Leaving the comfort zone…

Jeff has made great progress, but he’s still at the stage where adding a single rental foreclosure can increase his Net Worth by 67%; over the next 18 months he will probably need to maintain that growth rate … another $400k in equity over the next 18 months should do it, then $800k after that. Easy, huh?!

If not, where to from here for Jeff? Any suggestions?

______________

MM101 is my comfort zone. I was pretty successful in the 101 zone before I made acquaintances with Adrian. With his ideas (I like to call them “the rules”) added to my current bag of tricks, I expect to have continued success in this realm with a better understanding of the mechanics of MM101.

When I started this experiment I concluded that my number was 10 million in 10 years (by Jan 2019).

At that point my net worth was $383K and I needed a 38% annual compound growth rate to make it to 10 big ones in 10 years. To achieve that growth I’ve been planning to make use of stocks, real estate and business ownership. That should cause me to overshoot my goal (hopefully).

Since determining my number, I have made some positive progression.

The foreclosure home I purchased in February has given my net worth a nice shot in the arm. As of May 2009, I’m sitting at $642K and have surpassed my minimum required growth for this year.

Comparing the $642K with the $383K tells me I’ve had a 67% increase since December. That amounts to 1.75 years of progress toward my number. Almost two years worth of work in six months is fine by me.

At that start of this experiment, I needed to see better than 3.16% growth each month to stay on track. I’ve been hitting monthly numbers in the 4, 5, and 6%’s for the last several. A reassessment of my required growth rate tells me (assuming I’m doing the math correctly) that from this point forward I need to continue to compound at approximately 29% annually (or 2.44% monthly).

Now all I need to do is hook up to Josh’s rocket and I’ll be done by next week.

A 29% growth rate probably means I need to reassess whether to start a business or not. If memory serves me correctly (I couldn’t find Adrian’s post on the topic to confirm), 29% now puts me in a category that can be achieved by stocks and real estate alone, without the need for a separate business. This could minimize some of my risk exposure and require less of my personal time to accomplish.

This bothers me a bit, because I have been pretty excited about “making it big” on my own in an aviation related business. But if you don’t have to, it begins to beg the question, “why should you?” And it makes me think that I really need to have my business ideas clear and my personal reasons for moving forward on this one clear. My military commitment means that I have a good three years or so to think this one through, because I don’t have the luxury of chucking my day job in order to pursue a wild business dream.

Since unbridled pursuit of a business is not possible (nor really necessary) for the time being I’ll be focusing mostly on stocks and real estate for my growth engine.

Speaking of real estate, I’ve got another room I need to paint….

Going Vertical

Jeff’s got a great analogy about Space Shuttle take-offs v Navy Jet Fighters – when was the last time that you actually got to fly one of those things, Jeff? – that tells you a lot about how he thinks!

What advice can you give Jeff from your perspective, be it stratospheric, strictly earthbound, or anywhere in between?

_____________________

I’m sure Adrian advocates an aggressive vertical takeoff profile, given the picture he chose to use of the space shuttle taking flight.

My typical launch profile is a bit different than that of the Space Shuttle.  I’m used to starting from a standstill, checking the instruments, stroking the afterburners, taking level flight to build speed, and then pulling up to start a climb.  I’ve been launching this way for about 17 years now.  Not just professionally as a Naval Aviator, but also financially.

However, I think I’ve may have stayed in ground effect for a bit too long financially and its now time to pull back on the stick, load up the “Gs” and take things vertical.

But there’s more to going vertical than just honking on a big ‘ol pull on the control stick.  Pull too little or too late and you might not clear the trees at the end of the runway.  Pull too much, too quickly or too soon and you could decelerate rapidly causing you to peak out lower than you intended.  There’s a science to looking cool.

The struggle I am having in our experiment is one of changing old habits.  I’m finding that old investing habits can be hard to break, especially those that you believe have been good ones.

I have been a typical retirement account poster child.  I use ‘em and I max ‘em out.  And I haven’t done too bad along the way.  I’m on track to be comfortable later in life, not having to work until I die, nor rely upon the charity of my children.

But being comfortable in 27 years is not why I’m here.  I want to find a time machine to shave 17 years off that clock.

Let’s take a closer look at where things sit right now and determine if I have enough airspeed on this baby to take her vertical.

INCOME STATEMENT

Adrian made a nice graphic at the top of the page capturing my monthly income statement.  Before I add a little more detail, I have a small confession to make first.

Those numbers reflect what life will look like in May 2009.  My pay is still fluctuating from my recent move and won’t settle out completely until I officially “check in” to my new command on May first.

