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Investing

How to make a million dollars

February 5, 2010

You will likely make a mil­lion dol­lars. The aver­age Amer­i­can earns between $1 mil­lion and $2 mil­lion dol­lars in their life­time. But that’s not what I’m talk­ing about.

This arti­cle will tell you how to end up with $1 mil­lion dol­lars in your bank account. (And, as you’re about to see, you’re going to need it.)

$1 mil­lion at least

I’m 31. If I put $1,000,000 under my mat­tress today, when I came to retire (at 65) that $1 mil­lion would have the pur­chas­ing power of $388,977 today. If I lived until 85, that would give me only $20,000 per year to live on. That’s IF I hit my tar­get of mak­ing a mil­lion before I retire. Sud­denly aim­ing for a mil­lion seems a lit­tle low. For me to feel like a mil­lion­aire when I’m 65 I’m going to need $2,500,080 of today’s dol­lars. (Based on a 3% infla­tion rate). So your tar­get has to be some­where between $1 mil­lion and $2.5 million.

That’s not being greedy. Just responsible.

The way you learned in school

Com­pound inter­est isn’t the answer. Not on its own. Sure, if you put $5 in the bank every day AND find a way to earn 10% inter­est, in 42 short years you’ll have a mil­lion dol­lars. That sounds sim­ple, but a 10% return isn’t easy to come by and no one goes to the bank every day. (If you really like going to the bank though, this might be the excuse you’re look­ing for.)

Open a McDonald’s

Another way is to open a busi­ness, a fran­chise maybe. Fran­chises are a good option, but to start one you’ll need about $200,000 in cash –not a mort­gage for that amount, CA$H. Most real peo­ple, with real lives and jobs, can’t come up with that kind of money. And most peo­ple (let’s be hon­est) aren’t com­fort­able with that kind of risk.

Just do this

I’m just going to cut to the chase. I’m going to tell you what I tell my friends to do (because I like you. You’ve become very spe­cial to me). My advice is: buy an invest­ment prop­erty. Now, using some fancy math, I’m going to show you how easy it is and why it makes sense. I’m going to leave you utterly con­vinced and greatful.

The sce­nario: You’ll need to find a prop­erty you can rent. The rent will need to cover the mort­gage, or bet­ter. (If you can find a prop­erty where the annual rental rev­enue equals 11% or more of the property’s sale price you’ll be mak­ing an income from the prop­erty from day one, even with­out the cap­i­tal return I’m about to talk about).

Year 0: You’ve just put $10,000 of your own money on a prop­erty worth $200,000. It was tough com­ing up with that much money, but you did it.  You’re capa­ble like that.

Year 5: Fol­low­ing a 5% property-inflation rate, which is rea­son­able for most major cities (except maybe in the US at the moment), your prop­erty is now worth $240,916. Not amaz­ing, but not too bad either.  (Just trust me on the 5% part. I’m trustworthy.)

Year 10: Now the place is worth $292,166. Ten years ago, when you started, you only owned $10,000 of the prop­erty. But now your equity (the amount of the house’s value you own) is over $100,000. This is really some­thing. And it’s just just some­thing because you’ve mul­ti­plied your money by 10. It’s some­thing because now you’re the kind of per­son who really knows what to do with $100,000!

So now you’re smil­ing more. And you have a nice deci­sion to make. You remem­ber that you were able to get that first prop­erty with just $10,000. And you have $100,000 of equity in that prop­erty. The bank sees this like you have $100,000 in a bank account with them.  If you sold your prop­erty you’d have $100,000. The bank knows this and they don’t want to lose you as a cus­tomer. So, if you ask them, they’ll let you use some of that equity toward another prop­erty (or 2 more, or maybe even 3 more –depend­ing on your salary and smile).

You can do that with­out hav­ing to come up with another cent.

If you sell your first prop­erty after 30 years (using that 5% property-inflation fig­ure) you will have $500,000 in your pocket. ($10,000 got you half a million.)

The actual num­ber of prop­er­ties you’ll need to hit your tar­get will depend on a few dif­fer­ent fac­tors, but 2 or 3 will likely be enough.

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Live life like a game

February 3, 2010

As I kid I loved Snakes and Lad­ders. I don’t even know if you can find that board game any­where any­more, but I enjoyed it. (Okay, I just found it on Ebay for $2).

It was pretty sim­ple. Basi­cally you roll the dice to see how many spaces you can move for­ward. The first per­son to the end wins. You hope to land on a lad­der (which lets you skip a bunch of steps). And you want to avoid the snakes (which make you slide back, giv­ing up a lot of your progress).

I real­ized today that I’ve been using Snakes and Lad­ders as a guid­ing alle­gory for my life. Since I was a kid I’ve been using this game to make tac­ti­cal deci­sions about my life.

Life isn’t slow and steady

Think of lad­ders as things that can rapidly advance you ahead of the crowd. These are things that help you to “arrive” faster –to be finan­cially secure, happy, suc­cess­ful, self-actualized ear­lier than you would otherwise.

You’re prob­a­bly famil­iar with the 80/20 rule, which states that 80% of our returns in life come from just 20% of our efforts. The 80/20 rule sug­gests that we should focus on the things that give us the most bang for our buck. The Snakes and Lad­ders idea is sim­i­lar to this: avoid unpro­duc­tive behav­ior and invest the time into build­ing your­self an advan­tage of some kind.

