Tag Archives: Saving

The 4-step, never-fail plan to making a fortune in real estate …

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There is a lot of BAD stuff written about real estate and a little bit of GOOD stuff … start by finding and reading some of these good books (google “John T Reed” and see which books he recommends and which ones he pans).

The truth is that most people MAKE money through a business, then KEEP money by investing in real estate.

If you can’t (or won’t) start a business (even on the side) then you can at least accelerate your LIFE SAVINGS PLAN by buying and holding income-producing real-estate.

Right now, it’s very simple:

1. If you don’t yet own your own home (but would like to) BUY one now and LOCK in the interest for 30 years.

Why?

Home prices are relatively cheap (if you think they will get cheaper then wait a little longer … if you’re not SURE they will get cheaper, buy now).

Money is cheap – mortgage rates are probably 2% lower than they will be by 2009 or 2010.

You want to keep buying that cheap money for as long as possible …

… but, only IF you are prepared to take the next step, which is to …

2. Assess the increased / excess equity (what your house is worth – what you still owe) in your house yearly and use that excess equity to buy another as soon as you can scrape up a reasonable deposit (20% if you are conservative).

3. Lock in the interest rates for 30 years; rent the property out; keep raising rents; reassess the value of all of your properties yearly.

4. Repeat until Rich!

Now, this will take 10 to 30 years … to accelerate: start that little (or big) side-business and use the excess cash-flow to buy more investment properties rather than Porsches!

Simple … and, you couldn’t be starting at a better time in history.

Is your home an asset? A simple question with a not so simple answer …

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According to InvestorWords.com an asset is:
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
Examples that they give include:
Cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.
Now, here’s a definition that I like even better …
… it’s Robert Kiyosaki’s definition of an asset from Rich Dad, Poor Dad: 
 

Poor Dad vs. Rich Dad

My Poor Dad Says   My Rich Dad Says
       
  “My house is an asset.”   “My house is a liability.”
       
  Rich dad says, “If you stop working today, an asset puts money in your pocket and a liability takes money from your pocket. Too often people call liabilities assets. It’s important to know the difference between the two.
  
I don’t always agree with Robert Kiyosaki, but to me, this nugget is one of the best pieces of financial wisdom ever written (and, I have HIGH standards). Why?
Because, I have seen TOO MANY people base their ENTIRE financial strategy on the VALUE OF THEIR OWN home … 
But, your own home is ONLY A PLACE TO LIVE!
It’s only BECOMES an asset when you either (a) sell or (b) put the equity to work for you … until then, it’s just a piece of paper (title deed).Let me share a true story from my own family:
In the 60’s my Grandparents bought a 2-story downtown property with some friends … over the course of 40 years it became old, underdeveloped compared to the multi-story buildings that had sprung up all around, and simply didn’t bring enough rent in to allow her (and her partners) to keep up with costs (personal, and property-related taxes, maintenance, and holding costs).But, they tightly held onto the building because it was an ‘asset’ …

My Grandmother is still alive (she is now 95) and last year I had to LEND HER $40,000 (really! And, she wouldn’t let me just give it to her! Amazing woman …) because she couldn’t afford her share of the real-estate taxes.

Just before Xmas last year, she gave my son a check for his birthday … it bounced!

Happy ending, though …

She (yes last year at the age of 94, and on her own because her partners all live overseas) finally negotiated the sale of this building for $18 million (!) to a developer who way overpaid because he is putting up high-rise luxury apartments.

NOW it’s an ASSET. What about your home?

Will low interest rates and inflation eat up the interest the bank pays you on your CD's?

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Absolutely!

Here’s how to think about banks and cash … consider your time-frame first:

SHORT TERM

If you are keeping your money in the bank to save for something important (hopefully, for a deposit on an income-producing property?) over the next few months or two or three years, then don’t be overly-concerned about the interest rate or inflation. I keep a HUGE amount in the bank right now because I sold out of some investments and am staying ‘in cash’ for a short time through the current market.

