Suffer any bad beats lately?

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I have to admit that it’s very exciting seeing my two real-estate development projects coming to fruition [AJC: this is the architect’s rendition of just one of my two condo projects … click on the image to enlarge it … go ahead … do it … I’ll love you for it].

I’ll get back to that in a sec’ …

… first, let me tell you about a conversation that I just had with a friend, while we were playing poker today:

FRIEND: Do you find any parallels between business and poker?

AJC: It’s uncanny, but yes I do … and, it’s caused me to totally rethink the way that I think about money

Well, not so much ‘totally rethink’ as remind me about some important Making Money 301 lessons that I seem to have forgotten …

…. but, I keep getting side-tracked; back to the poker:

Case in point: I had quickly tripled my starting stack in a cash game but, just as quickly lost it on a series of bad beats; bad calls (by them, not me); and bad luck.

When you’re running hot, you feel invincible.

When you’re running cold, nothing that you do turns out right.

… and, your poker bankroll quickly slips away.

Well, it’s pretty much the same thing in business and personal finance:

Your investments and/or businesses are ‘on fire’ … the market’s running hot, and – if you’re smart – you cash out at the peak, building up quite a bankroll.

Maybe you even reach your Number.

What should you do then? STOP and smell the roses!

But, the trouble is, greed and the adrenalin kicks in … you believe that you’ve got the Midas Touch. And, you push for the next project.

… and, that’s the one that gets you.

You know, market downturn, bad luck, bad advisers, etc., etc. sob, sob, sob.

Which is, perhaps, why Ill Liquidity asked me:

I don’t get it. You make a tidy sum and retire from the rat race, paying yourself a salary… why go forth and try new money making ventures?

Given my own ‘stop and smell the roses’ advice in that regard, I agree, it’s hard to understand. Sometimes, it’s even hard for me to understand 😉

So, let me take a stab at explaining it; the story so far:

I made my $7 million in 7 years (mainly through reinvesting the profits of my businesses into buy/hold real-estate), and then made a heap more (by selling those businesses just before the 2008 crash), but ….

… then the crash hit, and here’s where my money went:

1. $1.5 million cash into my house in the US (you know I can’t sell that, right?)

2. $5 million cash into my house in Australia

3. 25% of what I sold the businesses for in taxes [AJC: sheesh!]

4. Lost 100% of my $3 million bonus on company stock price crash + taxes paid on the full $3 million [AJC: double sheesh! … but, it’s nice to know that I have a heap of capital gains tax credits to use for the rest of my life]

5. Gave my accountant $1 million to invest in the Aussie stock market for me … he promptly lost 75% in about 6 weeks. My fault for trying to time the market, not his 🙁

Don’t feel too sorry for me: when others try to get to sleep by counting sheep, I count millions!

My problem is this:

All of this bad luck and bad management has left me with assets – not including my $5 million primary residence – that I consider just enough to live my Life’s Purpose.

But, I am an über-pessimist and I really want a large margin for error.

Now, in my rational moments, I realize that my house provides me that i.e. as soon as the kids move out, in approx. 10 to 15 years, we will sell down into a, say, $2 million apartment, which would free up another $3 million (all in today’s dollars, but the price differential should still hold true).

But, even that’s not good enough for me.

So the question that I am wresting with – and, have decided to put off answering until I have building permits for both projects in my hands:

Will I take my own advice and sell both development sites (with permits) for a tidy profit (if all goes well), or will I pull the trigger and dump most of my net worth into these developments to get the Really Big Bucks?

Only time will tell … but, you will be amongst the first to know 🙂

In the meantime, have you suffered any ‘bad beats’ lately?

Riding the profitability curve …

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Take a look at the chart on the left … yes, the one that I’m busy drawing for you 😉

… because, if you’re in business – or aspire to be – whether online or offline, this is a lesson that you simply have to ‘get’ … and, early:

For those of you who have been to business school, there is a space between the sales [blue] and expense [red] lines called PROFIT.

Profit is for growing the business and returning value to the shareholders.

But, in a small business it’s mostly known as OWNERS’ SALARY, because the owners live off this instead of taking a wage … and, it’s usually (barely) enough to fund their ever-growing (assuming the business is becoming more and more successful) lifestyle.

Instead, it should be known as CAPITAL.

You see, large businesses (particularly publicly listed ones) find it easy to raise capital: they simply issue stock.

They trade bits of paper (stock) for more bits of paper (cash) to go ahead and do all the things they need to do in order to expand their businesses (e.g. buy new machinery, open new branches, fund acquisitions).

But, small business owners can’t do that … it’s very hard to raise money as a small business owner, for anything … including expansion.

So, my advice is to fund your own expansion, by retaining profits (instead of spending them on yourself) and using those retained profits to grow the business.

There’s your capital!