Monthly after tax income: $12,501 (made up of my paycheck and rental income)

Monthly expenses: $9,512 (made up of living expenses and two mortgages)

Monthly savings: $2,989

My surplus is normally divvied up between a 401K, two Roth IRA’s, two 529 college accounts, and cash savings.  However, right now everything is being funneled into money market savings to replenish my cash reserves and cushion the unforeseen expenses that come with a move.

NET WORTH

Reviewing my net worth profile yields the following:

Total assets: $1,355,253 (two houses, two cars, one boat, cash savings, and several retirement accounts)

Total liabilities: $753,755 (two mortgages, one short term bridge loan tied to my home)

Net worth: $601,498 (this is a new all time high for me)

WHAT’S NEXT

Reviewing all these numbers helps me understand some of my hesitation and reluctance to step away from my past investing practices.  Things don’t feel broke.

Adding to this hesitation are concerns for those who rely upon me.  I have a wife and two kids that are depending upon the course I chart.

What if I make a misstep in this experiment?

What if I lose it all trying something new?

Failure is not an option.

If I’m going to pull back on the stick the right amount, I have some more work to do in order to determine how much “pull” is enough.

But I’m committed to this and have been laying the ground work necessary to begin shifting my investment portfolio from mutual funds to a concentrated selection of individual stocks so that I can take this baby vertical.

Keep your eyes on the sky.

I’ll be the one with my hair on fire.

The Bottom Line

Josh puts it right: “we are coming to the end of our net worth exploration and have generated a fairly specific map of where we have been financially and will soon be plotting course for the terrain ahead” … well summarized, Josh!

What’s Josh doing right/wrong? What can you recommend?

__________________

It seems we are coming to the end of our net worth exploration and have generated a fairly specific map of where we have been financially and will soon be plotting course for the terrain ahead.  My networthiq graph shows the progress made since February 2008.  Since then, I’ve put into practice what I learned on this blog and others. There isn’t much I would have done differently, I just wish I would have done everything a lot sooner.  Saving, investing and actively learning about investments are some key actions I would have preferred to start in Pre-K rather then my last semester in college.

I still need to work on basic money management. Better budgeting for items I need to buy in order to maximize the amount I’m able to save and invest. This also includes money management for my internet business. This topic is approaching in the curriculum I’m studying in order to become a member of the CFA which has taken up ALL of my available time to do anything other then study, so learning more on that subject should solve two problems at once.

Before moving ahead in this experiment, lets record our current position.

Current yearly net earning from full time job: $31,300

Expenses include:

• Cell phone:  $720 per year ($60 per month)
• Car insurance:  $1500 per year ($125 per month)
• Gasoline: $ 1440 per year ($30 per week at worst)
• Food + other: $3600 per year ($300 per month)
• Cleaning Expenses: $480 per year ($40 per month, this is my share of a house cleaning service)
• Charity: $4800 per year ($400 per month, this is 10% of my gross income)

Total Expenses = $12,540

Income – Expenses =  31,300 - 12,540 = $18,760 per year (this does not include my 401(k) savings plan, which is automatically subtracted from my bi-weekly check and acts more as a retirement safety net.)

My Net Worth as of March, 2009

• Cash: $1,000 (I like to keep this around, just in case there’s a good poker game…just kidding)
• Stocks: $5,000 (this was down to about $3,000 in February, but has now recovered to about $5,000)
• Retirement: $12,000 approximately in a SDRA.
• Cars: $8,600 (just replaced the Audi with a 2002, 330xi. The Audi was totaled in a car accident, had to put in about $1500 out of pocket after insurance gave me what they thought the car was worth + cash from selling the crashed Audi + help from family.)
• Personal Property: $1,000 (TV, computer….stuff)

Liabilities = $0

Assets – Liabilities = $27,600

Recording this information is in itself exciting and motivating.  I look forward to reading the suggestions, comments, and questions of those participating, following along or just stopping by.

The Right Vehicle

The vehicle selected for my journey to 9 million in seven years is to start and manage a business, this selection is appropriate for the compounded annual growth rate necessary to achieve 9 million in seven years. The business I plan to start is essantialy a money managing business also know as a hedge fund (In the past several decades the title “hedge fund”  has become more of a blanket title then an acurate description of how money is managed in most “hedge funds”, because usually very little “hedging” is actually happening).

The fund I plan to manage will initially use purely long/short equites for investing purposes, using an aggressive yet risk adverse strategy to atract institutional investor’s as well as high net worth individuals. Most of the revenue from the fund is generated from from  fee’s taken from the investors capital appreciation, this is generally 20%-25% and usually 1%-2% of the principal for administrative costs.  The fee structure of hedge funds is the main attraction for me to this business model because when comparing to mutual fund’s, the fees guarantee that profits to the firm will only be paid when capital appreciation takes place, thus aligning the managers and investors incentives perfectly.