MEDIUM TERM

If you have a large’ish sum that you are building up for something major in say 3 to 5 years, then a better ‘savings account’ would be a low cost Index Fund … as you save enough to meet the minimum investment criteria, drop it in … just be prepared to hold for at least the MEDIUM TERM

LONG TERM

If you are, say, 7 to 70 years before retirement, you in the investment mode of your life, and (a) are unlikely to have your cash in the bank, and (b) are crazy if you do! Over 7 or more years, yes, ridiculously low investment returns (and, to a lesser extent inflation) will eat your future alive! Put your money into any mix of Index Funds, Business Opportunities, Real-Estate Investments, Direct Stock Investments – keep away from Mutual Funds – as suits your personality profile and desire to get rich vs merely keep up with the Middle Class Joneses.

SUPER LONG-TERM (a.ka. Retirement)

Here is where that low interest / inflation combo (even if inflation is just 2% or 3%) will eat you alive … be prepared to be retired for a long time, say 30 – 50 years (even if you die young, at least your spouse and kids will be happy with their nest egg!) … you do NOT want your money running out before you do.

If you have a lump-sum, there’s only a few choices:

– Put it all into an Index Fund and only draw down 2.5% – 3.5% each year to live on.
– Put it all into income-producing real-estate and spend no more than 75% of the rent (after paying down mortgages and building up a suitable buffer to guard against ‘problems’)
– Put it all into TIPS (inflation-protected Treasury Bonds) and happily live off all the interest that they pay you every 6 months
– Implement a Bond laddering strategy, such as the Grangaard Strategy, which claim to be able to let you live off 6.6% of your lump sum at retirement every year
– Any combination of the above that suits your needs and ‘investment personality’

Each of these strategies is relatively “inflation-proof”, in that you get to increase the amount that you take out every year as a ‘wage’ to live off, and pays more interest typically than the bank will give you (expect maybe, the bonds … you pay a ‘price’ for the inflation-hedge).

Hope this helps?

Dumb Money!

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I take issue with the seemingly interchangeable use of the words ‘saving’ and ‘investing’ …

Let’s not confuse buying Index Funds or typical diversified ordinay stock Mutual Funds with INVESTING …

… when you buy a Fund you are SAVING – consider it a long-term savings vehicle, no different to ordinary bank savings accounts, CD’s, and Bonds.

The difference? Effort.

 Buying a packaged financial product is no different to buying any other product: you send away for some information; if you like what you see you fill in the appropriate sales form; you pay your money and receive your ‘product’.

 Hopefully, when it comes to Funds, you make some money when you eventually cash out.

Contrast that with INVESTING:

 You do your research; you look for an underpriced item (in this case, a stock); you purchase the item; you watch the market carefully … and, when the price goes back up … you sell (this could be sooner = trading; or later = long-term-buy-and-hold).

Of course, you could just keep holding for dividends. In either case, you are aiming to MANAGE your holding to MAXIMIZE your RETURN.

Some people call the former Passive Investing and the latter Active Investing … but, if it walks like a duck …

… it is a duck!

BTW: there’s nothing wrong with SAVING … go ahead and buy some Index Funds if you’re not up to the task of INVESTING, even Warren says it’s OK …

“Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases. By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”W. E. Buffett – 1993

Making Money 101 – Debt Free & Saving Money

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If making money is a journey, then it is one best broken up into three stages. The first stage is all about ‘getting your financial house in order’ …

… kind’a like packing your bags and getting everything ready for a long-journey before you even leave your house.

 This (first) stage happens to also be the one that is well covered by many books (Rich Dad Poor Dad, The Richest Man In Babylon, The Automatic Millionaire, and many more) and many blogs (I Will Teach You To Be Rich, Accumulating Wealth, The Simple Dollar, and many, many more).

I have read them all and I am sad to say that not one of these will actually teach you to be ‘rich’ … but, some will set the stage …

… and, this stage is really just about paying off debt and starting a sensible savings strategy. It’s also about learning the rules about what you should buy and when and how much you should spend and save.

It’s really about ‘clearing the decks’ to lay a solid foundation for future wealth; the earlier in your life that you start this stage the more ‘runway’ you will have for letting your financial wealth really take off later.

This stage is not fun!

The tools of this stage are debt repayment strategies, tricks to save a little extra money or earn a little extra income, paying yourself first, savings accounts, index funds, and dollar cost averaging … there ain’t no ‘rich’ going on here but, it’s a start …

Keep reading this blog as I will be sharing many of these rules and strategies for breezing through Making Money 101 in upcoming posts.

And, keep coming back to this post – I will be creating a special tab for it (and it’s future ‘sister’ posts, Making Money 201 and 301) on the home page.

