Stuffing the income genie back in the bottle …

As I said in my last post, I think it’s ironic that the time that you think about income the most is when you don’t have any.

And, that’s usually because:

– You’ve lost your job, or

– You’ve retired.

And, the second one only becomes an issue if – like most people – you haven’t really thought about how much income you DO need when you are retired. For example, this 2006 AARP survey (rather depressingly) showed:

One-third of workers (31%) have not yet saved any money for their retirement; 26% admit they are not confident they know how to determine how much money they will need to live comfortably in retirement.

… and, this is before the 2008 global meltdown!

Unfortunately, for most people, the retirement income decision is made in two entirely unrelated sets of decisions:

1. How much income will you have pre-retirement?

This one is not really a decision for most of us: most people receive an income that is simply based on opportunity.

For example, you are presented with a new career opportunity; it may come from an employment ad you happened to see in a newspaper, or somebody contacted you (a friend, a headhunter), or it may be forced on you by a down-sizing at one company that leads you to start looking seriously.

In any event, you think you are lucky, because you score a new job with a 20% pay increase over your previous job!

But, you are not really lucky, because of the second – almost totally unrelated – decision that you then need to make:

2. How much money will you have in your nest-egg when you retire?

This one is really a function of:

a) Time: i.e. how long do you have until your retire – or, are forced to retire (through job loss, injury, circumstance)?, and

b) Accumulation Rate: i.e. what % of your income are you willing – and, able – to save?

The two choices are not entirely unrelated, as I previously claimed, because most people save a fixed % of their income (e.g. 2% with an employer match of some sort) into their 401k; presumably, this increases as your income increases.

But, virtually nobody – and, I mean nobody – really works backwards and says: “if this is my income today, and it grows at least with inflation – or more, if I am really clever and opportunistic – what does that mean at retirement?”

You see, post-retirement income is usually a function of pre-retirement income, give or take 20% or 30% according to most experts.

If you want to scare yourself, try this little calculation:

1. Take today’s income and then scale it up to an income that you realistically aspire to; for example, what income would you realistically like to have in 20 years time?

2. Double that number, because in 20 years (due to the effects of inflation), you’ll actually need double that amount.

3. Now, multiply that new number by 20

That, according to the Rule of 20, is how much you will need to have in your nest egg if you want to retire in, say, 20 years time.

I’m guessing that this will be a Big Scary Number.

So, let me give you two choices:

A. Control your income NOW so that you don’t have to worry about it in retirement

This is the frugal [read: boring, yet sensible for most people] way and it has two major benefits:

– By controlling your income now (i.e. not increasing your income dramatically), your frugality allows you to lower your final pre-retirement income expectations as well. When you plug these nice, conservative, frugal numbers into the above calculation you, hopefully, come up with a Slightly Less Scary Number.

– But, this doesn’t mean forgetting about opportunity …. no, absolutely the opposite is true: you still chase all of those increased income opportunities, but instead of spending more when you are lucky (!) enough to land one, you save – a lot – more, which gives you even more chance of reaching that Slightly Less Scary Number.

B. Put your income earning capability into overdrive

But, what if you could reach that Big Scary Number

Why, then you would be able to earn and spend as your income grew, and you would be able to keep spending outrageous sums of money (at least, that’s how it would seem to lesser mortals) even in retirement.

But, how can you do that?

Well, rather than focussing on cutting costs, you focus on controlling costs. But, far more importantly, you focus on ways to increase your income …

… ways to increase it even more than you previously had your sights set on (i.e. in question 1., above).

Of course, you then don’t spend the extra income, instead you save it … saving at least half of all future salary increases.

Not only does this allow you to rapidly accelerate your savings (dramatically bumping up the size of your eventual retirement nest-egg), but it also provides a huge income cushion allowing you to deal with short-term income setbacks by temporarily slowing your rate of savings (say, from 50% of your accumulated salary increases to a more ‘normal’ 10%) rather than compromising your underlying lifestyle.

The real safe wealth building secret is to:

Accelerate your income rapidly, but your lifestyle slowly!

So, what could you do to increase your income, even more than you have previously dared to hope?

Any one of a thousand things!

For example, you could chase even bigger work/business opportunities (that’s why I moved to the USA from Australia), or you could start a business (that’s why I left my high-paying corporate job), or you could do something ‘on the side’, or you could invest actively, or ….

This blog is obviously aimed at those who want to choose Door B.

