourself first’ savings are going into some sort of employer sponsored, tax-advanatged retirement plan …

… which we already know cannot possibly be enough to support your current lifestyle in retirement, let alone set you up for that hammock in the Bahamas with free flowing Pina Coladas that you crave 😉

However, I do want you to keep your retirement fund going – and growing – because it is insurance, if all else fails.

But, it’s the “all else’s” that will make the difference between an austere retirement in 20 – 40 years or a certainly more memorable (and, very early) retirement with $7 million in 7 years … or a happy medium, if that’s more your speed.

And, that’s why you need to Pay Yourself Twice:

– Once to maintain this insurance policy, and

– The second time to build your investing war-chest.

If the power of compounding at bank to mutual fund rates of return (i.e. 4% – 10%) is not sufficient, then it stands to reason that you need to start investing at (much) higher compound returns.

This means building up a modest starting capital amount and ‘rolling the dice’ with higher risk / higher reward investments e.g.

A few minutes with a good compound growth rate calculator will (a) confirm how well your current strategy is doing against your desired retirement needs, and (b) tell you how deep into the above table you need to dive to bridge the gap.

It goes without saying – so, I’ll say it anyway (!) – that I hope that you all succeed with your investments, be they in stocks, real-estate and/or businesses. However, if you should fail … well, by continuing to Pay Yourself Twice, it won’t take too long to build up enough starting capital to have another go.

And, it might take one, two, five times before you are successful …

All the while, you have a 20 year backup plan (by also continuing to pay yourself first) just in case 😉

My circle, my prison.

Posted on May 24, 2011 by Adrian

1998 capped a long period in my life when I was imprisoned by a circle.

I suspect this is the same for most. What separates me from the others – and, I suspect you, too – is that I broke out.

The ‘circle’ was my life and the things that I was trying to deal with:

– Keeping myself sane in an increasingly mad world

– Keeping my family safe, fed, and healthy

– Trying to earn a decent living to pay the bills and keep a roof over our heads.

This type of existence is inherently inwardly focused … we focus on ourselves, our immediate family, our friends, and our work colleagues (probably in that order) and little else.

The reason why it’s a prison – well, a financial reason (there are others beyond this scope of a humble personal finance blog) – is that our ‘investments’ are similarly inwardly focused; aside from what little we manage to save in our bank accounts and 401k’s, our so-called investments center around the things that make our inner-circle lives a little better.

We invest in our health (as much as we can – or feel motivated to do), our education (often because our parents tell us that “it’s an investment in our future”), our home (because that’s what our parents did) and, of course, our cars & possessions (because that’s what our friends and colleagues do), and so on.

Why do we invest?

So that when our income stops we can try and continue living within our circle and simply maintain what we have?

But, when I broke out of that circle my life began to change!

My First Big Realization was that my life wasn’t about my money … so why was I spending so much of my life – that precious, finite resource – attempting to earn money?

When, in 1998, I found my Life’s Purpose, which included what was in the circle (family, health, and so on) but also a lot more than I had ever felt desirable or even possible, I was forced to look outside the circle … way out.

Interestingly, and logically, I also realized that the investments that I had been making for my circle-bound future would no longer be adequate for a far less bounded life.

Not only did my thinking have to move beyond the circle, but so did my finances. And, if my finances wouldn’t be adequate for the life that I really wanted to lead, then neither would my investments!

So, in 1998, my investment strategy also shifted … and, shifted dramatically.

[AJC: if you want to understand a little more about this process, then check out this free site: http://site.shareyournumber.com/]

No longer would I try and upgrade my home and my car.

No longer would I try and upgrade my lifestyle in an attempt to keep up with the Jones’ (and, I had plenty of those to try and keep up with!) …

… I would simply begin to apply every spare penny to investing outside of the circle: in true investments that I could not eat, live in, drive, or share over a beer.

Now that those investments have born fruit, finally freeing me up to live my Life’s Purpose, I realize that living outside of the circle has actually also helped me live within.

The difference is that my inner circle is no longer my prison but my sanctuary.

The sooner that you identify what is in your circle and what – if anything – outside of the circle truly drives you, the sooner you will be motivated to seriously start making money and investing.

Then this blog will suddenly become very interesting to you 😉

Asset rich, cash poor …

Posted on May 17, 2011 by Adrian

Philip Brewer makes an interesting observation – a correct one – that land is only worth the income that it can produce.

The argument is that if you live in a house, the equity that it produces (by increases in market value) is imaginary, because you have to live somewhere and all land is equally increased in value.

Yet, I still suggest that you should buy a house!

