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She wants to be a world class professional singer …
Now, what do you want to be … and, what’s your “I can’t possibly do it because …” excuse, again?
’nuff said 🙂
So, what's your excuse?
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Tag Archives: millionaire
Dismantling the Ladder of Personal Finance …
For those who are new to this blog, 7 Million 7 Years is not about saving money, retiring on 75% of your salary in 30 years, stock or real-estate investing, frugal living, ‘getting rich quick’ or anything else that you are likely to find around the blogosphere …
… this blog is simply aimed at those who want to get rich(er) quick(er) more so than any of these other things – on their own – can possibly accomplish. That’s why, from time to time, you will read things here that (a) you won’t see anywhere else, and (b) will fly in the face of conventional wisdom.
You can choose to follow these suggestions or to ignore them; either way, this is unique opinion offered by somebody who has already made their millions and is doing one thing and one thing only: giving back to the best of their ability. Enjoy!
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Ramit Sethi, the personal finance blogging phenom – and, champion of Gen Y (18 to 30 y.o.) has finally published his book.
Naturally, it is being reviewed all over the blogosphere, including a review by my good blogging friend JD Roth of Get Rich Slowly, who ventures close to giving the book his highest possible endorsement (JD’s Caveat: for the right audience):
I’m often asked to recommend personal-finance books for young adults. I’ve read a few (and have more in my to-read stack), but there are only two that I promote … however, my friend and colleague Ramit Sethi has written a money book aimed squarely at those in their twenties. If you’re under 25 and single, and if you make a decent living, this book is perfect.
I have to confess that I have not (yet) read the book, but if JD recommends it, then it is probably worth a read.
However, I did find a ‘sneak peak’ of one of the pillars of the book, “The Ladder of Personal Finance“; Ramit says:
These are the five systematic steps you should take to invest. Each step builds on the previous one. So when you finish the first. go on to the second. If you can‘t get to number 5, don‘t worry. You can still feel great, since most people never even get to the first step.
Rung 1: If your employer offers a 401(k) match, invest to take full advantage of it and contribute just enough to get too percent of the match. This is free money and there is, quite simply, no better deal.
Rung 2: Pay off your credit card and any other debt. The average credit card APR is 14 percent. and many APRs are higher. Whatever your card company charges, paying off your debt will give you a significant instant return.
Rung 3: Open up a Roth IRA and contribute as much money as possible to it.
Rung 4: If you have money left oven go back to your 401(k) and contribute as much as possible to it (this time above and beyond your employer match).
Rung 5: If you still have money left to invest, open a regular nonretirement account and put as much as possible there. Also, pay extra on any mortgage debt you have, and consider investing in yourself: Whether it’s starting a company or getting an additional degree, there’s often no better investment than your own career.
It appears that Ramith Sethi has outlined a simple plan to financial success that is aimed at removing debt and ensuring that you have a great retirement, IF you are prepared to work until retirement age.
My major issue with it is that the book is called I Will Teach You To Be Rich and I will need to read it to see what Ramit thinks ‘rich’ is, because inflation will erode a good chunk of the benefit of any time-based ‘retirement saving plan’ …
… but, if you’re reading this blog, you probably want to become rich(er) quick(er) [AJC: After all, this blog IS called How to Make 7 Million in 7 Years 😉 ], in which case I have a simple solution for you:
Turn Ramit’s ladder upside down!
The 7 Million 7 Year Patented Upside Down Ladder of Personal Finance might look something like this:
Step 1: Start investing in yourself: start a side-company or get an additional job
Step 2: Put at least 50% of the extra money into a regular nonretirement account
Step 3: Pay off your credit card and any other non-mortgage, non-investment debt
Step 4: Start investing in real-estate, stocks, and/or your own business
Step 5: Since you will have money left over (i.e. at least 10% of your original – pre-Step 1 income) feel free to feather your 401(k) nest with it (grab the employer match if you do)
A simple solution with a powerful result … and, if you don’t get past Step 4 then I won’t be terribly upset. 🙂
Another sensational headline
Motley Fool are masters of the sensational headline; case in point: their blog shouts Avoid the Mistake That Cost Buffett 8 Years of Better Returns, which turns out to be a reasonable discussion of technical analysis v fundamental investing a la Warren Buffett:
Technical analysis is the practice of predicting where stocks will trade based on charts of historical pricing and volume information. There’s a certain logic to it. Stocks trade based on supply and demand, which is greatly influenced by investors’ attitudes about the stocks. The charts should reflect those attitudes and might predict where the individual stocks will go.