Do you ever get the feeling that you are too ordinary to be successful?

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Paul Potts

Believe it or not, this man went from being a total unknown to selling 1,000,000 CD’s last year …

… who is he and how did he do it?

If you want to win big in the game of life, you need to find out what it is that you are passionate about, and then go for it …

… no if’s, but’s, or maybe’s.

You can turn that hobby, talent, or passion into $1,000,000 in a year and $7 million in 7 years if you have the passion, this blog will show you how …

If the humble, ordinary, unconfident (really … he says so himself!) man in the picture can do it, then we all can! So, who is he?

Even if you already know his name, watch this YouTube Video … I can guarantee that it will change your perception of who you need to be to win in life:

http://youtube.com/watch?v=1k08yxu57NA

BTW: he went from being a complete unknown to win over $200,000 in this competition and then went on to sell a million CD’s last year …

Now, why don’t you go back and expand your Life Vision?

Why does real-estate investing crush your 401k mutual funds?

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You know that you can’t just save your way to a fortune … right?!

So, what to do with that ‘extra’ cash that you manage to scrounge from time to time?

In a previous post , I pointed out that we are at a UNIQUE point in history.

For the FIRST TIME that I can recall BOTH money AND real-estate are cheap!!

If you save up a deposit (AFTER paying of any pesky credit card debt) and plonk it down on a rental property (or even your own house, if you ain’t got one yet) and LOCK IT IN for 30 years, how can you EVER go wrong?

If you do buy to live in it, eventually you will move on – just keep it as a rental FOR EVER.

I don’t know what will happen over the next year or so, but over 30 years it’s a no-brainer …

… your mortgage payments remain flat (you fixed them, remember?) …

… the value of the house doubles every 7 years or so (and, you will take advantage of this ‘spare’ equity, won’t you?) …

… and – here’s the kicker – your rents rise roughly in line with inflation … see how that compounds over 10, 20 or even 30 years to spin off income that will help you stop working!

And when you eventually do retire, the real-estate strategy STILL kicks your 401k’s butt …

This built-in inflation-protection makes real-estate a great adjunct or alternative to so-called safe retirement strategies such as the Grangaard Strategy and Worry-Free Investing (two of the best that I have come across).

Try doing any of that with your 401K or mutual fund!

Do you really care that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?

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I just received a hilarious e-mail in my in-box from Fidelity. It said: Did you know that weekly contributions of $34 could potentially grow to over $76,000 in 20 years?*

*This hypothetical example assumes a participant earns $30,000 every year and defers 6% of his/her weekly pay ($34/week) at the beginning of every week for 20 years to a tax-deferred retirement account earning a 7% annual rate of return compounded weekly.”

Why is that funny? Well, in 20 years, $76,000 won’t even buy you a car!

That’s the problem with these “save your way to $1,000,000” advertisements (and, books) …

… while you certainly should put away at least 10% of your gross income (hopefully, it eventually comes to a lot more than $34 a week!), and

… while you may (and should try to at least) make it all the way to $1,000,000 in the bank (or CD’s or 401K) by the time you retire in 30 or 40 years:

(a) You will probably be too old and tired to enjoy it … hell, I’ve waited to 49 to retire and I already feel too old .. and

(b) $1,000,000 will buy you diddly squat because of a little thing called inflation.

Inflation is the thing that causes a  sixteen ounce loaf of bread to cost $0.19 in 1950 and $2.10 in 2008!

You don’t have to look too far to see this inflation-effect taken to it’s extreme: in Zimbabwe raging inflation is the thing that means even Z$750,000 isn’t enough to buy that $2 loaf of bread!

What does this mean if inflation averages, say, just 3%?

Let’s say that you are 25 years old today, aiming to save $1,000,000 by the time you retire … by the time you reach 65 and cash in your $1,000,000 ‘retirement check’ that would be the same as your grandfather retiring today on just $315,000 savings!

Does that sound like a lot? Let’s see …

$315,000 would give your grandfather just $15,000 a year to live on (allowing for small yearly ‘pay increases’ after 65, so that he could also keep up with inflation).

Would you want to retire on just $15,000 a year?

No?

Then the only choice that you have left is to try and get rich … quickly, slowly, any legal, safe and ethical way that you can …

Stick with me, and I’ll show you how! Really.