My reasoning is simply insurance: if all else fails, your 401k and the equity in your house can help to fund your retirement … or, earlier, fund your comeback from a failed venture etc. etc.

Again, my reasoning is simple: you can release equity in your house by down-sizing (moving into a smaller, cheaper home), cross-sizing (moving into a cheaper neighborhood), or simply borrowing against your equity (remember the good old HELOC?).

However, the general principle of ‘asset rich, cash poor’ still applies …

My grandmother was an immigrant after the war: from rich beginnings in Europe, she emigrated to Australia with her husband and teenage daughter, virtually penniless.

Yet, she and my grandfather managed to build up a property portfolio worth many millions of dollars.

The problem is that the properties – whilst in prime, downtown areas – gradually became run-down and weren’t bringing in enough income. She became the classic ‘asset rich, cash poor’ person always struggling to pay her tax bills.

My wife’s mother was the same, although in a different financial class: her only asset was her house, her only income her meager pension, yet she refused to sell or refinance the house and lived a virtual pauper.

Ironically, dividing the house into three when she passed on was not really life-changing for any of her three daughters, so it was a financial sacrifice IMHO not worth making … she should have taken a reverse mortgage; even $10k would have made a dramatic difference in her own life, especially since she was too proud to take handouts.

In both cases, Philip’s “house [or asset] rich, cash poor” certainly holds true.

But, it need not be so …

Philip points to times long passed by, where “land was wealth because it produced income–crops, grazing, timber, game, etc. If the land didn’t produce an income, it wouldn’t be considered especially valuable”.

Nowadays, this is simply called ‘rental real-estate’.

If you buy land/real-estate, you no longer need to till the soil yourself to generate an income, you can be the middle man who ‘introduces’ the land to the person (nowadays, usually a business) who is willing to till the land and pay your fee – called ‘rent’.

You still run risks:

1. Related to the land: repairs and maintenance, depreciation, floods, fire, vandalism, and so on, and

2. Related to the business: If the business goes under, you will be left with an empty building.

But, these risks are one step removed from the ‘feast or famine’ risks of land ownership such as for a farmer, that Philip talks about: “it was possible to ruin the income from your land through poor management or bad luck. That was how you found yourself land rich but cash poor.”

These days, as a landlord, you can manage these risks through good selection and management of tenants, provisions (i.e. put aside money for a rainy day to cover vacancies, repairs and maintenance, depreciation, etc.), and insurance (e.g. agains floods, fire, public liability and malicious damage).

If you buy right, add value, manage your real-estate investments well, and allow some time for your investments to ‘mature’ a little (i.e. your loans to be paid down a little, and rents to go up a little) there’s no reason why you can’t be both asset rich and cash rich.

I’m speaking from personal experience 😉

Pay Yourself Twice!

Posted on May 12, 2011 by Adrian

It is commonly taught that in order to build wealth, you first need to save; and, the best way to save – so common financial wisdom says – is to pay yourself first.

Investopedia (the online investment dictionary) explains Pay Yourself First:

This simple system is touted by many personal finance professionals and retirement planners as a very effective way of ensuring that individuals continue to make their chosen savings contributions month after month. It removes the temptation to skip a given month’s contribution and the risk that funds will be spent before the contribution has been made.

Regular, consistent savings contributions go a long way toward building a long-term nest egg, and some financial professionals even go so far as to call “pay yourself first” the golden rule of personal finance.

Whilst certainly better than the other 99% of the population who don’t even bother saving anything, paying yourself first doesn’t go far enough:

Never mind underestimating what it costs to live a reasonable lifestyle, realize that the old “retire a millionaire’ ideal is no longer adequate; this is largely because of inflation i.e. over 40 years, you will suffer roughly two doublings in the cost of living.

Another handy way to think about this is to think of your retirement date & financial target:

Think of a ‘number’ … the amount that you think is reasonable to aim for in retirement, given the financial strategies that you feel that you can employ. Can you save $1,000,000 by your expected retirement date? Less? More?

Don’t guess; there are plenty of retirement saving calculators around to help you with this task …

1. If 20 years out, ask yourself: “would I be happy with living off no more than 2% of that number, each year?”

2. If 40 years out, ask yourself: “would I be happy with living off no more than 1% of that number, each year?”

If your answer is a resounding ‘yes’ then you are done … it looks like your retirement savings strategy will work.

Congratulations!

Now, stop reading this $%@@# blog, it will make your head spin 😉

But, I’m guessing that the answer will be ‘no’ … then what?

