Why cookie-cutter personal finance does not work

Marie (speaker, blogger, investor) agrees with my simple plan for wealth creation:

I have to go with your 2 step plan. All my years in PF it seem to work best than the cookie cutter approach.

The ‘cookie cutter’ approach that Marie refers to are the approaches that I was talking about in my provocatively titled guest post at Budgets Are $exy: “Why Most Personal Finance Blogs Are B.S.“, and includes: paying off all debt; maintaining an emergency fund; frugality and expense-cutting; paying yourself first via max’ing out your 401k; and, so on.

[AJC: To be fair, I was asked to write something ‘feisty’ so you should head on over and read the article (and the comments) now …]

To prove any personal finance strategy you need to have an objective against which you must measure the outcome.

To me, that goal must be: financial freedom.

But, what does ‘financial freedom’ mean?

That depends entirely on you …

If your goal is to simply replace your income, say, within 20 years, and you can train yourself – through frugality – to live on a lower income than your peers then it is possible to save your way to wealth (simply defined as financial freedom, or having enough passive income to replace your then-current income from employment).

For example, MB writes about her 12 year plan to replacing her and her husband’s dual working income:

After a couple years of full-time work I started to wonder, how can anyone possibly tolerate doing this for 40 whole years?!

[Now] our number is somewhere in the $1-2M range depending on how many kids we end up having (if any). But, then again, we are saving >50% of our salaries.

By ‘training’ themselves to live on only 50% of their salaries – or 1/4 to a 1/2 less than their peers – MB and her husband accomplish two purposes:

1. They save a lot more than most people,

2. They live on a lot less than most people

So … they need a much smaller Number than most people and they’ll be able to reach that number much, much sooner than most people.

According to my calculations, if you start off earning, say, a combined $50k p.a. and are prepared to live off just $25k of that (assuming your combined salaries increase by 3% per year, and you get a very hefty 8% after-tax return on your savings) you will be able to retire on a combined $40k passive income in not the 12 years that MB is hoping for, but a still-healthy 17 years time.

The catch is that just 4% inflation would mean that you really have the earning power of a little less than $25k p.a. today.

In other words, to actually make this cookie cutter personal finance plan work, you need to be debt-free and be able to live on just half your current annual income for your whole life.

Is this you?

If not, I recommend that you spend a little time with an online retirement savings calculator and work out what income you would need in today’s dollars (i.e. assume you retire today) …

… then, leave a comment and – in my next post – I’ll explain what that means and what you need to do to get there.



The 2-Step Wealth Generation System

This is one of my favorite posts; a great place to start for new readers, especially if you follow the links …


The traditional approach to paying off debt and personal finance (interchangeable terms, it seems, according to the popular media) is simple:

1. Tear up your credit cards : pay off debt : get new credit cards : goto 1.

2. Pay off all of your bad debt : all debt is bad : goto 2.

3. Save 10% : use to build an emergency fund : dip into emergency fund : goto 3.

What is the point of all those “goto”s, you may well ask?

Well, ‘goto’ is an inelegant way of writing computer code … it’s something that programming dinosaurs used back in the Dark Ages [AJC: when I used to work in the computer industry; they had ‘mainframes’ in those days].

And ‘goto’ here means that each step in the traditional personal finance investment plan (as in the sample plan, above) is iterative …

… it never ends.

You never really get out of debt, human nature being what it is (self-defeating, or everybody would be debt-free). You never really get rich, making money being what it is (really hard, or everybody would be rich).

Here, instead, is $7 Million 7 Year’s Patented 2-Step Wealth Generation System:

1. Start Investing

2. Deal with emergencies as they arise

Of course, you will immediately see the flaw in the above: I haven’t created a debt reduction strategy, an emergency fund, or a pay yourself first plan.

That’s simply because, if you follow my patented 2-step plan, you won’t need a separate debt reduction strategy, an emergency fund, or a pay yourself first plan!

