(Guest Post by Adrian J Cartwood, with a giveaway of his new book at the end: “Share Your Number!“)
I’m a different kind of personal finance blogger because I believe that most of what you read in the pf blogosphere is wrong.
My alternative financial viewpoint arises simply because I come from a different background than most pf bloggers. Most bloggers write because they want to make money, or are embarking on a journey to get out of debt, and they are passionate enough about their finances to share their own experiences.
I write because I have already made my money (I made $7 million in just 7 years, starting $30,000 in debt) but found, as I was on my own financial journey, that most of the advice in the books and blogs on offer was either wrong or outright dangerous.
Wrong, because most personal finance advice is designed to make you frugal and debt free – not wealthy. Dangerous, because you need to amass a much larger fortune than most bloggers and authors will have you believe is necessary, if you want to enjoy life beyond work. Aim too low and you’ll end up working for 40 years or more, only to live the rest of your life in virtual poverty, relying on government handouts to supplement your meager retirement income.
So, here are some of the more popular myths of personal finance that I resolved to bust:
The Millionaire Myth
Fortunately, the myth that you can retire comfortably on a million dollars is a fairly easy one to discredit with some simple mathematics (stick with me on this). In fact, becoming a millionaire in your lifetime is going to be easy … too easy:
If you start off earning $25,000 a year and work for 40 years (earning around $80k in your last pre-retirement year), and save just 10% of your annual salary (earning 8% on your money), you will have exactly $1,000,000 when you retire.
Of course, you will be used to living on $72k p.a. ($80k less 10% set aside for savings) by then, but – assuming a 4% ‘safe’ withdrawal rate – $1 million will only give you half of that to live off.
Now, $36,000 a year without working may sound tempting, until you factor in the effects of inflation which tends to double the cost of living every 20 years. This means that your $36k retirement salary is worth less then $9,000 a year in today’s dollars!
So, you will be a millionaire in your lifetime, but that is hardly the point!
The ‘Bad Debt’ Myth
The most common and costly mistake that personal finance bloggers make is confusing good and bad debt with cheap and expensive debt.
Because so many people have trapped themselves into credit card debt, which they should pay off as quickly as possible because it’s just so expensive, they have been lead to believe by so many financial pundits that they should pay off all of their debt, including their mortgages.
For most people, this is actually a huge mistake.
Instead, they should first pay off expensive debt (such as credit cards, and auto loans) as quickly as possible. But, as soon as their remaining loans (such as student loans and home mortgages) are at a lower after-tax interest rate than, say, the cost of an investment loan (such as you might get to buy an investment property), why pay it off just to take out a bigger, more expensive investment loan later?
The ‘Emergency Fund’ Myth
It’s become popular for personal finance authors to promote the idea of putting cash aside to deal with life’s little emergencies – 3 months salary or $10,000 seems to be popular choices amongst bloggers.
But does putting aside $10,000 cash make financial sense? First, let’s assume that this fund is big enough to cover all likely emergencies.
Haven’t you just created your worst case outcome? Haven’t you just depleted your investment fund by $10k? Wouldn’t it be better to instead invest that $10k so that it is always working for you, earning a return, whether there is an emergency (very unlikely) or no emergency (very likely)?
To protect yourself in the unlikely event of an emergency, you could simply create a source of money that you can tap into only when needed (e.g. a line of credit against your home; a redraw facility against your 401k; a 0% APR credit card, sitting there – unused – just for this purpose).
A 2-Step Plan For Wealth
If these myths – and, others – need to be broken, what should you put in their place? Well, it starts with understanding – if retiring with $1 million isn’t sufficient – just how much is enough?
That answer will differ for everybody, but I’m guessing that if you are just starting your working life, you will want many times the $9,000 per year in today’s spending power that $1 million in 40 years actually delivers.
And, the only way that you will amass that kind of wealth is to:
- Increase Your Income
- Actively Invest
Saving money is far less important than increasing your income, simply because – as your income increases – you will have more to save. For example, you should be able to save 10% of your current income, but saving 50% is almost impossible without making dramatic sacrifices to your lifestyle. Yet, continuing to save 10% (or, whatever your current rate of saving is) and saving 50% of any future increase in income should be far less traumatic, yet your overall savings will increase dramatically.
And, you should also be actively working on your investments: my rule of thumb is that 75% of your net worth should always be working for you, at the best possible after tax interest rate.
For example, why put your money into a CD at 2% (or less) or an Index Fund at 7% (over a long enough timeframe) when $10,000 invested at:
- 15% (direct stocks) grows to $35,000 after just 10 years
- 30% (real-estate) grows to $106,000 after just 10 years
- 50% (business) grows to $384,000 after just 10 years
Now, you will need to learn a lot and work hard to get anywhere close to these kinds of returns, but if you increase both the amount that you invest and the rate of return, over a 20 to 40 year working life, you can safely expect far more than the typical financial blogger will have you ever believe is possible.
**Giving Away 2 Copies of Adrian’s New Book!**
Like what Adrian had to say? Want a copy of his new book, “Share Your Number!“? Tell us how much you think YOU’LL need to retire comfortably in the comments below, and you’ll be entered to win one of them :) Or just tell us what you thought of his post today for fun, haha… Just make sure to let us know if you want to be entered in the giveaway or not when leaving your comment.
We’ll pick the two winners Sunday evening, and will use Random.org to select them. Good luck! And hope you enjoyed today’s change of perspective!
Guest Post by Adrian J Cartwood – A self-made (and, recently retired) multi-millionaire and author of the personal finance blog “How To Make $7 million In 7 Years” where AJC blogs about his personal journey from $30,000 in debt to $7 million in the bank. AJC (in conjunction with popular blogger and author, Debbie Dragon) has just published his first book, “Share Your Number!“
[MY THOUGHTS: I both agree and disagree with this article ;) Yes you need a lot more money to retire comfortably on later than just a million, but a) Not many people can find investments that pay out 15- 50% in returns (or else EVERYONE would be doing it!) and b) You have to be okay with taking out all emotions from the equation too. Which most people also can’t do – myself included (though it would certainly be financially smarter to do so). So yeah, by all means shoot for hitting $7 million+ and follow these steps when you’re ready to up your game, but in the beginning at least I still think it’s smart to pay attention to your emergency funds and mortgage debts/etc. There’s nothing wrong with going for the gold once you have a great foundation down, and you don’t want to get overwhelmed before you even get started! Overall an interesting take on things though, and I greatly appreciate the fresh perspective here. Thanks again Adrian, and congrats on the book!]
PS: Also? All personal finance blogs are sexy.com ;) You NEED all the different viewpoints out there in order to learn and make better decisions! So I’d call them more “mainstream” than I would B.S. cuz all that stuff is def. helping people no matter what the opinions…
Photo by: Ecstatic Mark
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!