Then, you have to face some realities about your current “pay yourself nothing” and “pay yourself first” and “no debt in my life” strategies:

– A million dollars in 20 years (= approx. $500k today) to 40 years (= approx. $250k today), is too low a target,

– 10% isn’t enough to save,

– 20 – 40 years is too long to wait,

– Your 401k – more importantly, the underlying investments – isn’t the right place for your money,

– And, you are probably under-leveraged.

Today, we’ll deal with the first issue:

If you have two reasons to save money (1. to pay down debt, and 2. to build your investment war chest), then it stands to reason that you should pay yourself twice!

But, most people pay themselves second, if at all.

From now on, I want you to concentrate on paying yourself twice … before you spend money on anything else (other than taxes and social security); here’s how:

1. Pay Yourself Once: If you currently participate in an employer-sponsored retirement plan, then you should continue to do so, and

2. Pay Yourself Twice: You should save an additional 10% of your take-home pay – for now, this can be in an ordinary savings account clearly separated from your other funds.

If you do not currently participate in an employer-sponsored retirement plan or if you and/or your employer are currently contributing less than 5% of your gross pay into your retirement account, then you need to increase your pay yourself twice target to 15% of your take-home pay.

Of course, this is easier said than done: if you had 10% of your take home pay just lying around, by definition you would already be saving it …

… in other words, you are already paying yourself twice; if not, all of your take home pay is currently spoken for!

So, let’s start slow:

Step 1 – Could you save just 1%?

Take a close look at where your money is going: do you think you could find any spending areas where you can cut back enough to allow you to save just 1% of your take home pay?

If you are already saving – but less than the 10% / 15% Pay Yourself Second target – do you think you could find any spending areas where you can cut back enough to allow you to save another 1% of your take home pay?

[AJC: No need to start at 1% if you can find ways to save more; start at (or, adding) 2% or even more, but make sure that once you start that you never turn back … be realistically aggressive in setting your Pay Yourself Second target]

Step 2 – Wait 3 months and double it!

Over the next three months, perhaps by scouring the personal finance blogs on the internet, dedicate yourself to finding ways to double your savings rate i.e. if you started at 1%, after three months you should be saving at least 2% of your take home pay. If you started at 2%, don’t take your foot off the gas … double your savings to 4% of your take home pay.

Step 3 – Repeat

Keep doubling every three months until you reach 8% of your take home pay; three months later, save that 8% plus an additional 2% of your take home pay.

Step 4 – Almost there

What you do next depends on your Pay Yourself Second target:

– if you are already saving at least 5% of your gross pay in an employer-sponsored retirement plan (or similar), then you are done! Keep saving that 10% of your take-home pay.

– if you don’t participate in a retirement plan, or if you contribute less than 5% of your gross pay (including employer contributions), then you should keep saving 8% of your take-home pay plus you should concentrate on doubling the additional 2% every 3 months (i.e. 2% to 4% to another 8%) until you reach your combined target of 15%.

Step 5 – NEVER give up

Start today and never stop!

Unfortunately, as I’ve already pointed out, saving alone won’t get you to Your Number … it won’t even replace your current salary!

So, next time, I’ll help you decide what to do with your Pay Yourself Twice savings …

More on the the myth of paying yourself first …

Posted on May 9, 2011 by Adrian

You can play with numbers until you go blue in the face, but unless you understand the principles you won’t be able to make the right life choices.

So it is with the myth of paying yourself first.

It’s usually pitched as putting aside the first 10% to 15% of your paycheck into your 401k with any excess (when your 401K’s maxed out) I guess being put to work elsewhere. Some offer slight variations on the theme, like David Bach’s one hour of salary a day (or 12.5% of your gross).

Any way the ‘gurus’ put it, the alluring promise is of following this discipline your whole working life to ‘finish rich’. David Bach – author of the book to the left – goes even further calling this a powerful one-step plan to live and finish rich.

We have to examine this promise very carefully, because following this line of reasoning for 40 years to see what happens leaves very little room to maneuver if you come up short.

If the ‘normal’ working life is 40 years – to me this concept is almost incomprehensible – then, picking a mid-point in your career and a mid-salary of $50,000, adjusted for inflation, that you think (another terrible assumption) that you will be happy with for the rest of your life, then in my last post I showed that you would need to save almost half of your pay packet (again, indexed for inflation) until you retire …

… simply to replace your $50k salary (by then, inflated to roughly $100k but so have all of your living expenses).

But, what if you start young – as Bret @ Hope To Prosper suggests – and are happy to work 40 years?

Firstly, I would have to ask why you’re reading a blog titled “How To Make $7 Million In 7 Years” 😉

Putting that aside, you would need to save a tad under a quarter of your paycheck if you want to maintain your $50k per annum lifestyle beyond retirement (inflation would have roughly halved your buying power twice in that period, meaning that you would actually be withdrawing around $200k per annum just to maintain the same lifestyle that $50k buys you today).