Fellow Aussie and business/success coach, Jon Giaan (knowledgesource.com.au) similarly advises aspiring business owners:

When starting a business, most people focus on generating income and lose sight of their long-term goal of having a successful and ‘sustainable’ business that will provide freedom, independence, wealth and support many years into the future. Keep focused on building a long-term asset.

No doubt this is true; Maslow’s Hierarchy puts food/shelter/clothing right at the top …

But, once your business has grown to supporting those needs, your mind starts to look at wants, and before you know it, you NEED your business just to survive mortgage payments, expensive car leases, private school/coach/country club fees, and the list goes on.

Right from the beginning, we had a different view, one that saw the owners of an [eventually] profitable business jointly deciding that the partner not working in the business – my wife – still needed to work her $60k – $90k per year ‘day job’ (as an IT Project Manager with a major telco).

The reason was exactly as Jon says: we wanted to keep “focused on building a long-term asset”.

We knew that it was only by reinvesting the cashflow produced by the business – both within (reinvesting in the business) and without (buying good quality buy/hold real-estate and other investments) that we would eventually reach our Number.

[AJC: Right there, in a nutshell is how we reached $7m7y: use the cashflow from the business to invest instead of spend. A side benefit being that we didn’t need to rely on the ongoing success and/or sale of the business to reach our Number. Too easy, huh?]

In fact, we eventually blew our first $7m7y out of the water … but, that’s a whole, other story 🙂

Panning for gold …

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[BEGIN Message from our Sponsor]

Some minor changes to the 7million7years format:

Previously, I had been trying to post to a Monday/Wed/Thur schedule PLUS a video on Sunday. Unless I really find a video that knocks my socks off, I’m going to drop my Sunday video (for now) and shift my posting schedule to Mon/Wed/Fri each week.

I should also point out some key differences between this free blog and my paid membership site (7m7y.com): my blog (i.e. the site you are on right now) is much more ‘chatty’ and random than my membership site; my blog simply reflects my thoughts, feelings, and experiences gleaned from my own journey from $30k in debt to $7 million the bank in 7 years.

My journey – hence, what I share on this blog – is absolutely authentic and I believe that there is real gold to be gleaned simply by reading this blog 3 times a week.

IMHO, it’s the best 6 minutes that you’ll spend each week, besides your love life 😉

I liken reading this blog regularly to wading in a shallow stream and panning for gold: stand there long enough and you get what you need and, hopefully, enjoy yourself in the process. But, don’t expect instant results …

On the other hand, my NEW membership site (The $7 Million 7 Year Wealth System) is a complete course on wealth; if you’re a regular reader of this blog you’ll immediately recognize the main modules (Finding Your Number, Making Money 101, Making Money 201, and Making Money 301) but it’s covered to a depth that this blog simply doesn’t – and, can’t – go.

And, I’m building it to be a true step-by-step course to fulfiling YOUR financial destiny.

BUT, I don’t advertise on this blog, so the only way you’ll hear more about the course, is by subscribing to my free MONTHLY newsletter – using the form in the right-hand side-bar [see right ====>].

[END Message from our Sponsor] 😛

There IS an entrepreneurial bug!

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This post has been featured in the Carnival of Wealth: http://personaldividends.com/news/admin/carnival-of-wealth-august-7-2010-edition

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People often say that they have been “bitten by the entrepreneurial bug” … and, I can say that is perfectly true!

I always wanted to be a ‘millionaire by 30’, but I missed my first million and jumped straight to making my 7th by the time I was 49 😉

But, that did not translate directly into wanting to be an entrepreneur; in fact, I was working for a Fortune 10 company and happily dreaming about becoming its CEO (“one day”) …

… apart from one or two disastrous years, I had a charmed time there, winning ‘bonuses’ left, right, and center – and, traveling around the world on the corporate budget, having the time of my life.

But, that all changed by Work Year 6.

Suddenly – and, I mean suddenly and inexplicably – I was struck with the desire to be in my own business. Almost literally, I was bitten by the entrepreneurial bug!

From that point on, I was miserable in my job … I schemed and planned my way to a myriad business ideas that I couldn’t quite translate into a real business.

In the end, I wimped out and joined IDB.

Yep, the Great Entrepreneur was In Dad’s Business!

Thankfully, that business promptly went broke leaving me with nothing but a $30k debt and a customer list, which I turned into a ‘cloned’ business (i.e. same customers, same concept, very similar name) that I still own, nearly 20 years later. And that business helped to fund the ‘other business’ that took me to the USA.

So, I guess I found the true Entrepreneur Within, after all …

But, what I wanted to share was my thought process, all those years ago when I was still at my ‘desk job’:

I wanted to be in business, and all I knew was IT (information/computer technology), so here were the choices that I came up with:

1. Consulting: as I mentioned in passing, in a recent post, I was something of a ‘world expert’ in my little niche so consulting was a natural first choice for going it alone. But, I realized that I would still be trading hours for dollars.