Judging from the fee structure, anyone can see that the more money under management, the greater the profit potential is, although it is arguably harder to make 50% per year with 1 billion dollars then 1 million dollars, so the competition to earn the greatest return for investors becomes more difficult as more and more money pores into the fund.

The path to the initial starting capital for the fund will come almost entirely from the what I saved up and continue to earn and make from investments. As certain milestone amounts have been reached it will become feasable to start the fund. There is no dought in my mind that managing a hedge fund has the potential to increase my net worth past my number of 9 million.

mmm

Straight To The Point…

No pictures of jets, Jeff? Straight down to business? So, THAT’S how it’s gonna be is it … ?

In the post, Jeff is flaunting his violations of both Rules, what are we gonna do about it??!

Seriously, Jeff has a plan and a strategy and I would be interested in hearing comments from any of our readers, including the 7MITs, of course … but, also the ‘silent majority’.

C’mon, we all have homes, so we all have something to learn/offer here …

___________________________

As most you already know I’m closing in rapidly on “closing” on a new home.  Rather than answer Adrian’s questions by using my current home in Virginia as the frame of reference (it’s soon to be a rental business), I’m going to do a little guestimating and use my future home in Boston as the basis for my answers.

1. What is your home’s current value?

The appraiser hasn’t visited the home yet, so I’m going to use the low estimate from Zillow.com as my answer: $698,860

2. What is your current mortgage?

$502,650

3. What is your current monthly mortgage payment – both as $ and as a % of your ‘usual’ after-tax income?

$3600 / 37%

4. How does your current setup fit within the 20% Rule and the 25% Income Rule?

Vs. the 25% Income Rule: At 37% I’m clearly in violation of this recommendation.

Vs. the 20% Rule: With the new home in the mix, my Networth is now approximately $509,210.  The equity I have in the home is roughly 698K-502K = $196K.

196K/509K = 38% so I am violating the 20% equity/net worth rule as well.

5. What – if anything – do you plan to do about it, if you currently break either/both of these rules?

The main reason I’m in violation of the rules is that I’m making a speculative play for appreciation on this property based upon two factors.  The first being my belief that we are at or near a low point in the real estate market and the second being that I was able to purchase the property at an additional discount because it’s a foreclosure.

At this point I don’t plan to do anything to adjust my situation with regards to the 20% rule.  I’m stretching myself to get into this house and I’m not ready (nor able) to stretch some more by doing a cash-out refi to get under the 20% rule (a cash-out refi will raise the monthly mortgage payment).

I’m trying hard to fix things in relation to the 25% Income Rule.  That’s what my Making Money 201 strategies are all about.  Click baby click!

6. What are your plans for your first home (if you currently rent) or your next upgrade (if you currently own)?

Do I have to think about buying another home already?  I’m so burned out on Mortgage lenders and Realtors, I can’t stand it.

If I must…the next home that I plan to occupy will likely not be much of an upgrade relative to the one I’m purchasing.  Size-wise, this new home in Boston is more than four people need, so if I buy a follow-on home to occupy, it will be because my family moves again.

A move away from Boston will likely result in a sale of this new property.  I believe the mortgage payment is/will remain in excess of local rents for a few years.  I’m not interested in running a negative cash flow rental property unless there is a really good reason that I should maintain ownership of the property.  If that be the case, then I am mentally prepared to operate the property at a loss and consider the negative cash flow as an investment.

I’m projecting the sale of the Boston property could yield 150-400K in profits depending upon what the real estate market decides to do over the next three years.  My fingers are crossed, but I’m in positive territory either way.  I’ve often heard that in real estate, you make your profit when you buy.

With a sale, I would take the resultant profits and put some of it into a new home and some of it into down payments for several rental properties.  I’m planning to split the profits 50/50 between a new home and several investment properties.

7. What questions/issues/opportunities, if any, that you would like to explore further do the above questions bring up?

I find the 20% Rule and the 25% Income Rule interesting book ends to one’s approach to affording a home and how much equity to have in it as you manage money.  On one hand you shouldn’t have too much of your net worth tied up in the equity of your home (20% Rule) and on the other you shouldn’t be using too much of your after tax income to pay your mortgage (25% Income Rule).

I’m going to caveat my next comment with the fact that I’m speaking off the top of my head and have not run the numbers in detail.

To me these these two rules work against each other.  Strictly abiding by the 25% Income Rule limits your ability to adjust your situation relative to the 20% Rule, and religiously following the 20% Rule in some situations could force you to grossly violate the 25% Income Rule.

If faced with this dilemma, should you knowing violate one rule to satisfy the other?   If so, which one should you sacrifice first?  I think violating the 25% Income Rule could be the greater danger.  Where is the balance point?

Of course, this is coming from a guy who is knowingly violating both rules. 

