Tag Archives: wealth

Happiness = $75,000 a year!

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Finally, there is a study that equates money to happiness!

The Wall Street Journal reports a study by “the Princeton economist Angus Deaton and famed psychologist Daniel Kahneman”, which states:

As people earn more money, their day-to-day happiness rises. Until you hit $75,000. After that, it is just more stuff, with no gain in happiness.

Let’s assume you want to retire in 20 years on the equivalent of $75k p.a. – after adjusting for inflation (roughly double your required income every 20 years) and applying the Rule of 20 (equates to a 5% p.a. drawdown on your money), this means:

Your Optimal Happiness Number = $3,000,000

None of my readers are chasing less – otherwise, why would you be reading a blog called How To Make $7 Million In 7 Years (?) – but, the point of the study has been taken by the press and the pf blogging community to mean that it’s pointless to chase more than $3 million … seemingly making my uniquely positioned blog redundant by half 🙁

Well, it’s quite interesting because there’s a second part to the study that the media and most other bloggers are conveniently ignoring:

That doesn’t mean wealthy and ultrawealthy are equally happy. More money does boost people’s life assessment, all the way up the income ladder. People who earned $160,000 a year, for instance, reported more overall satisfaction than people earning $120,000, and so on.

“Giving people more income beyond 75K is not going to do much for their daily mood … but it is going to make them feel they have a better life,” Mr. Deaton told the Associated Press.

I don’t know about you, but I like to be happy ($75k p.a. happy) and have a better life ($250k p.a. better life)!

How about you?

A fund manager’s view …

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This is a little different to all of those “this is what a millionaire thinks” posts, because Evan is in a support role (“my role is more brain storming and putting together documents and calculations….then I prepare materials for the planners’ second meeting and beyond”) at a financial planning office that specializes in sucking the blood out of – I mean assisting – high net-worth clients:

My role is more brain storming and putting together documents and calculations. So basically I see almost every balance sheet that may have significant net worth which goes through my office

Since I’m a sample of one, when it comes to high net-worth clients, it might be interesting to see what Evan sees:

The House is almost always Paid off

Prepaying your mortgage is always a hot topic on Personal Finance Blogs.  Everyone once in a while one of the big players in the field will put a post and it will garner tons of comments.  The comments are usually heated and go both ways about how the move is stupid and then invariably someone will say, its a great move.  Regardless of how you feel, most of the high net worth clients’ balance sheet that I see will have either a paid off house, or one with a very low debt to equity ratio.

They Almost Always Own a Business

Almost every high net worth client’s balance sheet has a business on it.  The types of businesses range from the mundane, lawyer who owns their practice, to beyond what I could have imagined as a viable business.

They Almost Always have Investment/Financial Advisors

Almost every single high net worth client/prospect is not hands on when it comes to their own investments.  Some are more active than others when it comes to asset allocation, but for the most part unless they are in the money business (fund managers, hedge fund execs, etc.) they just don’t deal with it.

Since Evan is coming from a position of observation of his sample size of many, I will observe from my position of a sample size of one:

– I found it valuable to have a business; indeed, it’s the ultimate driver of my financial success; even before selling the business I could use the spare cashflows (after attending to the business’ own growth needs) to fund a substantial real-estate and investment portfolio.

– I own a house, and almost always have … now that I am wealthy, I carry no debt on these houses, but started reducing my debt almost in proportion to the increase in my wealth. It’s not a strategy, just a happenstance. But, I will not hesitate to use some (perhaps, up to 50%) of that equity, if required to fund an investment.

– I certainly use an investment advisor – in fact, multiple; but (here is where my experience diverges from Evan’s observations) Evan says: “Almost every single high net worth client/prospect is not hands on when it comes to their own investments.”, yet the opposite is true for me. Could this be observation bias for either Evan (he does work for a financial planning/advisory firm, right?) and/or for me?

I would never hand the keys over to my Future Fortune [AJC: How do you make $1,000,000? Give an ‘investment advisor’ $10 million … and, wait!] to somebody who has not already made their’s … if so, why do they need me?

Thanks for sharing, Evan!

The key to untold wealth!

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If you’ve been following this blog for a while, you may have the sneaking suspicion that I’m also a bit of a ‘mad scientist’.

For example, I told you that, like Albert Einstein, I’ve been working on a ‘unified theory’ [AJC: I’m rather proud of this post, so go ahead and pull it out of the 7m7y archives by clicking on this link: The Big Papa lives in the 11th Dimension!].

