Alex asks:

I think I have a fairly solid financial intelligence, although I am always on the lookout for learning new information on stocks, and real estate and the like. When I was a sophomore in high school I spent my saved money on stocks instead of a car like everyone else. But what I want to know, is how to START. It seems like you need money to make money, but right now I am just about to begin college, and while I have no intention whatsoever of spending my life (especially my youthful 22-40 years) working, right now I don’t have the money to buy real estate and begin to build an income generating property portfolio. In four years when I graduate, I will have no college loan debt, but I don’t want to “enter the workforce” because I will never get rich working for someone else. Do you think its possible to do something like 2 million in 4 years, so that when I graduate I will have enough money to use to make more money with? And if so, how do I start that now? I currently have about $16,000 in stocks.

So Alex wants to go from $16k to $2 Million in 4 years …

… as I pointed out to him, that’s a 400% compounded return. The stock market averages 12%; Warren Buffett averages 26%

But, I did point Alex to two places that can return 400% or even more: the lottery and business. I humbly suggested that he start the next Facebook.

Alex responded:

Well maybe I was too hasty in throwing out the figure 2 million. I guess what i really mean is how do I build up a large enough sum of money to actually begin making money with? All of your “money making 101″ strategies seem to already require a sizable pile of money with which to begin implementing them. Also, the real estate strategy of building up passive income through rents is an extremely long term one. If I were to buy a $160,000 dollar house at 6% with about 30,000 down (assuming my 16k turned into 30k during my college years), my mortgage would be around 720 a month. Realistically, I could probably rent that property for about 1100 a month. So we are only talking about somewhere around $3600 per year. Its a strategy that takes over 25 years to really begin producing enough passive income to support just a modest, middle class lifestyle.

Now, I’ll let you in on a little secret, and the younger you are – College age is ideal – the better this works:

Skip Making Money 101.

There, I said it: don’t worry about all the save 15% of your salary stuff; all the pay down debt stuff; all the diversify into Index Funds stuff …

… simply forget all the personal finance blogs, altogether.

Jump straight to Making Money 201.

Start a business – the internet is ideal – because I can’t think of any other legal way to give you a shot at making millions … and, it’s clearly possible because others have done it.

But, wait … surely you can’t expect to create the next Facebook?!

No, you can’t … but, you won’t need to: you only need to focus on making as much money (income) as you reasonably can – while still concentrating on getting good College grades.

Here’s the SECRET:

While you are making oodles and oodles of cash (well, at least a few extra bucks), you don’t spend it … in fact, you don’t even tell anyone that you have it. Your business could be generating an extra $100 a week, $1,000 a week, or even $10,000 a week and you still don’t tell anybody.

Why?

Because your secrecy lets you keep living like a penniless college kid, mooching off family and friends like any ‘normal’ college kid does, while you’re busy investing 99% of what you earn.

Will this work?

Maybe … but, if you flame and burn [AJC: did I forget to mention this was high risk / high reward 🙂 ], so what?

As long as you’ve been careful to avoid accumulating personal debt, you’re still just as poor as your buddies; you learned a lot; and, you had a helluva ride …

… one that you would never had been able to take if you actually needed Making Money 101 😉

That’s why you take risks when you are young, before you are saddled with debt, commitments, and angst.

LuckyInvestor has been busy building a kind of reference manual / index to our ‘grand experiment’ at 7m7y.com … take a look and let him know what you think (what is he missing? what’s in/out of place? suggestions?) … the only reason why I won’t directly support the site is that I am not sure where it is going and I cannot control if he eventually puts in advertising, which is against my principles for this program (but, he is welcome to) … so, any help that you can / want to give him … check this out: http://luckyinvestormn.blogspot.com/

Now, on with today’s post ….

______________________________________

If you think you’re confused, then you really are confused!

This seems to be Ethel’s dilemma, one that we inadvertently uncovered when she wrote me an e-mail (on Networth IQ) asking for help on transitioning from Making Money 101 to Making Money 201.

After reading my answer to her original problem Ethel left a long – and critically important – comment, saying:

I’m glad that Ethel asked the question on NWiQ and gave me the opportunity to respond here, because she has summarized very neatly in this comment what I have obviously so far failed to make clear on this blog.

And, that is:

Retirement is not some nebulous date in 30 years when society ‘norms’ say that it’s time to stop working …

… it’s when you need to stop preparing to live and actually start living!

You ‘magic number’ is not merely a number ….

… it’s a DATE.

A date when you need to stop working (or, at least stop working as hard) to concentrate on LIVING your Life’s Purpose.

Rick asks:

What about time commitment? What is a realistic estimate of hrs/year needed to manage a single rental property?

Well, I can only tell you what we do: we only have one property that qualifies as a ‘single rental property’, one little condo in a complex of about 16 units that we do not own, near the beach …

…. and, while we live in the USA, that beach is in Melbourne, Australia!

Also, it’s my wife who manages this one, so I asked her:

It takes about 2 hours per year.

Now, we have another residential property that is a quadruplex; it’s also in Australia and my accountant takes care of that one while we are in the USA.

I checked and it takes him less than 2 hours per month … at least, that’s what he bills me for, so the whole thing probably also takes him about 2 hours per year!

The secret?