And, far more importantly than greed, the real reason is that once you let it out (i.e. accept an income increase) it’s almost impossible to stuff the income genie back into that bottle …

… in other words, rather than trying to live frugally by focussing your financial plan on cutting costs and saving the little that’s left, it’s far better to prepare a plan that allows you to rapidly increase income and spending in a controlled manner, so that you can build in the buffers that allow you to preserve your lifestyle should things go wrong.

But, which option would you choose?

And, what would you do do if dramatically increasing your own income actually became a financial imperative?



The problem with income …

I’ve been thinking a lot about income lately, which is ironic as I don’t have any right now (at least, not in the traditional ‘work for a paycheck sense’).

It’s also ironic because, when I did have an income, I didn’t worry about it at all:

Back in 1998, I had two businesses that, between them, managed to earn exactly $0 …

… what one business made (about +$5k a month), the other one managed to lose (about -$5k a month).

But, I wasn’t at all worried.

That’s because this break even scenario already took into account the cost of my (then) still-quite-basic basic lifestyle.

For example:

– I could deduct the cost of my cars as a business expense, so my business paid for those

– I could deduct the cost of my travel as a business expense, so my business (or the occasional consulting client) paid for those

– And, I could afford to pay myself a fairly basic (at least, for a guy with a family) $50k salary a year

So, with my combined businesses breaking even (after these expenses were taken into account), together with the fact that I could control my cost of living by delaying gratification (not to mention, my wife was still working and bringing in a decent income), I simply didn’t worry too much about earning an income.

But, all that changed when I started investing actively, and built up my first $7 million (in 7 years) fortune …

It changed for the worse!

Firstly, my cost of living increased. A lot.

Then, my wife stopped working. Of course.

And, my actively-generated income stopped. Because I sold my biggest business.

Now, I mostly have to rely on ‘passive income’ which is really just spending the money I have in the bank while I figure out how to make more money from investments than I spend on their expenses + the cost of my lifestyle.

And, that’s now a big number!

So, ironically, just when most people think that I have “f**k you” money, I have started to worry about income …

… simply because I have to create my own.

How about you? Do you worry about income? Why (or, why not)?

How to buy a business with No-Money Down

You’ve heard of ‘no money down’ deals for buying real-estate, but you probably have never done one yourself. But, did you know that it’s much easier – and, more profitable – to do ‘no money down’ deals in business?

[Originally published on Biznik, the small business online network]

You’ve seen the late night infomercials on cable: “buy my course for only $149 (plus S&H) and learn the secrets of how to buy 52 properties this year with NO MONEY DOWN”.

Naturally, you’re sceptical – and, so you should be because ‘no money down’ deals on real-estate are far more rare than the infomercials would lead you to believe [AJC: post-financial crisis, now almost impossible] … and, some of the ways that they are done are ‘on the edge’ of ethical business practices to say the least.

That’s why I have purchased a lot of real-estate over the years, but have NEVER done a ‘no money deal’.

But, did you know that it is possible to do ‘no money down’ deals on businesses? And, not only are these deals ethical, but they can be win/win for everybody involved?

And, they can be so easy to put together that my 13 year old son [AJC: this was a few years ago, now] put  one of them together for himself!

1. Let me start with my son’s example, as it is a good illustration of how simple the process can be:

My son started a small e-Bay business, but he didn’t have the capital to meet the minimum order requirement of $100 from his online wholesale supplier.

So, he asked me to put up half the capital for that first order for him: $50. In return, he offered me 45% share in the business, which I accepted.

He made that order and sold the stock within one month and promptly bought me back out!

[AJC: he handed $50 back to me and said he wanted his 45% back; I didn’t have the heart to say “son, it doesn’t quite work like that …”]

Not quite ‘no money down’ … but, close.

Now his e-Bay business nets him a cool $30 a week (not bad for a kid who only gets $26 a month in Allowance)

[AJC: Now I’m extra sorry I handed back my equity for $50, because his latest online/part-time business – he’s still at high school – makes him $150k a year]

2. I had the opportunity to take over a defunct family business: it was a finance company that needed both working capital and bank funding (a lot of it!) to run.

Unfortunately, at the time, I had neither the capital nor the access to bank funding … in fact, I was $30k in debt. But, I did have a customer list.

So, I used the same ‘no money down’ technique that my son used: I found an investor (who happened to be a competitor, often the best place to go for help) who put up the 25% capital that the business required to get started.