Unlike Albert Einstein, though, I am (a little more) kempt; (very slightly) less absent-minded;  (a lot) less than genius (even a little more ‘less’ each year); and, have no Germanic accent, although my parents spoke the language fluently (but, never allowed me to learn it … it was their ‘secret language’).

On the positive side, unlike Albert Einstein who reportedly went to his grave with his secret, I have found the Unified Theory of Finance!

After literally years of searching – and, this blog has been a way for me to publicly articulate my thoughts, and get the feedback that I needed along the way [AJC: so, I will need to remember to thank all of my readers – that’s you! – at my Nobel Prize for Finance acceptance speech] – I finally made this Great Discovery (?!) on the weekend.

In fact, the breakthrough came in two parts:

The Search

Because I am (still) enamored with Sponge Bob, I was attracted to “Eugene Krabs“, who left his version of the secret formula for wealth in a seemingly innocuous comment on Free Money Finance’s blog:

I’ve boiled what I’ve read myself down to the following equation:

Wealth = Capital + Risk + Time

(To be clear, capital is the money you have right now to make more money with.)

Technically, any one of those factors can do it for you. For example, if you have a massive amount of capital, or if you take massive amounts of risk and beat the odds, or if you have a lot of time to build your wealth, then you can still become wealthy at the expense of the other two factors.

However, there are downsides to all of these individual factors.

Sensational stuff!

Unfortunately, I can’t thank “Mr Krabs” because he didn’t include any links with his moniker. On the other hand, you may quickly spot a few issues:

1. Clearly Wealth isn’t an additive of capital, risk, and time, it’s really a complex function. But, that can be solved by rewriting the equation as W = C * R * T or, even better yet, as:

W = Fn {C,R,T} i.e. Wealth is a (perhaps, complex) function of Capital, Risk, and Time.

But, understanding the math is not the point – I’m sure that Mr Krabs’ formula is meant as conceptual, not mathematically rigorous – it’s understanding that you need to balance Capital, Risk, and Time, if you want to become wealthy, that’s important … at least, according to a fictional cartoon character who saves every penny that he can get his claws on 😉

2. The more important point is that this version of the formula forgets Return; and, if we substitute Return (e.g. the 9% or 0.09 return that you supposedly get if you stick your money in the stock market for long enough), you actually have something very similar to the basic formula for compounding (which, at least according to Einstein, is the ‘most powerful force in the universe’:

3. Even if I somehow modified Mr Krabs’ simple version (and/or the more complex – but, correct – mathematical representation of compounding) to include both Risk and Return (a.k.a. Reward), the formula IMHO still wouldn’t explain why Warren Buffett is sensationally rich investing in exactly the same stocks that we invest in, yet we manage to lose money (in the short term, in absolute value, and even in the long term, certainly after inflation is taken into account)!?!

Until I can explain that, there is no formula 🙁

The Breakthrough

Still my gut told me that Mr Krabs [AJC: I love using his pen name … I’ll see how many more times I can fit it into this really very serious post!] was on the right track, because his representation did provide the missing simplification that I needed.

But, I kept hitting brick wall after brick wall …

… until last Sunday.

Last Sunday, I took my son and a few friends to play in their weekly teenage tennis competition [AJC: we all got free ‘slurpies’ from a 7-11 Convenience store on the way back home from tennis because it was 7-11 Day: November 7, 2010. Go figure!].

Instead of watching the game, I sat in the car with all my notes – pages and pages of complex math, simple math, all trying to fit Risk, Return, Capital, Time, and so on into a simple, conceptual ‘formula’ … all the while, trying to use it to explain the difference between you, me, and Warren Buffett.

As I said, until I could do that, I had nothing!

It was driving me crazy! So, I did the only sensible thing: I laid back the car seat and dozed off … but, when I woke up half an hour later, I had it:


“Is that all?”, you say [yawn]

Hell, yes!

Really understand this, and you have the key to untold wealth … in any field of endeavor.

I’ll explain the X-Factor (it can be explained!) in an upcoming post …

AJC.

PS Remember: this ‘formula’ is conceptual and is more correctly (but, still grossly) simplified as:

W = Fn {C,X,T} i.e. Wealth is a (definitely, very) complex function of Capital, The ‘X-Factor’, and Time.

The False War On Debt …

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There’s a war raging out there: it’s being fought by authors and bloggers everywhere.