Unfortunately, you are unlikely to reach your desired salary so early in your 40 year working career …

So, if you’re a graduate with a starting salary of, say, $30,000 and you somehow ramp that up to $50,000 after 5 years (at which point you start saving for retirement), you would need to save around one third of your paycheck for the remaining 35 years until you retire.

To be clear, following the common wisdom and “paying yourself first” 10% of your $50,000 gross paycheck (then indexed for the next 40 years for inflation) as recommended by many (if not most) personal finance ‘gurus’ is a sure-fire way to make sure that you retire on over $60,000 a year.

However, far from being a pay increase, because of inflation it actually represents less than 50% of your current $50k salary. Work and save diligently for 40 years and cut your paycheck in half …. nice 🙁

Any way you look at it, paying yourself first is no Powerful One-Step Plan to Live and Finish Rich as claimed by David Bach and his ilk.

Next time, I’ll share a plan that will work much better …

Anatomy Of A Startup – Part VII

Posted on May 5, 2011 by Adrian

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Please let me know (in the comments) if my slightly off-topic forays into the world of internet-startups are interesting, boring … or, somewhere in between.

If you’re still not sure, read today’s post then answer the poll 🙂

I’m sure that many people are put off the idea of starting a business – any business, not just a web-business – by the perceived failure rates: the ‘urban myth’ is that 9 out of 10 businesses fail in their first five years, so I wouldn’t blame you for simply dismissing the idea of becoming an entrepreneur!

For you, though, the chance of failure is 50/50: either you will fail … or you won’t.

Statistics (i.e. what happens to OTHER small business owners) mean nothing to you … but, your personal success or failure means everything.

Even if you subscribe to the statistics more than my philosophical view, we can still agree because the real numbers are much closer to 50/50 than 90/10 [click on the image to enlarge]:

[Source: Amy Knaup, Monthly Labor Review]

The chart shows that the four year survival rate for small businesses across the USA is anywhere from nearly 40% to nearly 60%. While not quite 5 years, and not quite 50/50 (you can reduce these 4 year survival rates by approx. 10% for each succeeding year), it’s certainly not as glum an outlook as the 90% failure rate that the popular press would have you believe.

So, how would you like a surefire way to tell IN ADVANCE if your Internet-business has an 85% chance of surviving, with an additional 9% chance of being sold for millions of dollars, and with a ‘booby prize’ of at least a 75% chance of achieving a huge amount of additional funding (an average of $500k)?

Fortunately, for the Internet entrepreneur there is a super-reliable way of doing this:

Simply apply to join one of the respected Venture Accelerators springing up all over the world!

If you DO manage to make your way through their selection process, here’s what you can expect in terms of survival/success after 4 years:

[Source: Techstars]

Time to dust off that business plan?

The fallacy of multitasking?

Posted on May 2, 2011 by Adrian

Kevin exposes a fallacy:

Concentration…fortunes are built on it—or lost by the lack of it…

Here’s a clue…if you’re a salesman, you have to sell; if you’re a writer, you have to write; if you’re an accountant, you have to be crunching numbers. The more time and energy spent doing something other than your primary activity, the less progress you’ll make in your career and the less income you’ll earn.

I used to struggle with this myself …

My natural tendency is to do a LOT of things … at once.

My father (my then business partner) used to tell me to forget the ‘new business’ and just focus on his one.

My wife used to tell me to focus.

Then I did an online ‘psych test’ about ‘money and personality’ (I highly recommend this one: http://www.kolbe.com/assessmentTools/assessment-tools.cfm#rindex you’ll want to do the A-Index AND the Financial MO+) …

I learned two things about myself that changed my mind … then, my life:

The A-Index told me that I was an entrepreneur – this may be “well, duh” to you, given the title of this blog, but – at the time – it was news to me: I was a struggling entrepreneur, but wasn’t feeling very well cut out for the ‘job’.

The Financial MO+ Index told me that I work best by having “several balls in the air at once” – it’s the way my mind works best, the report said, and it was 100% true.

So, these reports – all $150 worth – gave me the confidence to work according to my instincts … and, a 356% compounded return on my investment 😉

Kevin’s ‘fallacy’ may well be true for 99% of people. But, it’s not true for me.

And – just maybe – if you want to achieve results that only 1% of the population ever dare aspire to and achieve, it won’t be true for you, either?

In any event … I learned to follow my instincts and so should you!

7million7years

How to make 7 million in 7 years …

Monthly Archives: May 2011