But Buffett discovered one small problem. Technical analysis didn’t work. He explained, “I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.” After eight years of trying, he concluded that it was the wrong way to invest.
So, what does Warren say is the right way to invest?
Well it would be unfair of me to steal Motley Fool’s Thunder [ AJC: see I, too, can write clever headlines 😛 ] …
… instead, I want to point you to an even better strategy for small-time investors who can hop in/out of positions far more nimbly than Warren Buffett:
Combining value investing with basic technical analysis as touted by Phil Town of Rule # 1 Investing ‘fame’. Phil reportedly turned $1,000 into $1,000,000 over 5 years using these strategies, so maybe you can, too?
I didn’t have this same kind of success (with stocks!), but I did only start to use these strategies as the market crashed 50+%, yet my loss (including doubling my risk by using margin lending) was a 15% loss in the US (on approx. $1,000,000 invested) v a 60% loss in Australia (on approx. $750,000 invested) and a 80% loss in the UK (on approx. $3,000,000 invested) where these techniques were NOT used.
Before you say “what a dope”, my UK ‘investment’ was actually part of my buyout, so I had no choice … but, Australia and US were my [stupid!] decisions to invest at the peak 🙂
So, a 15% US loss should actually be read as a 35% ‘gain’ over the market, thanks to these tools …
Here’s what Phil Town has to say about sticking to his technical analysis-based buy/sell signals:
For all you arrows users (Investools or Success): I buy with three greens and it’s amazing how many times I regret it when i jump the gun and buy with two. So three green.
And I get out when the stock stops going up and I get two reds down below.
And, here’s how to combine the two:
– Select a stock based upon sound fundamentals: i.e. is it trading below its long term value?
– Buy when the ‘technicals’ tell you that the major fund are beginning to buy in and sell when they are beginning to sell out.
IF this works for you (and, it has worked pretty well for me), it allows you to rid the short-term ‘waves’ in a stock’s price …
… but, you sell out for good, once your ‘value analysis’ tells you that the stock is no longer cheap.
Guest Post by Andee Sellman: What you really need to know to win the personal finance ‘game of life’ …
This is my third ever Guest Post: Andee Sellman agreed to it, after I had come across his blog and linked to one of his videos on this site.
Andee soon contacted me and we realized that we both live in the same city (Melbourne, Australia … well I split my time between Melbourne and Chicago) and share similar philosophies on personal finance.
This ‘video post’ explains the ultimate goal of Andee’s unique Personal Finance game (called Where’s The Money Gone). Andee’s video can be accessed by clicking on the image below; I really think that you enjoy it …
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Many people have been fooled by the financiers over the last 15 years of boom into looking at the wrong ratios. As a result they don’t know whether they’re being fiscally responsible.
Have you heard of the ratio 80% LVR. This stands for 80% loan to value ratio. Another way of expressing ratio is this :- 400% Debt to Equity!!!
If people continually focus on looking at the lower ratio they will be lured into buying overvalued assets, funding them with too much debt and then wondering why they’re struggling with their cash flow when they’re supposed to be feeling wealthy.
In this video I explore a better ratio to focus on. This means wealth creation is built more sustainably and with less risk.
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Thanks for the video, Andee!
It really helps to explain why people go broke in buying too much property (home and investment) and/or other investments on finance, even though we’ve always been told to borrow more to invest more. In upcoming posts, we will explore the link between Andee’s ‘twin equations’ and our own Equity and Income Rules …
BTW: Andee filmed this video in the lovely (if a bit dry due to the extended drought) Stephens Reserve – a section of parkland near his office in Vermont (an outer suburb of Melbourne); Andee plans to do a ‘video tour’ of Australia, filming a number of videos at scenic locations around the country … or, perhaps the world!? If you want to keep an eye out for these videos – which are sure to be instructive and entertaining – I suggest that you check in at Andee’s blog from time to time.