But, is it the right war? Is it a just war? Or, are we just throwing ourselves, by the millions, into a hail of fire: exploding spending, rampant inflation, the death of social security?

Sure, as we sit in the relative safety of our trenches (at least, that’s what we tell ourselves, until a random mortar shell of job loss or unexpected expenses chooses to lob our way) this is not OUR future … it’s somebody else’s, or it’s too far away, or it just can’t happen …

The sad truth is that legions have jumped the wall before us and have been brutally cut down for lack of an adequate nest-egg; it’s sad to see them go over the dreaded wall of retirement (be it their time, or forced on them early) without an adequate safety net … when they do, it’s as though their grim fate had already been sealed.

Broke – or ‘just’ financially crippled – and unable (for financial reasons) to live life as they had hoped, they are a sad, sad lot.

You see, the war that they fought wasn’t – isn’t – a just war. It’s not even a war … well, it shouldn’t even be more than a skirmish.

It’s the War Against Debt!

When it comes to that war, I’m strictly a pacifist; isn’t it better to simply avoid BAD debt?

Of course, that doesn’t mean that we can’t … shouldn’t … defend ourselves.

Far from it: if we find that BAD debt has snuck through our defences, let’s keep an eye on it. And, if we find that it’s also EXPENSIVE debt, then let’s whip out the Big Guns and wipe it out. Quickly, surgically …

… but, let’s not commit Debt Genocide.

You see, unlike the well-intentioned, but largely Debt-McArthyist “ALL Debt Is Bad, So Let’s Wipe It Out” rabble out there, let’s first ask The Missing Question:

What will you do after your debt is paid off?

“Well, start investing of course!”

But, does that REALLY happen? Who better to ask than Money Reasons:

This past February 2010, I became totally debt free, but now what!

I thought that there would be a period where I would break even for a while, and then start to plow about $1,000 extra each month into investments!  So now that it’s seven months later and how much extra did I save or invest?  Not a single cent!

Hang on, the whole purpose of suiting up for battle – for going to war against debt – was so that you could start investing, right? What’s up with that, Money Reasons:

Well it’s been a matter of bad luck with equipment breaking down and needing replaced and spending too much for our past vacation to Hilton Head Island!

But it’s also been a subtle form of LifeStyle Inflation!  Thinking back now, I realize that when wants would arise, I would just go ahead and buy it.  Yeah, I thought about it a bit, but I knew that I had the cash.  Then when your car and lawn mower broke down, I had the cash too…

Money Reasons should have started investing well before all of his debt was paid off … he should have started investing as soon as his expensive debt was paid off and left his cheap debt on a regimen of minimum payments.

The problem with this war is that it’s an unjust war; as TraineeInvestor said: “Debt is a tool. Paying it off is simply choosing not to use the tool.”

Yes, becoming debt free is simply a tactic …

If you have to go and fight a war, don’t fight a war against debt …

… go and fight a war for investment 😉

In case of emergency break glass …

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A couple of weeks ago, I shared my thoughts on how – and why – to set up an emergency fund with just $0. For a start, it doesn’t take much cash 😉

I suggested using a HELOC, or tapping your 401k in case of a true emergency. Some of our readers had other suggestions:

– Trainee Investor suggested selling stocks (they can be liquidated pretty quickly), or taking an unsecured overdraft.

– Evan suggested adding the “Cash value portion of a whole life insurance policy to the list. You can have the cash in your account within a day or two”

– Investor junkie says that you can avoid selling your stocks by taking a margin loan [AJC: just beware of the dreaded ‘margin call’ which can force you to sell your stocks – possibly at a loss – if there’s a drop in market price]

And, Yahoo Finance provides their view of the The Best (and Worst) Ways to Raise Fast Cash; check it out. Then let me know if you’ve changed tack with your own emergency fund, or if you still prefer to fund it with cash?

Who cares what a millionaire won’t tell you?

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I love (not!) these “secrets of how a millionaire thinks” types of articles, like this one called 10 Things A Millionaire Won’t Tell You [AJC: actually, this one really is quite interesting] …

… the problem is that they mix the poor millionaires in with the rich ones!

I’m not sure that I can define a ‘rich millionaire’ for you (seems like a tautology, but isn’t), but it’s something GREATER than $7 million, because I don’t ‘feel’ rich yet. Wealthy, yes. Wealthy enough to live my Life’s Purpose without ever needing to work again … just.