The formula is (from memory) 1440 possible working hours of the year – hours lost due to marketing, administration, and time off x billable rate = MAXIMUM total revenue. Plug any number in that you like, and it doesn’t add up to $7m7y.

2. Sell something: The only thing I knew how to sell was computers, and the only ones of those that I would likely be able to get a licence to sell would be PC’s. Unfortunately, I could see a price war and shakeout happening which would crush the small guys (this certainly happened).

3. Build something to sell: Again, the only thing that I knew was software: I could develop a piece of software and sell it. Unfortunately, every piece of software has a lifecycle … when the better one comes along, I’m toast.

There was my dilemma …

Fortunately for the world, Mr Price and Mr Coopers didn’t think about the consulting equation before starting PWC (one of the world’s biggest consulting companies before selling off to IBM).

Equally fortunately, Steve Jobs didn’t worry about costs and margins when creating the Apple 1 and 2 – then Lisa and Macintosh – computers and offering them to the world.

Perhaps unfortunately for the world (if you’re a M$-basher), Bill Gates didn’t think about obsolescence before licencing his piece of of software to IBM, then others.

Bottom line: if you’re passionate about an idea, give it a go … you’ll find a way to make money if the idea is good enough. If not, what you learn will be worth the ‘cost’ in lost time/money.

To mini-retire or not to mini-retire?

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DrDollaz takes issue with whole ‘eat hamburger now so that you can eat steak later’ philosophy:

Problem with that philosophy is that years later – after being used to eating nothing but hamburger – most people have a hard time splurging on steak!

The whole fallacy of ‘saving so that you can enjoy retirement’ is BS – your life should be filled with mini-retirements.

But, Think Simple Now tried a mini-retirement and found that it wasn’t all it was cracked up to be:

When I first learned of the mini-retirement concept, I was immediately attracted to the idea. To me it represented freedom. I had all these romantic notions associated with it, and when I found a way to take three months off from work, I jumped at the first chance and ran with it.

While traveling is an eye-opening experience and a chance to see how others live in vastly different cultures. It is exhausting, on many levels. It quickly became clear to me that the romantic concept of traveling is flawed.

It turns out that TSN is more disillusioned with travel rather than mini-retirements, per se.

Fortunately, I agree with DrDollaz …

The $7million7years Way  is all about leading you to some future date where you have amassed the required amount of money to start living (your Life’s Purpose).

But, of course, if that’s all you take away then you’ve missed half the story:

Because I also say that money has only one purpose: to spend.

And, I have written many posts telling you to save now, but also to spend now!

Life is a journey …

… and, that includes the bits both before and after your reach your Number 😉

The Real Value of Money?

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Aside from the interesting New Zealand accent (only a hop, step and a jump away from my own Aussie accent) – and, the fact that the Porsche Cayenne costs NZ$260k (or a little over USD$189,000) making them ridiculously expensive in the Land Of The Long White Cloud – I think this video is misnamed.

So you forgo the car and invest the money (as you probably should, while you are trying to work towards your Number) and get back $1.8 million after 20 years … what do you do then?

Well, isn’t the Real Value of Money based for spending? Am I missing something here?!

What you spend it on is up to you: you could give it all away or you could go out and buy yourself a Porsche Cayenne.

And, if you’re going to buy a Porsche Cayenne then, why not buy it now (if you have reached your Number and/or can afford it within the 5% Spending Rule)? 😉

Still, the message is clear: don’t go out and waste your money on ‘stuff’ if you are still trying to work towards your Number!

The Murphy’s Law Fund

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Scott who – in my post proposing a Zero Dollar Emergency Fund – says:

I’ve given this topic a lot of thought and how do you feel about seeing a typical ‘emergency fund’ as more of a temporary ‘war chest’? In that, you are building up this cash savings reserve as fast as you can, while you scout for that next great investment opportunity (ie; stock in that excellent undervalued company that you researched, or that terrific foreclosure that you’ve scouted out in a great area that you want to purchase and turn into a rental property, or an excellent business idea or perhaps funding the expansion of your current business).

I figure that way, this money has a specific target(high returns that are more likely to get you to your number by your date) BUT, in the meantime, if Murphy pays you a visit while you’re building up this ‘war chest’, you have some liquidity(ie; emergency funding) to tackle that emergency. But, as soon as you have enough built up to take that next investment opportunity, take it with this money!

The short answer is that Scott has some cash lying around, and hasn’t yet figured out what to do with it. An ’emergency’ pops up, so the logical thing to do is to dip into that cash and use it to solve the problem.

