What’s an eco-friendly standard of living?

Fellow blogger, Jonathan Ping, was kind enough to include a chart from one of my earlier posts in one of his recent posts, so I thought that I should repay the favor by including one of his charts, here:

I recommend that you read his original post, but the chart itself is pretty self-explanatory; it shows the problem in personal finance … and that’s:

As your income grows so do your expenses.

It’s called ‘lifestyle creep’ and is one of the key reasons why the actual wealth of high-income earners (as indicated by the grey shading between the green income line and the red expense line) is not necessarily that much higher than that of some medium- (or even low-) income earners.

The obvious solution, according to Joe and many other pf bloggers, is to reduce your spending:

Low Income


This way, you decrease the red expense line relative to the green income line …

… in the process, enlarging the grey-shaded area between the two lines i.e. allowing, at least in theory, even low-income earners to increase their wealth!

The problem with this strategy is that saving – especially, saving more (probably a lot more) than you do now – is really, really, really hard.

Austerity hurts. Austerity is against nature (well, my nature).

It gets worse: saving now so that you can spend later simply doesn’t work!

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

In other words, you need to drop the red savings line to no more than half the green income line … not later, but now … and keep it there for the rest of your life.

Never fear, I have a better plan …

… it’s one that is far more natural, because it allows you to maintain your current standard of living, even increase it over time:

wealth graph

Let’s say that you start off as an average-income earner; here are your steps to success:

1. You can start to save a little, perhaps more than you have done in the past. Don’t worry, this austerity is temporary … after all, you already know how I feel about too much belt-tightening.

2. Once you have a little money beginning to pile up, you should find a way to put it to use to help you grow your income. Perhaps you could: start a part-time business; buy an ‘absentee-owner’ franchise; or open a car wash. You could work a little smarter and score that big (or little) promotion. Maybe you could collect a windfall: a tax refund; find a rich aunt who dies and decides not to leave all her money to her cat after all; or, you get really lucky and hit a small jackpot at Binions.

3. As your income grows, you should increase your spending by no more than 50% of your after-tax ‘pay rise’. The rest must go back into your little pile of money. Then you should concentrate on finding even more ways to put it to use to help you grow your income. Are you beginning to see a pattern here?

4. As your income grows at a (much) faster rate than your spending, you will slowly begin to see that you are actually already tending towards saving 50% of your income without even trying!

Keep it up for 15 to 20 years, and you’ll be able to sustain that savings rate all the way through – and beyond – retirement, as you build a big enough bucket of wealth (your net worth) as shown by the green-shaded area between your income and expense lines.

What’s more, this fully sustainable standard of living is always more than your current standard of living, so you never, ever need to tighten your best. The secret with this plan is that you simply don’t loosen your belt as fast as other high-income earners tend to do.

Obvious, really …

Now, that’s what I call eco-friendly finance 😉

[You can also read this post in the Carnival of Personal Finance:  http://wealthpilgrim.com/carnival-of-personal-finance-happy-days-are-here-again-edition ]

But, I’m not smart enough to be rich!

Firstly, let me warn you: this post will have absolutely no bearing on how wealthy you will become!

Now, do you need to be smart to become wealthy? Is “but, I’m not very smart” a valid excuse for not even trying?

It turns out that the answer to both questions is NO.

You see, your IQ (more correct: your cognitive ability – i.e. your ‘smarts’) has very little to do with how wealthy you will become …

… studies have shown that 97.5% of the factors that can explain wealth have nothing to do with how smart you are:

Zagorsky found a correlation of 0.30 between IQ and (recent annual) income, which is relatively low — roughly 9% of the variance in income can be accounted for by IQ, and the other 91% is due to ‘other factors’. On average, he found that each IQ point added about $200 to $600 in annual income. As for net worth, the correlation with IQ was even lower, at 0.16, meaning an explanatory power of about 2.5% (leaving 97.5% of the variance to be explained by non-IQ factors). In his words, “Since the statistical results are not distinguishable from zero, this suggests IQ test scores and net worth are not connected.” You can view a scatter plot of net worth vs. IQ here: http://www.flickr.com/photos/pke…


the non-relationship between financial worth and iq

from the journal intelligence

He also dives into about 30 other variables with interesting outcomes. For example, your net worth at age 28 has only a slight correlation of 0.13 with your net worth at 33-41. Self esteem has a correlation of 0.11 with net worth. Being US-born (as opposed to being an immigrant) has a correlation of negative 0.01 with net worth, while having siblings has a net worth correlation of -0.06; but don’t worry, those aren’t significantly different from zero either.

Ironically, you will need a reasonably high IQ just to understand what this is all telling you, so let me simply remind you of a story that I shared some time back:

I bumped into a friend of mine, who was voted “least likely to succeed” at high school. I was surprised to see him stepping out of a shiny, new, red Ferrari.

After we exchanged pleasantries, I congratulated him on his success, told him that I wrote about personal finance, and asked him how he made his money.

He said that he simply bought and sold stuff on a 3% margin, and that’s been enough to fund an amazing lifestyle and a huge real-estate portfolio to underpin his retirement.

Well, I was incredulous … only a 3% margin?! And, I told him so.

But, no, he said: “I really do work on a 3% margin: I buy stuff for $1 and sell it for $3. That’s 3%!”

As I said, whether or not this post makes any sense to you whatsoever, it will have absolutely no bearing on how wealthy you will become … thank goodness 😉

The Golden Rule of personal finance …

golden ruleIf you find yourself asking a personal finance question like this one, this post will give you all the tools that you need to answer it for yourself:

I am in my early 20s, earning between $110-180k/yr depending on my bonus. Would it be inappropriate for me to drive a $50k Mercedes Benz?

Most people would deal with this by saying things like:

– Can you pay cash for the car?

– If you buy a Merc now, what will you buy next year?

– Save for your own home

– And, so on …

Which are all valid concerns …

… but there is one important question that nobody thinks to ask:

What is your current net financial position (i.e. net worth)?

Yet, this is the most important question to ask!


Because it’s your Net Worth that sustains you in retirement:

– Before your retire, you earn income

– You save and invest as much of your income as possible to build up your ‘nest egg’ (this is your net Worth on the day that you retire)

– After you retire, you live off the income (e.g. interest, dividends, investment income, etc.) generated by your Net Worth and/or deplete it over time

And, this takes you directly to The Golden Rule of personal finance …

… because, it’s the one financial rule to live by; the one above all others; the one that – if you follow it – will answer all of your financial questions and guarantee your financial future:

Always have 75% of your net worth in investments.

This means: at least until you retire at a time and place of YOUR choosing, that you should always have no more than the remaining 25% of your current net worth (tested yearly) as equity in your own home, car, possessions, etc..

These rules of thumb then follow:

– Have no more than 20% of your current net worth as equity in your own home

– Have no more than the remaining 5% of your current net worth in your other possessions. It is typical to split this 50/50 between your car and your other ‘stuff’.

– This means that you should have no more than 2.5% of your current net worth in your car. I suspect that the reader’s proposed Mercedes would break this rule.

There are a few important things to note, if you’re going to obey The Golden Rule:

1. You can – in fact, should -break the 20% Equity rule for your first house (otherwise, you will never be able to afford to buy one), but don’t upgrade for as long as you will be breaking this rule.

2. You will probably need to borrow money to buy your house (first and/or future home), but don’t spend more than 30% of your take home pay on the mortgage repayments, except – again – for your first house (but, only if you absolutely have to).

3. Never borrow money to buy a depreciating asset (e.g. car) UNLESS it’s required to earn income AND you have no other way of buying one. Even then, obviously buy the cheapest that will do the job, borrow the least, and pay it off early.