Extravagant, no … but, it would seem extravagant to you, wherein lies one of the problems: you may consider house with swimming pool and tennis court extravagant now. You may consider private schooling for your kids extravagant now. You may consider a BMW M3 Convertible and a Lexus Hybrid extravagant now.

But, when you become a ‘millionaire’ you won’t: you’ll expect the house + a second home in the country. You’ll expect the BMW and Lexus on the street + the ‘exotic’ in the garage. And, you will only want the best for your kids (unless you already live in a top public school district … then, watch your land taxes!).

You need to pin this down … now … when you are working on your required annual living expenses. Inflate this by 4% per year until you expect to retire (a.k.a. begin Life After Work). Multiply by 20. Add in your one-time costs (e.g. house/s). There’s your Number.

Which brings me back to my point; as the article says:

Some 10 million households have a net worth above $1 million, excluding home equity, almost double the number in 2002. Moreover, a recent survey by Fidelity found just 8 percent of millionaires think they’re “very” or “extremely” wealthy, while 19 percent don’t feel rich at all.

A millionaire, these days, can ‘safely’ spin off about $30k to $50k a year. That’s it.

If that makes me rich, then I was rich when I was still working my first job in my mid-twenties.

So, what does it take to truly feel rich, these days. Somewhere north of $7 million …

… Fidelity says the ‘magic number’ is about $23 million [AJC: citation needed; can anyone find the original Fidelity source for this?] before fat boy gets thong girl.

I won’t argue with that! 😉

Enough is enough!

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Early Retirement Extreme wants to slay the ‘enough’ dragon; while, for many, ‘enough’ refers to their income and/or spending, in ERE’s case it refers to his investment net worth:

In terms of the invested assets dragon, I have several. I want to have a $500k net-worth. Once I hit that, I want $750k; then I want $1M. It’s been like that all along. It might just be my biggest source of stress— not being able to rapidly save money, which, rationally, I’m not going to spend anyway. It’s pretty stupid, I know.

And, before you think that “when I’m rich, then I’ll have enough” remember that when people who you and I think are rich (i.e. with net assets in the $5 million to $25 million range) are asked how much they will need before they consider themselves rich, they tend to say: “about double”.

That is, they tend to think that they need about twice their current net worth in order to feel comfortably rich!?

The solution is to prepare your definition of ‘rich’ … in advance!

… and, that should be to have enough money to live your Life’s Purpose. We call that number your Number.

When you get there, STOP because that is – for you – truly ENOUGH.

On the other hand, my ‘dragon’ isn’t income, investment assets, spending, etc., it’s my entrepreneurial gene … I see opportunity in everything and want to invest in it.

Right now, I’m working on my real-estate development projects, partnering with a young entrepreneur in his first bricks-and-mortar venture, and have any number of browser windows open with new technologies that I want to pursue.

Enough!

While it’s all fun, and mentally challenging, and fits totally within my Life’s Purpose, it all still takes money … so, in some ways, it’s no different to any of the other forms of ‘enough dragons’ out there.

So, how do I deal with my ‘enough dragon’?

Well, I built enough ‘fat’ into my Number to allow both the free time and the free cashflow to play with these new ventures: about 10 @ $50k a pop. Unfortunately, just one of my non-property business ventures is already in $100k territory, so I need to tweak by reducing the number of other ventures that I back.

And, as I’ve already said, this is easier said than done 😉

Pay off debt or invest?

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I’m publishing a whole series of posts targeting Debt … it has very little to do with conventional financial wisdom on this critical subject. Here is the second post (I have another one coming up, soon) …

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Gen-X Finance is polling his readers as to whether they would prefer to pay down debt or save:

If you have both debt and a need to save money, how do you prioritize? Some people will pay off debt at all costs before saving a penny. Others will be fine getting by with minimum payments while dumping as much money into savings or investments as possible. While others try to do a little bit of both. That’s why the poll today asks how you view this subject.

You should go ahead and answer the poll.

Now, this is such an important decision – perhaps one of the MOST important mindset changes that you need to make if you want to follow in my $7 million in 7years footsteps – that, for my new readers, I will point you again to my trademark Cash Cascade™ system (don’t worry, it’s simple and free) that replaces the Debt Snowball, the Debt Avalanche and most of the other other debt repayment systems that you may have previously tried.