The partnership disease …
OK, it may be me who may carry the disease … I may be jaundiced by my experiences with partnerships, but frankly I don’t see the need.
Unless your partner brings a unique skill-set that you can’t hire in, contract out, or simply acquire for yourself – or, provides a lot of capital then is willing to sit back and let you work your magic – I think that you would be well-advised to rethink your need for partners.
I was having coffee this morning with my insurance broker / friend who expressed a desire to acquire some residential property.
To digress, I would normally suggest commercial property for its superior income-generation ability (assuming that you buy / manage right … but, that’s another story), but in his case: he has a 50% share of a small broking practice that turns over $2.5 million a year and puts around 30% on the bottom-line.
If you set aside one client that provides about 25% of this revenue, that’s about $300k per year that he can pretty much safely ‘bank on’ as income year-in-year-out … with upside as he grows the practice.
So, income isn’t his ‘problem’ … for him it’s equity and taxes:
1. Equity: broking practices (as do many professional practices of other types and in other markets) tend to sell for a multiple of earnings (i.e. profits) or simply a smaller multiple of revenue; for insurance brokers in his market, right now, it’s bout $2 for every $1 of revenue. Since he has a 50% partner, he’s currently ‘worth’ about $1.8 – $2.5 million (depending upon what happens with that one big client) plus whatever equity he has in his house.
Again, not a lot of risk in that equity figure, and it will grow with the practice, but not a lot … his practice would need to double in size before he’s worth $5 Mill. (and, if that takes 20 years, then he’s really gone nowhere, slowly).
2. Taxes: How does a professional in a professional practice protect against taxes? The answer is that they don’t: these are the soft targets for the tax systems of most countries!
So, if he doesn’t need the income, then it may very well be that residential real-estate provides a suitable solution to his tax/equity ‘problems’ … one that fits into his investment ‘comfort zone’ (assuming that his Number is circa $5 Mill.):
If he buys Tax Cashflow (or better) residential property, he may have enough income/purchasing power to acquire enough property that he can afford to wait 20 years to supplement his ‘retirement’ when he eventually sells his practice.
So, what does this have to do with partnerships?
Not much, other than he asked if I wanted to go 50/50 with him on a small block of apartments … I said ‘no’.
The reason is that our interests may diverge: and if one wants to sell and the other doesn’t, what happens?
And, what’s so special about a block of apartments that we couldn’t each buy one on our own for about half the size/price of one that we could buy together (eg a duplex each instead of a quadraplex).
And, if you’re the type of person who needs a bit of motivation/hand-holding, you can always do what a friend and I did (in fact, this was my first-ever property acquisition):
We researched and found together two apartments in a new construction.
We negotiated a reasonable price from the bank-in-possession (it was a foreclosure) since we were buying two, and a reasonable loan … then we simply executed two sets of loan and purchase documents, one set in each of our names.
Sure enough, he ended up selling way before I did … but, it had absolutely no impact on me 🙂
What if you don't want to exit?
I wrote a post about the real (nay, ONLY) succession plan for any small business: sell it!
But, Steve asks about the alternative:
What if you don’t plan to leave? I mean, Maybe the plan is to run it till you can’t any longer, then the wife runs it till she is ready to sell, or pass to the kids(if they are even interested in that type business). My idea is to find Businesses that provide (mostly Passive income) where you don’t need to spend much time at the shop daily. Where your biggest job is probably gonna entail paperwork.