4. For a pleasant surprise, test these numbers annually: because your Net Worth will go up each year, yet your car and other ‘stuff’ will depreciate (check eBay). This means, you can actually afford to buy more ‘stuff’ every year or so, if you like, or just save up your ‘spare net worth’ for a couple of years to upgrade your car, etc. when ready.

So, are you following The Golden Rule?

If not, what do you have to change in your life so that you do?

Getting the keys to the golden treasure chest …

golden keyI love it when I receive an e-mail that begins:

As much as I know that I should read some of your posts to better understand some of the questions I’m about to ask, I thought it may be faster to drop you a line.

Yep, this really is part of an e-mail that I received today …

Now, I don’t mind – in fact, I love – receiving e-mails from my readers.

And, as many of you will attest, I really do try and answer them all (often backing up my answers with a post, such as this one)!

But, there are so many online sources that provide great, basic information …

… so, why waste your time asking a multimillionaire how to tie up your shoelaces, when he’s willing to almost-literally (well, as good as) give you the keys to the golden treasure chest?

Instead, I heartily suggest you first try doing your own basic research then, by all means, ask me to help you fill in the blanks

[AJC: Google is an amazing tool for finding the answers to standard personal finance questions. Another great tool is the comment section to my posts, where one of the other readers may be able to help; and, I often respond to comments, as well]

… believe me, I’ll be more than happy to do so.

And, if you’ve put in the work ahead of time, what you’ll end up with is some information that you will not be able to find anywhere else.

That, I can promise!

Happy googling 🙂


Why you’re not rich yet …

I’ve been writing this blog for 5 years …

… and, I made $7m in 7 years.

So, if you’re an early reader, that means that you should have added around $1m to your net worth since you started reading this blog.

Have you?

If you haven’t, I’m guessing that it’s for this reason:

Screen Shot 2013-04-09 at 8.42.30 AM

[Source: http://www.quora.com/Life-Lessons/What-is-the-most-important-life-lesson-that-you-have-learned-up-to-this-point]

The things that I discuss in this blog aren’t for reading or intellectualizing [AJC: is that even a word?] …

… they are for doing.

If you don’t get out of your comfort zone and actually change the way that you go about things – and, I’m speaking financially, here, but this is equally valid for any aspect of your life that you wish to improve – then how can you expect your results to change?

As Albert Einstein said:


If what you’ve been doing hasn’t brought about the life-changing financial situation that you’ve been hoping for, then think about what you should be doing …

… and, just starting doing it.

How to do a personal budget …

4fWhilst it’s very tempting to go to your 4-F‘s (friends, family, financial planner a.k.a. ‘lifestyle planner’, financial advisor a.k.a. accountant) for advice on budgeting, I find that it’s quite a personal exercise.

In order to budget they – actually, you – have to ‘get’ … well … you.


Let me give you an example:

I tried going to my accountant when I got back to Aus after a few years in the US, and here’s how the conversation went:

Him: Well, you could start off with a budget of $150k per year and see how you go
Me: Start by writing 4 things on your whiteboard:
1. Private Schooling for 2 children
2. One to two overseas trips per year
3. Invest in at least one startup per year
Him: OK, now what?
Me: Write $50k next to each of those
Him: OK, that’s $150k total
Me: That’s $150k per year, then you can add your $150k ‘starting budget’
Him: Oh shi …

The steps to perform the only kind of budget that really makes sense are as follows:

1. Do a One-Time ‘As Is’ Budget

I described this kind of budget in this post, and it truly is the one and only time that I have ever made a personal budget.

It consisted of everybody in my family (at the time, only my wife and me) carrying around a pencil and piece of paper for a whole month …

… and, writing down every single thing that we spent a penny or more on during that month, whether by cash, check, credit card, or electronic transfer.

At the end of the month, it was fairly easy to categorize the expenses and tally them up. Of course, we also needed to prorate in some expenses, such as insurance, that are paid one-time, and prorate out similar multi-month expenses that may have been paid during that month.

At the end of it, you should have a fairly accurate picture of what you are currently spending.