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I think I'm revealing the whole 'secret' of money …

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In my first post I briefly alluded to the 3 stages of money: I call them Making Money 101, 201, and 301.

Starting next week, I’m going to write one post a week on each of these stages …

 First, though, let me tee up how I think about making money … serious money … say, $7 million in 7 years.

Making that sort of money – for most of us who don’t inherit, win, steal, speculate, gamble our way to that much moolah – is a long journey …

It’s not so bad when you consider that 99% of people can’t SAVE their way to $1,000,000 in 20 years … but, my point is that it’s still a journey that takes quite some time.

So, if you were to go on a long journey (besides taking a change of shorts) what would you need?

Three things …

1. A destination

You would need to know where you’re going … for a short, local journey, you probably need an address … for a long, global-scale journey, a country and city would be a nice start.

2. A map and compass

If it’s a local journey, you will probably need a street map … although, very simple instructions from somebody who knows the way will probably do.

But, if it’s a global-scale journey, the trip will most likely be broken down into stages for you by your travel agent, and you will need a series of  ‘planes, trains, automobiles’ maps, telling you how to get from HERE to THERE.

 Also, it would be a good idea to have a compass to tell which way is UP when you read the maps!

3. The Rules of the Road

Now, it would be nice to get to where you’re going without being arrested. If it’s a local journey, you can probably use common sense (although, it’s still best not to jaywalk).

But, if it’s a global scale journey, the rules may be totally different at different stages of the journey (you DO know that the Brits drive on the other side of the road, don’t you?).

Well, making money is a journey as well … therefore, you need …

… three things:

1. A destination

When it comes to money, your destination is in two parts (a) HOW MUCH you need, and (b) WHEN you need it. The when is usually in terms of WHEN you stop working, but it need not be; and the HOW MUCH is determined by how well you want to live when you get there (1 star? 5 star? In between?).

2. A map and compass

Your map will be the three stages of your financial journey (getting debt free and starting a savings plan; ramping up both your income and your investments; keeping your money once you get wherever ‘there’ is for you) and we will cover all of that over the coming weeks.

Your compass will be your Investment Net Worth (we’ll discuss the difference between this and your ordinary, old ‘net worth’ later this week).

 3. The Rules of the Road

Like every good ‘rule book’ the Rules of the Finance ‘road’ is a thick one! I’ll be giving you many of these rules over the coming weeks and months in the cyber-pages of this blog; an example of a Financial Rule is the 20% rule of investing in your own home …

… there are many, many more. By learning these Financial Rules, you can shave YEARS off the time it takes you to get rich.

This blog is here to show you how!

Are you really on track?

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I read an interesting question on one of my favorite blogs the other day.It was from a couple thinking about retirement asking the usual saving-for-retirement questions, peppered with the usual ho-hum terms: ROTH IRA’s, 401K, HSA, CD’s …

What caught my attention was the opening sentence to their post:

“I feel very knowledgeble about long term investments.  I feel I manage my retriement savings very well and this has been a top priority.”

If you think your ‘retirement is on track’ just because you are saving your 10% or so into all the ‘right investment vehicles, or retirement for you is still a hell of a long way off, I would just ask that you do the following quick ‘reality check’:

1. What is your current Net Worth (try the CNNMoney calculator)?

2. What is your annual income goal to fund the retirement that you always hoped for?

Multiply that by 20 to 40; depending on how certain you want to be that your money will last as long as you do …

3. The difference between 1. and 2. is what you have to make up (ADD a little more for inflation) between now and retirement.

If it’s only a little, keep doing what you’re doing; your retirment is probably ‘on track’ …

BUT, if it’s a lot, maybe you need to think about INVESTING actively (business, real-estate, trading) rather just SAVING (CD’s, 401K’s, etc.).”

The problem is that most people seem to SAVE (or not save) for their retirement without having a clear understanding of what they want out of retirement, therefore, how much income they need to fund that lifestyle.

It MAY have NOTHING to do with what they currently earn … yet, replacing some or all of the pre-retirement salary is what everybody seems to be aiming for. 

So, the issue changes – in my estimation, for MOST people – if they are set to save for a $35k a year retirement, but their dream of living in Tuscany [insert retirement dream of choice: working with the poor in Africa; sailing around the world; quitting my job well BEFORE usual retirement age to become a painter; etc.] requires $150k a year!

Are you really on track for your retirement?