This is the ‘pipe dream’ of many a small business owner – and, was certainly my father’s ‘dream’ … bring the kids into the business and then pass it on to them. After all, look at the advantages:
– Continuing ‘passive’ income … your kids will eventually run the business and look after you
– You’ll be smart enough to keep a chunky % of the business for yourself to ‘guarantee’ a healthy share of the ongoing profits
– No issues around selling the business, finding the right buyer, or handing it over
– It’ll keep the kids off the streets (probably, my father’s greatest motivation)
And, that’s certainly the central theme of a book that I reviewed some time ago, called Get Rich, Stay Rich, Pass It On: where the authors suggest that the ONLY way to ensure that your wealth carries on through the generations is to have roughly 50% of it in “continually innovative enterprise/s” a.k.a. a business:
What we mean here by a continually innovative enterprise is one that either offers a product or service that breaks new ground or changes a traditional product or service so much that it becomes virtually new.
As I said in my review: “that is something that you do before you retire so that you can retire rich … you take risks, you innovate, then you sit back and reap the profits (or sell)”.
But, there’s a serious flaw in this logic: 99.9997% of small businesses are inextricably tied to the owner; large companies know this, that’s why when they buy a small business, it usually comes with an employment contract to tide them over until they can ‘wash out’ the Owner/Founder Effect:
This is the truism that the business IS the owner/founder and the owner founder IS the business!
The reality is that owner/founders and their businesses cannot be parted so easily and these large companies should NEVER buy small businesses because of the Owner/Founder Effect … inevitably, the owner falls afoul of the new management, leaves disappointed [AJC: hopefully, with bundles of cash in her pocket to help console her 😛 ], and the business goes downhill thereafter.
Eventually, the business becomes ‘absorbed’ in the overall enterprise and they conveniently ‘forget’ that they totally stuffed it up … and, more often than not the old owner eventually buys back his own business for 25 cents in the dollar.
Friends of mine started a computer company and sold/bought it three times … each time selling high, buying low and making a heap on each subsequent sale 😉
Do you think it’s any different, Steve, when you ‘sell’ your business to your wife and/or children?
Because that’s exactly what you are doing: selling it to the least qualified purchasers; you may be able to teach them some of what you know … perhaps even a lot … and, there’s a VERY slight chance that you will be able to teach them (assuming that they have the will and ability to take on what you teach) 98% of what you know …
… but, you can NEVER pass on that last 2%: the Owner/Founder Effect ‘magic’ that made your business one of the few small-to-medium business success stories.
That’s why I called the book’s concept of encourage people to start/buy, then keep, these innovative enterprises “the most dangerous idea in retirement planning that I have ever read”, because that last 2% – the bit that is IN you and ONLY in you – is the bit that you CANNOT pass on and will eventually send your family broke.
Of course, there’s at least (my best guess) a 0.0003% chance that your business COULD become the next Walmart and pass on to at least ONE more generation, but I wouldn’t be willing to bet my family’s financial future on that.
So, instead of trying to fit your business into your Life, here’s what to do:
1. Find Your Number, the one that allows you and your family to live their Life’s Purpose
2. Apply a FULL 100% of YOU to molding the business into something that can be sold for at least Your Number (LESS the value of any investments that the excess cashflow that you truly outstanding business has been able to fund)
3. Spend your free time TEACHING your kids how to fish for themselves
… that’s what I’m doing for you, and that’s what I suggest you do for them 🙂
The Time/Money Paradox
The uber-blogger, John Chow uses a surprisingly interesting visit to the park with his daughter to make a REALLY IMPORTANT POINT about the “trading time for money (and, money for time) dilemma” that afflicts most people … and, how he is one of the lucky few who avoids it by blogging …
… BUT, there are VERY FEW ways that you can earn money that don’t involve time. So, for the rest of us, we can separate our lives into two portions:
1. Earning/Investing until we reach our Number
2. Having both the time and money to live our Life’s Purpose
The aim is to accelerate the transition to 2. from 1. … how will YOU do it?
Guaranteed Returns?
In choppy and down markets it’s natural to be nervous … so, it’s no wonder that investors start to look at funds that purport to ‘guarantee’ your initial capital, your return, or some combination of both.
I have a close friend who is a financial adviser, who works strictly on a fee basis, yet his practice is associated with the products of one major insurance and fund management company.