2. Create your ‘To Be’ Budget

After my earlier post, you should have a reasonable idea as to how to do a Top Down Approach To Investing analysis.

It consists of working out how much money you need in order to stop work (retire … early!) i.e. Your Number, and when you need it i.e. Your Date.

Then you can work backwards to find out how much compounding you need and what investment vehicles can get you there.

But, the missing step is working out how much starting capital you need …

… now, I can’t tell you that, as it depends upon what you have in mind.

But, the chances are – and, to me, this is the sole point of doing your budget anyway – you will need to find a way to increase your savings to build up that little investing war chest of yours.

And, the best way to do that, is to start by paying yourself twice!

[AJC: most of the ‘how to’ detail in this post has been covered in the earlier posts that I have listed, above … don’t be afraid … go click some links!]

Now, that’s how to do a personal budget 😉



Should I buy a new car?


Since you’re unlikely to win a car

[AJC: if you haven’t seen yesterday’s April Fools Day post, you can check it out here]

… you may be thinking about buying one.

For example, Michael asks:

My business is going well and I’d like to update my old Ford Ranger pickup (160k miles) with something new.  I saw that there is a bonus depreciation on vehicles over 6000 lbs GVW so I was looking to use that to save on taxes.  I settled on a new Range Rover Sport.  But here lies the issue…
It makes me uncomfortable to think about how others will perceive me in the Rover.  [But, if I buy another type of car] the lack of tax advantages would probably end up costing me more than the “pretentious” Rover.

Before we worry about what brand of car to buy, I would question why Michael’s buying a new car, rather than a new investment property.

Other than that, he should simply buy the cheapest car that meets his requirements.

You see, unless the vehicle specifically supports your business (think delivery truck), it’s just a depreciating liability (it doesn’t earn you any money, so it sure ain’t an asset!) …

… which means that any money that you don’t spend on it (or can claw back in tax deductions, etc.) is the next best thing to not spending the money in the first place!

Why spend money just to feel uncomfortable?!

Don’t spend more money just to get rid of the discomfort: spend less (e.g. buy a lower-profile American or Japanese car; one that costs less than 60% of the list price of a Rover) or none at all.

Why not put off buying the car, altogether?

On the other hand, if your business is producing enough cash to support its own growth and is producing enough to fund outside investments, there’s no reason why you shouldn’t spend what’s left …

… after all, that’s what money’s for, right?


Win my car!

writing competitionI have a confession …. and, an announcement!

First, the confession:

I am a little tired of blogging …

I’ve been doing it for 4 years now, but – so far – I have earned $0 from my investment in sweat, blood, and tears.

You may have noticed that I’ve cut back from daily posts, to 2 – 3 times a week … and, sometimes, not at all.


So, I have decided to cast out for somebody to continue writing my blog for me.

I get reasonable SEO rankings, so I want to maintain those and the right person will be able to monetize this blog even better than me …

… and, I’ll split the income 50/50 with the winner.

The winner?

Yes, because I’m also doing this as a competition!

The winner will be the person who sends me the best one page proposal (with a sample of your work and an outline of what you have already written). You can send it to me at: ajc@7million7years.com

But, that’s not all …

Since I am planning to upgrade my car [AJC: do the words: Italian, Red, and Ferrari mean anything to you?], I am prepared to let the winner drive my ‘old’ car for a year.

That’s not all …

… after the year, if you’re still writing my blog (which means that I – and my readers – are happy with you), I will simply hand over the keys to the car.

That’s right: if you’re the winner, you get to keep the car!


We will make so much money, together, monetizing this blog that in just one, short year, one little car will hardly matter …

Now, this ain’t no ordinary car; this a 2008 BMW M3 convertible (special edition) in excellent condition:

Screen Shot 2013-04-01 at 3.06.04 PM

So, are you up to the challenge????

Great! Get your proposals in!!!

The winner will be announced next week …

Good Luck 🙂