Here’s why it works:

People make the mistake of thinking that there is GOOD DEBT (typically, investment debt) and BAD DEBT (typically, consumer debt) … but, this is only true BEFORE YOU TAKE ON THE DEBT.

Once you are in debt, then there is only CHEAP DEBT and EXPENSIVE DEBT. Put simply, pay down your expensive debt, until only the single digit ones (on an after tax basis) are left, THEN start investing.

This goes against the ‘pay down all debt’ theories, but works both logically and practically. Try it … and, let me know how it’s working for you?

She’s an heiress …

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Madam X (provocative name) over at My Open Wallet says that she is an heiress:

Remember Great Aunt Minnie? She died peacefully a few weeks ago. I had a chance to see her one last time in May, and spoke to her on the phone a few days before her death … it was even more weird to find a thick envelope in my mail the other night, which turned out to be from Minnie’s lawyer, because I’ll inherit a share of her estate. So now I just have to see what happens once the estate is settled and divided up. I have no idea how much money it will be. I certainly don’t expect much, given I’ll only get one twelfth of her estate.

Receiving money ‘suddenly’, be it from a sad occasion such as this, or from some fortuitous circumstance such as winning a substantial prize in the lottery, can be difficult, because you probably have no plan.

And, because you have no plan, the money can go as quickly as it comes (remember poor-then-rich-then-poor Lou Eisenberg?).

I call this Found Money, and here’s how to deal with it:

If you’re lucky enough to receive such a windfall, you should spend enough to fully celebrate your good fortune (even more so if it was a result of hard work – e.g. selling your business – rather than luck).

Here’s a table that will help you decide how much to save and how much to spend, depending on how much Found Money you happen to come across:


The idea is that money is for SPENDING and ONLY FOR SPENDING … but, you need to PLAN to spend some now and PLAN to spend some later (a.k.a. saving). That’s exactly what this table is designed to do.

So, if you find $10 in the street, buy yourself a fun magazine, then stick the rest in a jar.

If you happen to inherit $100,000 go ahead and upgrade your car (and/or take a vacation) – totally guilt free – then plan to invest the other $90k very wisely 😉

Disability no object …

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I think that there are fewer ‘hold backs ‘ to getting what we want than we think …

Here, Lance shares his disability, but that’s NOT his hold-back … access to money is. But, I think that’s NOT his hold-back either, and it shouldn’t be yours:

I’m 32 years old and born completely deaf. I’ve worked twice as hard as my non-disabled peers to get to where I am now and am only 18 months away from being completely debt free including having my home paid off.

Meanwhile I am working full time and am trying to get a side business going that focuses on media services for the Deaf population. I strongly believe that my media business will someday replace my current income.

Now, I’m doing everything I can coming from low class family on both my side and my wife’s side to fund my way to success while watching friends from wealthier families getting much further ahead to their wealth than I am. Don’t get me wrong, it’s not a competition and I’m happy for them but I’m seeing that it takes money to make money and the road I’m taking with “self-made-funds” is taking forever. While I know my friend with a wealthy father in law wouldn’t be nearly as far as he is without his in-law’s fund I feel like in order to succeed you need to know someone wealthy, I see it all the time. My problem is I have absolutely no relatives who are wealthy, no friends with money enough to invest, or any kind of connection to people with money.

Being on the path to debt-free I really don’t want to borrow money either, I hate debt but at the same time I know it’s necessary as you call good debt. One of my next steps requires $35k – $50k, so I’m asking you where someone in my position can find that kind of money without having to save it over the next 5 years.

Now, Lance may have some advantages that some of these ‘wealthy-relatived others’ don’t have: for example, Lance is debt-free (almost)!

And, I have wealthy relatives, but would never have considered holding my hand out, anyway … some people have the ‘take gene’, but others don’t.

I don’t.

Lance could go to a bunch of non-wealthy friends and ask for a little from each … he might be surprised to find that 10 friends would be happy to cough up, say, $5k each. And, he may be able to tap into government grants to make up the difference, given his disability and the planed area for his business.

But, Lance’s best bet IMHO is to refinance his house. This is a good opportunity to lock in a very low interest rate line of funding for his business anyway by fixing at the current low home mortgage rates.

I know that this goes against Lance’s “pay off your home mortgage” mentality, but is his house any less valuable or livable because he does/doesn’t carry a mortgage?

Of course not!

If you also have a hot business idea, but have stalled for lack of money, maybe you should do the same?

But, you have to REALLY believe in your business …