He was telling me of the rise of these Absolute Return funds that work on the basis of not only guaranteeing the original amount that you invested, but also lock in your returns to date …
– in other words, if you invest $1,000 this year and the market falls, the fund guarantees to pay you back at least $1,000
– then next year is a good year for the market and your fund increases by 10%; now the fund guarantees to pay you back at least $1,100
– but, next year there’s another market crash and the market drops by 15%; but, the fund STILL guarantees to pay you back at least $1,100
– if you remain with the fund and the market eventually totally recovers, as soon as the fund value rises above your new $1,100 ‘guarantee’ then so does your return.
There have been plenty of systems that have produced similar results … they usually do this by some combination of insurance and/or derivatives (e.g. stock options). In fact, you could replicate some of these results for yourself simply by buying the right type and duration of stock option along with the underlying stock (or index).
The problem is that all of these end up costing you money: the insurance premium and/or options are bought out of your initial (or ongoing) investments. The ‘cost’ of these ‘guarantees’ comes as some combination of increased fees or reduced returns when compared to a similar fund that does not offer the ‘guarantee’ …. it’s that simple.
You can provide yourself a similar – or better – result at far less cost: buy a low-cost Index Fund and wait 30 years to cash it out; I can virtually ‘guarantee‘ an 8.5% minimum return 🙂
A little rain must fall …
We left Chicago just before Christmas … it was one of the coldest winters that most could remember, certainly the coldest that I have experienced. The last day of school was canceled due to the cold, so my children didn’t even get a chance to say a final goodbye to their friends.
When we packed the house, we moved into a hotel down the road for a week – for the life of me, I don’t understand why suburban-Chicago hotels don’t have underground parking lots:
In the morning, ice built up on the inside of the windshield …
… I remember, when the temperature ‘warmed up’ for a day or so back to mere freezing (circa 32 degrees) that it felt quite comfortable: no heavy coats, hats or gloves required.
When living inside a refrigerator feels ‘comfortable’ you just know that something’s screwy with the weather!
So, we arrived in Melbourne on Christmas Day to one of the hottest summers on record. Our children’s first day of school was also canceled just a few weeks later, as the hot spell continued, due to the extremely hot weather … that’s the definition of ‘irony’.
And, I got around to contemplating the various ways to water the garden in our rental house, as Melbourne has been plagued by a drought with strict water restrictions:
The house has a rainwater tank – it fills up from rainwater that lands on the roof and is funneled via the gutters – with a fancy automatic pump that starts up as soon as you squeeze the spray-fixture attached to the hose … I used up the whole tank in just one watering of the garden and it hasn’t refilled itself since (well, it is finally full again now). Needless to say, I wasted my time … without another watering, the garden looked as bad as before.
Then, I noticed that I didn’t really need to water the back garden and most of the grass, because there is a very efficient ‘water dripping system’ in the back (but, not in the front of the house … that part of the garden that now looks, well, dead) that just drips the smallest amounts of water under a timer that is only allowed to run 2 hours twice a week … that seems just enough to keep the plants and much of the grass alive.
Finally – and, this is what filled the water tanks – it rained!
In fact, we had a whole series of rainy days (surprising, since it’s summer) that finally put out all of those horrible bush-fires that you may have heard about …
… not only did it douse the fires, but the whole garden has sprung up, and in the space of just a week or so even the weeds look like something from The Day Of The Triffids … seriously!
So, what I learned it that there are two ways to water your garden that work and one that doesn’t:
– You can drip, drip, drip feed your lawn water in the most efficient way, or
– You can water more deeply, less often, but it must be done a number of times, but
– BUT, you cannot simply dump your entire water supply on the garden once and expect miracles.