Exam­ples of Ladders:

Mak­ing prop­erty invest­ments made when you’re young. There are sev­eral invest­ment strate­gies you can use. Prop­erty is the one that’s always made the most sense to me. The key is start­ing early. (And I sup­pose the key to that is being dis­ci­plined about sav­ings from a young age).

Get­ting a uni­ver­sity degree. Aside from the increased feel­ings of per­sonal effec­tive­ness and being more inter­est­ing at par­ties, a col­lege master’s degree is worth $1.3 mil­lion more in life­time earn­ings than a high school diploma (and about another mil­lion on top of that if you get a PhD). (You could debate this, on the grounds of cor­re­la­tion ver­sus cau­sa­tion, but if you thought of that you prob­a­bly already have a degree and there­fore you don’t want to).

Hav­ing a trade. Very much like a degree, hav­ing an in-demand trade sets you up well to branch out on your own and really cash in. How­ever, it also seems like those who really ben­e­fit from hav­ing a trade are those with some busi­ness acu­men as well, so they can fully cash-in when the moment is right.

Being a well-known brand. Per­sonal brand­ing is one of the new next-big-things. I encour­age peo­ple to take some actions to dom­i­nant their ‘name space’ online, to make it so that when some­one types in their name in Google, they are the first one that comes up and that they’re happy with the infor­ma­tion being shared. (If you type in Tim Woods in Google you’ll find that I still come behind a Tim Woods who was also known as “Mr Wrestling” and Tim Woods, an Aus­tralian com­poser). But I’m get­ting there.  And, even at #3 in my name space, I’ve had a lot of pos­i­tive feed­back from my efforts online. (I got a job, was cho­sen to judge a national envi­ron­men­tal com­pe­ti­tion and become an inter­na­tion­ally rec­og­nized expert on slang… don’t ask).

Being hap­pily mar­ried. Research shows being in a mar­riage that lasts cor­re­lates strongly with sus­tained career suc­cess and bet­ter health in old age. Also it’s nice to have some­one to share clean-up duties. Long-term, sta­ble friend­ships can have sim­i­lar benifits.

Under­stand­ing risk. Peo­ple have money per­son­al­i­ties. Some peo­ple avoid debt (even good-debt) like the plague. And those poor peo­ple don’t lever­age their money. So they miss-out on long-term benifits –such as being able to retire.

Learn­ing a lan­guage. This one is actu­ally more of an ‘alleged lad­der’. I don’t actu­ally know any bilin­gual peo­ple who credit their suc­cess to their bilin­gual­ism. How­ever, I’ve always sus­pected that if I spoke another lan­guage I’d be unstop­pable, so I’m keep­ing this one in the Lad­der category.

Exam­ples of Snakes:

Going bank­rupt. Even with bank­ruptcy pro­tec­tion, there can be lin­ger­ing effects from bank­ruptcy that will snake you back down a few steps.

Get­ting arrested. In these days of ubiq­ui­tous infor­ma­tion, it’s hard to hide mis­takes from your past.

Get­ting divorced. For some peo­ple divorce goes smoothly. But for oth­ers it can put an enor­mous emo­tional and finan­cial strain on your life for a very long time.

Can you think of any more snakes or lad­ders? Please add them in the comments.

(Update: Just before post­ing this, I’ve learned the game Snakes and Lad­ders was orig­i­nally called Moksha-Patamu. “Of Hindu ori­gin, it taught the play­ers that vir­tu­ous behav­ior would aid your pro­gres­sion to Nir­vana, but evil would make the jour­ney dif­fi­cult.” I told you this game was deep, didn’t I?)

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What’s Your Money Personality?

May 8, 2009

Money is an emo­tional thing for most of us. I’ve met wealthy peo­ple who still felt they didn’t have enough and rel­a­tively poor peo­ple who embar­rassed me with their gen­eros­ity. Cer­tain atti­tudes toward money seem almost hard-wired into people.

There are few ways you can find out which money per­son­al­ity type you have. There is this arti­cle and this one and this one which are all inter­est­ing But the most insight­ful might be this one, writ­ten by psy­chol­o­gist Kath­leen Gurney.

Atti­tudes toward money seem to be influ­enced by how we grow up (see Born to Rebel ). Brent Kissel (in this arti­cle) says that, “our early expe­ri­ences with money cause us to cling uncon­sciously to spe­cific strate­gies to feel secure and happy about our finan­cial deci­sions.” Fair enough. But I can hear some sub­tle bias here against risk-adverse types, those who play it safe. Is such a bias fair?

Cer­tainly, I would like all of us to be rich some day soon. And I’m com­fort­able with my atti­tude toward money. (We are pretty involved in try­ing to build some invest­ments and our strat­egy seems to be work­ing so far. Fin­gers crossed.) And I think we can all agree that risk tak­ing gen­er­ally leads to increased wealth. But does this mean that every­one should be tak­ing risks? It seems as soon as we look at it as a Qual­ity of Life ques­tion it’s not so straightforward.

Kath­leen Gur­ney has some good advice here. She says that peo­ple make the best use of their money when they are aware of how to con­struc­tively use their per­sonal assets and work with their own style of money management.

Update: If you’d like to learn more about invest­ing you might try The Mot­ley Fool.

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