Simple: we always hire property managers and get them to take care of everything:

1. Finding tenants

2. Negotiating leases

3. Handling repairs and maintenance

4. Collecting the rents

5. Paying the bills

Doesn’t it cost money?

Sure. 6% – 9% of the rental income (plus usually the first month’s rent for any replacement tenancy after a tenant leaves).

Would it be cheaper doing it ourselves? Of course: we could ‘pay ourselves’ that 6% to 9%, but then:

1. We would eventually suffer burnout. It can be very stressful handling retail tenants.

2. We would be trading (our) time for money.

Trading time for money is exactly the wrong way of looking at it: time is a finite resource; money is an infinite resource, why trade the finite one for the infinite one?

In other words, they keep printing money, but nobody is giving away more time.

So, every time that I can find an opportunity to ‘buy’ time with my money that’s exactly what I will do.

It’s why I give my shirts to the dry cleaners; my mowing to the landscapers; and my property management to the experts. It’s why I outsource practically everything to do with my investments, too – except picking the investments themselves, or managing any issues to do with risk.

If I didn’t outsource my property management, I would eventually stop buying real-estate because every property that I bought would add to my workload, and who wants to do anything that makes you have to work harder? And, I would eventually get what Dave Lindahl calls “tenant burnout” …

So, I may lower my return on each property somewhat, but I reinvest the ‘saved time’ into purchasing more investments … the whole shebang is much greater than the parts.

Ryan asks:

I’d like your opinion on investment newsletters such as those offered by the guys over at Tycoon Research. Is it possible to use this in your money making 201 phase. At the moment I’m still in making money 101 but I can’t shake the idea of leveraging someone else’s knowledge to make you money. Of course, as with all things, you should know enough not to be taken for ride.

This is a really easy one!

Does Warren Buffet:

a. Write about his stock picks and earn a fixed fee for each one that he publishes?

b. Invest in his stock picks on behalf of his customers and take a 1% ‘cut’ on the money invested?

c. Invest in his stock picks on his behalf (and, on behalf of the other shareholders in his own company)?

Let’s see:

a. Might produce $100k – $1 million per year revenue, depending on how many subscribers you can get.

b. Might produce $1 million – $100 million per year revenue, depending upon how much money you can get under your management.

c. Well, how much did we say Warren Buffett is worth?

Newsletter publishers are on the bottom of the wealth totem-pole, so I would give their ideas about as much credence as I would give to anybody who makes their daily living by giving you information.

I would only take my information from somebody who has already made 10 times as I want to make from doing the exact thing that I want to do …

… so, if you can find a newsletter publisher who fits that criteria (and, I’m sure they’re out there, for the same reasons that I’m here), then go for it!

Otherwise, you’re going to have to learn how to do research (BTW: much of what I’ve seen in the Tycoon Report that you mention falls into the ‘how’ category … I read it!), then do it yourself …

If it’s stocks that you’re interested in, you could do worse than start by reading Rule # 1 Investing by Phil Town.

I wrote a piece about the 80/20 rule: how 80% of the people do nothing. I then broke the remaining 20% who do ‘something’ into two sub-groups:

– The 19% who save, pay down debt, etc.

– The 1% who will strive for – and perhaps reach – the top of the financial totem-pole.

And, I believe that the difference between all of these groups boils down to one thing: propensity to take action.

Josh‘s question sums it up quite nicely:

I guess you don’t want to be one of those people who contract “paralysis by analysis”. I’m thinking the key here is to just make a move, even though it may not be most perfect move?

Most people fail because they either take too much action or not enough!

Too much action can be a problem, for example, when you chase the market and switch investments a lot; as the Dalbar study found:

During the greatest bull market of all time from 1984 to December 2002 the study came up with an annualized return of 2.57% [for market timers, who move in/out of investments chasing better returns] compared to 12.22% for those who bought and held an S&P500 index fund.

But, how much did those who took NO action make?

0%

Clearly, taking some action is preferable to none … but, what of Josh’s second point: taking action even if “it may not be most perfect move”?

Life rarely presents us with a Final Choice Option …

…. when we take an action, we are usually free to take another! If you make a mistake, back-out as best you can and try something else.

I think of life in terms of a branching structure: at many stages – every day, hour, minute – we are standing at some sort of fork in the road and we have to take the left branch or the right. Somehow, we find a way to choose one:

a) If it seems to carry us to where we want to go. Fine. We stick with it (at least for a while).

b) If it seems to carry us away from where we want to go, we simply wait for the next branching opportunity and try something different.

For example, if an investment works we (should) stick with it. If not, we can always exit for a (hopefully) small’ish loss and try another … if we don’t the loss might increase and take us to zero (how about Enron?).

Of course, this is where it helps to have an overall destination in mind; it helps us understand what does represent the ‘right direction’ for each of us: sometimes, more than one branch appears to be sensible.

But, if you have a clear idea of your Life’s Purpose, all of a sudden only one of the branches may start to make more sense than another.

This helps to explain: where your Life’s Purpose goes, your finances will eventually and surely follow … either by direct route, or meandering, you will eventually find the road to what you deem to be success.

For those of you going into business – or are thinking of it (one day … when?), today’s installment of my Video on Sundays series is for you!

AJC.