And, this story actually has something to do with money …
… you see, I think that there’s only two ways to make keep your ‘financial garden’ healthy, and at least one way to guarantee failure:
1. You can follow the Making Money 101 steps of drip, drip, dripping money into your savings account – being very careful not to soak up too much with excess spending – and gradually find your veggie patch bearing small fruit; enough to live on, if you have spartan needs,
or
2. You can regularly ‘deep soak’ your financial future by large – but, not too large (such that you are left with nothing in reserve) – and regular applications of finances into various Making Money 201 ‘income acceleration techniques – such as small businesses and/or ‘buy/hold, income-producing’ investments – some of which may actually take root and bear an abundance of fruit on their own,
but
3. You must not be foolish enough dump all of your financial resources into the One Big Thing [Insert Speculation of Choice: Lottery; Business Deal; Sports Contract; Stock Market Holding; etc.; etc.] and hope that it solves all of your financial problems in one fell swoop …
… it rarely does, and it’s no fun going back to ‘drip, drip, drip’ once you have tried and failed 🙁
7million7year's April Fools Day Joke!
OK, I promised myself that after my March Fools Day joke-with-a-message (you know, the horse racing system one) that I would NOT do an April Fools day post …
… apparently, promises are made to be broken 😛
So, yesterday’s April Fools Day Post was another joke-with-a-message: no matter how much you have, you can always spend more.
Yesterday’s post is actually (slightly) rooted in fact; I have made some errors recently, and the market has turned, so let me come clean:
– We bought our current home for about $1.6 Mill.; naturally, we paid cash.
But, after we cashed out on the second part of our 7m7y journey (the part that I have NOT yet written about on this blog, because it’s a business success story, not a personal finance success story like my 7 million 7 year journey), things took a turn for the ‘worse’:
– We upgraded to a $4.5 mill. home (plus $1 Mill. renovations to come: house/swimming pool/tennis court), and again paid cash … unfortunately, the market correction has probably wiped $500k – $1 mill. of value … but, this is ‘value’ that will only be realized when we sell (hopefully, we’ll be there for at least 10 to 15 years).
– We bought $300k of cars (for cash) but also managed to sell the Maserati
– I did indeed lose $600k in the stock market; this is the ‘cost’ of my experiment in letting somebody else manage a small part of my portfolio for me, and trying to time the market (bad AJC … bad boy!)
– And, I was due to receive a $3 Mill. ‘bonus’ from my ex-employer, that was to be delivered in cash, but ended up being delivered in now-reasonably-worthless stock (that 30 pence to 7 pence slide is real).
The two mistakes that we made were:
– We tried to time the market … however, $1 Mill. represents a small’ish % of our total portfolio
– We spent money on a house that we assumed that we would have, but didn’t get (i.e. the UK cash-to-stock thing).
So, right now, we have broken the 20% Rule … but, I counted cash, and after all of this (including completing the renovations) we still have a LOT of cash in the bank, plus the houses, plus equity in a number of apartments / commercial property, not to mention a ‘passive’ business or two floating around … I won’t have to ‘downgrade’ my $7 million 7 year mantle anytime soon [AJC: because, say, $3 million in 11 years just wouldn’t have the same ring to it, would it?] 🙂
Still, how are we going to ‘correct’? After all, we have broken so many Rules, it hurts me to think …
Well, exactly the same way that you would:
Some of it will come from simply waiting for the market to correct (that $600k stock loss will partially reverse, as will the 30-pence-to-7-pence UK stock slide) … some of it will come from making long-term buy/hold investments in this soft-to-recovering market over the next year or three … some of it will come from applying a large portion of the equity in the home (and selling the old one, when the market recovers) to investments (thus bringing us back within the 20% Rule).
But, the lessons are clear: always obey the Rules … do NOT speculate … and, heed Rick Francis’ Making Money 301 advice:
You really should [not] have to worry about affording needs anymore- you just have to control your wants. Also, you can afford to be more conservative in your investments. Making Money 301 should be a lot less risky as you only need to maintain your principle against your spending and inflation.
Where were you when I needed you, Rick? 😛
PS: In case you didn’t get to see the masthead that went with yesterday’s post, here it is … I’m particularly ‘proud’ of the by-line (something to do with noses, white powder, fast cars/girls) … unfortunately, all-too-true for too many people (but, definitely NOT me! Well, the fast car – singular – maybe). I don’t even know who the photo is of? Do you?