I then found a bank willing to finance the remaining 75% simply secured against the ‘paper assets’ of the business.

If you think about it, this is very similar to a ‘no money down’ deal on a property: find a partner willing to put up the deposit money in return for, say, a 50% share of the future profits, and a bank to lend you the balance as a mortgage over the property.

If the business is growing, my advice is to buy your partner out as soon as you can afford to … that’s what I did: we parted good friends. Make sure you always do the same.

3. Another way to do a ‘no money down’ deal for a business is where you have an asset that a larger company needs for their own business (preferably a non-profitable division of a larger company … believe me, there are plenty out there).

Most people are happy to sell this ‘asset’ to the larger company, or perhaps consult to them, for a fixed fee. Instead, consider ‘trading’ what you have for equity. Here’s how I did it:

I had some software that I used in my business that made our operation quite profitable; I found a Fortune 500 company that had a division operating in the same niche, but in another non-competing location, and discovered that they were still operating on older technology, hence, were unprofitable.

They offered to buy my software and consulting to help turn their own business unit around. However, we instead proposed a joint venture. For the ‘price’ of the software and our expertise, we received a majority share in that business unit. No money down!

It only took us two years to make the business profitable (using our software) and, we on-sold our share soon after for a huge return. We made about 7 times more profit by trading assets for equity than a simple software sale would have provided.

4. These are the types of ‘no money down’ deals that you should be looking for if you want to get into business or if you want to expand your existing business. But, there is an even simpler way:

If you want to buy an existing retail business with an existing lease … no matter what the asking price: ALWAYS start by offering No Money Down. Simply offer to take over their lease.

Many times that will be enough to do the deal … people need to sell their businesses for many reasons (marriage, divorce, moving) and are tied to their leases. By offering to take over their lease, you are removing a major headache for them … no money down!

Now that you have seen how easy it is – and, how lucrative it can be – to buy any type of business with No Money Down, maybe you will give it a try?

If you already have, please let me know your experiences …

How to pay off credit card debt?

Last week, I asked our readers what advice they would give to Chris, who asked for help getting out of credit card debt:

Over the past 2 years I have watched as my credit card debt has risen to over 13K. I  have a very well-paying job, making 130K

The vote is in and, as the graph shows, just over one quarter of our readers thought that Chris should just continue paying off his existing cards.

But, why pay at 13% interest, when you can pay the same debt at 0%?

And, if it takes you one year to pay off the 13% debt, say, then you should be able to pay it off in just 10.5 months at 0%, so why pay more/longer than necessary?

Fortunately, just over half of you thought that Chris should transfer his debt to a 0% APR card. I like this strategy … as I said last time, a dollar saved is exactly the same as a dollar earned.

This means that Chris has just earned 13% after tax interest, simply by moving the debt to a 0% card!

Of course, that doesn’t mean that you should now go out and rack up a whole lot of expensive c/card debt just so that you can move it to a low – or zero – interest credit card 😉

Whilst a good first move, another reader (whose name is also Chris) pointed out that just moving credit card debt from one card to another is not really a debt reduction strategy; you also need to figure out how to pay the card off before the 0% interest period expires.

Even more than that, this reader advises:

Not only do you need to pay them off ASAP. You need to cut them up so you don’t rack up debt for a third time…No one should be putting a honeymoon (aka vacation) on a credit card without a clear plan to pay it off.

The other option that Chris offered was to pay off his credit card debt by borrowing against his 401k; Chris says that he can borrow the money effectively at 0% and pay it back at his leisure (the ‘loan’ is at 4% interest, but that is actually credited back to his own 401k).

But, another reader, Steve, pointed out one potential flaw in this strategy:

He needs to weigh against what he could earn (inside his 40k) against what he saves from paying off this debt, and what he puts back in. If he is paying himself 4% interest into this 401k program,but could earn 7% by not taking it out, [it] seems like a bad idea.

I don’t think it matters greatly which option Chris takes as long as he:

a) eliminates the 13% APR debt immediately (either by moving it to a new 0% card, or borrowing other 0% funds to pay it off)

b) has a plan to pay off the outstanding (now 0%) debt off as quickly as possible

c) has a plan to stop the debt from re-accumulating once paid off

The bottom line: if you find yourself in a situation like Chris, follow the 2-Step Wealth Creation Strategy that I outlined in a recent post and you won’t go too far wrong in your own financial life 🙂