Here are the principles upon which this strategy is built:

1. Paying off debt is investing

In previous posts, I’ve outlined my cash cascade; it works much better than any debt snowball, debt avalanche, or any other debt reduction strategy you’ve ever read about, because every single one of those ‘other’ plans works on the flawed assumption that debt is bad, therefore should be paid off as quickly as possible.

The reality is that 75% of your net worth should always be working for you … at the best possible after tax interest rate (taking your personal attitude to risk – and, your affinity to / aversion against certain types of investments – into account).

Keeping in mind that a dollar saved is EXACTLY the same as a dollar earned:

– Paying off a 13% (after tax) credit card instead of buying a 1% (after tax) CD certainly makes sense.

– Paying off a 4% APR (before tax benefits) home mortgage instead of investing in an income-producing property that may return 7.5% cash-on-cash (after tax benefits) does not.

2. Creating an emergency fund is your first emergency

Let’s say that you create a $10k emergency fund; let’s also say that this fund is big enough to cover all likely emergencies.

Haven’t you just created your worst case outcome?

That is, haven’t you just depleted your investment fund by $10k?

And, if you didn’t have the ’emergency fund’ in place, isn’t that exactly what you would otherwise only needed to have done, but only in the event of an actual emergency?

Wouldn’t it be better, instead, to invest that $10k so that it is always working for you, emergency (very unlikely) or no emergency (very likely)?

But, how would you deal with emergencies ‘as they arise’?!

Well, you could simply create a source of borrowings that you can tap into only when needed (e.g. a line of credit against your home; a redraw facility against your 401k; a 0% APR credit card, sitting there – unused – just for this purpose).

If you just start investing, you will soon want to become successful by investing more and more.

And, it won’t take you long before you you are cutting costs, paying off your credit cards, putting more and more aside, reading everything that you can about personal finance and investing, and so on …

… simply because you will want to invest more. It’s exciting and addictive.

That’s why these two simple steps will change your life, forever.

Go ahead, try it: my 2-step plan comes with a Lifetime 100% Compounded Money Back Guaranty 😉

How much interest can you earn on $1 million?

Welcome Budgets Are Sexy readers!

Today’s post is a pretty good place to start, if you are interested in finding out a little more about how I like to think about personal finance …

And, for my regular readers, head on over to Budgets Are Sexy’s blog and read my provocatively titled guest post (“Why Most Personal Finance Blogs Are B.S.”). The blog’s editor asked me to write something “feisty” and, judging by the comments, I think I did just that 😉

Don’t be afraid to leave a comment on that site (or here, if you prefer) to let me know what you think?


“How much interest can I earn on $1 million?”

This is the question, if I am to believe the google search statistics, that I am being asked more often than any other …

And, the answer is very simple: if you keep $1 million in the bank, earning about 1% on a CD, you’ll have $10,000 a year in interest. Given that inflation is running at two or three times that, you are running a (very) losing race.

So, the bigger question that you should be asking is: Why do you even care how much interest you can earn on $1 million?

$1 million today, if it’s to last your lifetime, probably only replaces a $35k income (in today’s dollars). It could produce more, but if you don’t know how to make more money than $1 million in your lifetime, you’ll never know how to actively invest it for higher returns.

So, I’m guessing that what you really want is to know how much interest you can earn on $3 mill. – $10 mill. today, or even more.

What you should be asking is:

1. How much income do I want to generate without working (I’m guessing $100k – $350k p.a.)?

2. Multiply 1. by 20 (my rough Rule of Thumb for an active investor) to get your Number (likely to be in the $2m – $10m range)

3. When do I need to reach my Number (probably 5 to 10 years. Any less and you’re dreaming; any longer and you don’t really have what it takes)?

4. Then you need to spend some time with an online annual compound growth rate calculator to work out what annual % return you need to be generating to get there, on time (3.) and on budget (2.).

Then, use this handy table to work out what sort of things you should be learning about and investing in to get that sort of return:

Now, these returns aren’t what you get ‘off the shelf’ … rather, they require hard work (plus the kind of education that you get from this blog), but they are achieveable (after all, that’s how I made $7 million in just 7 years, starting $30k in debt).

How much do you think you need to earn passively to be happy, and when do you think you need it?