I don’t have any issue with that: but it isn’t an Emergency Fund. It also isn’t a ‘war chest’. It’s just some spare cash lying around …

Of course, I’m overstating things for dramatic effect, here 😉

So, let’s take a look at the following graph to see what may be happening [AJC: I’ve adapted this graph from something to do with the ‘mating cycle of dogs’ that I found on Google image search, but I think it suits our non-canine purposes just fine!]:

Let’s pretend for a minute that this graph represents the amount of ‘spare cash’ that Scott has lying around (Y-Axis) at any point in time (X-Axis):

Scott starts building up his savings, has a little glitch as he realizes that he forgot to pay his car insurance premium by installments so he has to pay it all at once, then steadily builds up again until it reaches Scott’s ‘peak’  – his ideal Emergency Fund of $10,000.

Then Scott hits paydirt: an idea for a new online business, and he starts to spend that $10k on programming, domain name registration, hosting, Google Adwords and all the other stuff needed to get the ‘side business’ off and running. A couple of months and $9k later, Scott’s business is paying it’s own way [AJC: well done, Scott!].

Great, now Scott can start building that Emergency Fund again …

Do you see the problem?

The only time the Emergency Fund is adequate is between the time that Scott has managed to save up the full $10,000 and the time he starts spending the money on something else (in this case, his new business idea; it could easily have been a vacation, new car, girlfriend, or …?).

[Sigh] If only Life’s little ’emergencies’ knew how to fit into Scott’s calendar [double sigh]

I guess it’s up to me to propose a better solution …

Next time 😉

The case FOR credit cards …

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I think, by now, we all agree:

Credit Cards = BAD

I mean, that’s pretty much Personal Finance Kindergarten, right?

Why pay 19%+ interest for something that just goes down in value (like that 3D TV)?

But, why do I pay all my bills – both work and personal – by credit card.

I’m sure the answer’s pretty obvious to all and sundry: it’s for the points, man!

Yes, even millionaires like to get free stuff …

…. and, Sugardaddy outlines on NetworthIQ exactly how he does it:

1) Assuming that you pay your bills on time, most of the time, put all routine expenses on your credit card…utilities, groceries, etc.

2) Set up an automatic bill payment plan from your checking account for the card online.

Result:

1) you get a 30-day free loan.
2) you get free credit card points that are worth real money.
3) you increase your credit score.
4) you consolidate all your bills in one payment
5) You will never have a late fee and the APR will never concern you.
6) You will always watch your checking account balance like a hawk as failure to have enough in the account IS NOT AN OPTION.

I have done this for 10 years and it works like a charm…I get all my video games for “free” from Best Buy, and beat the banks at their own game.

Life does not get any better than that.

But, there’s always a catch in Life, Sugardaddy 😉

The one, here, is that the credit card companies HOPE that you forget to pay your bill on time, then you get to pay interest from the date of purchase.

[AJC: actually, they’ve already made their $$$$ from the Merchant Fee – believe me, I understand this side of the business VERY well – but, that 19% they get from you is just sweeeetttttt]

So, I add a few more steps to this otherwise inspired plan:

7 ) See 6)
8 ) See 6)
9 ) See 6)
10) See 6)

Point made?

Great, because I, too, have been doing this for years.

My assistant puts all ‘work’ expenses through my personal credit card (needless to say I have a LARGE credit limit), and my wife does the same with our home expenses.

Both ensure payment in full each and EVERY month.

Having done that, later this year I’m traveling ’round the world first class [AJC: I’m told that First Class on the new A380 entitles me to my own/private room on the ‘plane!] … fully ‘paid’ by points.

Sweet 🙂

Monetizing your passion …

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If you want a business but don’t know where to start, think about monetizing your passion.

By that I mean, find out what it is that you like to do in this world (golf? personal finance? knitting?) and parlay that into a business.

Here’s somebody who turned a passion (and talent) for jewellery made from twisting little silver-plated wires into a $600k+ p.a. online business that teaches others how to do the same!

That’s why I recommend that you start today …

… whether you have any idea what/how to start your business or not, start by writing a blog.

It can tell others how to do whatever it is that you do (if you are already an expert), chronicle your own journey to ‘expertness’ (great way to get started, even if you don’t know much about your passion at all), or it can simply be a collection / review of others who are experts.

Down the track, you’ll have enough randomized blog entries to create some of your own information products … all neatly reviewed, scrubbed, and honed with the volunteer assistance of your readership.

What do you think I’ve been doing with this blog all of this time? 😉

Seriously, if you think this is hard, check out this story of a 9 y.o. who decided to (successfully, I believe) help pay for his own heart operation by writing/selling an e-book:

http://steve-olson.com/9-year-old-helps-pay-for-own-heart-surgery-by-publishing-estory/

Inspirational, true story even without the business/money lesson that I had to wrap around it!