Photo credit: loanswithrob.comt

Home Sweet Home

I have to admit that I admire those who jump in early … writing these posts is no exception: by posting first, Scott – and now Ryan – are taking a chance. But, taking chances is what life is all about: jump in and see if the water’s fine … find out for yourself, don’t wait for somebody else to tell you

I think there’s a flaw in Ryan’s reasoning around the 20% Rule – but, I’ll have to double-check his NetworthIQ profile to be sure – in the meantime, can anybody else see it?

_________________________________

I purchased my house in February 2007 for $685,000. It was just after everyone knew the bubble had popped, which is why we were able to purchase it for $65,000 less than it had previously been listed for (what we thought was a great deal!). Since then, it has dropped in value to around $630,000 (Yikes!), and we have paid off $20,000. This means we owe about $35,000 more than our house is worth.

My monthly “nut” for this house, including everything, is $4700 (hence the picture at the top of the post!). This is 34% of my net income, BUT, because my home is large enough to serve as my office as well (large dedicated space for storage of product, meetings, etc.), I do not have to lease another office. Therefore, my corporation pays me $1200/month for the use of that space, taking my gross house liability to $3500, or 25% of my net income.

As for the 20% rule, I would be right on with $101,000 net worth and $20,000 of mortgage paid off. BUT, the value has gone down, so technically the 20% rule says I should pay off $55,000 more, right? Though if that is the case, I would probably not follow the 20% rule due to my adherence to the 25% rule and not seeing any additional return on that investment (of course, my payment would go down, but it’s only at 5.25% and I can write off the interest). What do you guys think? What would you do?

As for our plans with this house, we will likely live here for another 8 years or so, until I retire with my number!

AJC and the 6 MITs?!

………. Snow White and the 6 Dwarfs?!

The 6 Deadly Sins?!

6 Days of the week?!

6MITs ??!!

It was never going to ‘fly’, was it?

After all, this blog IS called 7 Millionaires … In Training! And, look at all the artwork I’d have to change

So, it should come as no surprise, following Debbie’s seemingly sudden departure to work on our ‘secret’ book project, that there would be another announcement; and, here it is:

Jeff, our favorite naval aviator (that’s him about to tip over the edge in the photo because he was too busy thinking about his first post to remember to turn on his afterburners) has agreed to join our team.

Why Jeff? Well, have you seen anybody contribute to this site – other than our 7MITs themselves – more than Jeff? More importantly, this is the message that I want to send out to everybody and anybody: do the ‘hard yards’ and karma will see good things (eventually) come back to you … and, most of all … never, ever give up!

Welcome aboard, Jeff! Here is his first post …

_________________________

Now Launch the Alert-7 Millionaire in Training

The Alert-7 is a watch that Naval Aviators at sea stand when the carrier is in a threat environment that may require her to launch self-defense aircraft at a moment’s notice.  As the aircrew pulling this duty you are in full flight gear strapped into a fighter jet positioned either on or near the catapult.  Electrical power is on the jet to keep the weapons systems, RADAR and navigation equipment warmed up and ready to fly and fight.  The only things not operating are the motors and hydraulics.  As a single seat fighter-attack pilot, your only company is your thoughts of the unknown, a good book and the 18-year-old plane captain (PC) standing next to your steel horse on the flight deck hoping you take his jet flying.

It’s always a tense and exciting moment when the Tactical Action Officer calls for the launch of the Alert-7.

The loudspeakers explode…”Now launch the Alert-7 F-18, initial vector 030!”

All eyes are on your jet.  The race is on. You are expected to be off the flight deck before those seven minutes expire.  Your pride and the honor of your squadron mates are on the line.  You’ll be either a hero or a zero in a few moments.  No pressure.

You give a signal to the PC, flip a switch and breathe life into the two General Electric jet engines.  You initiate the flight control computer checks and the airplane takes over, telling you “Don’t worry boss, I’ll be ready to go, get your head in the game.”

With positive checks of the flight controls complete, two good motors and all systems GO, you signal to pull chocks.  The Taxi Directors quickly direct you onto the catapult, and ready the aircraft for launch.  With the engines at full power, one last check of the flight controls, you offer a smart salute to the Shooter.  A moment later all hell breaks loose.  Your jet is slammed hard and fired like a bullet out of a gun.  Straining against the launch force you can’t breathe, but you hold your head forward keeping it off the head rest, just because it’s one small element you can control during this chaos.

Three seconds later everything is quiet….you’re airborne, free and soaring.  A large smile spreads across your face, you are once again back in control, climbing and free from the boat.

[AJC: Reading the foregoing, pulse quickening prose reminds me of the punchline to an old joke: "Smell it? I'm sitting in it!!"]

The last several days have felt like this rush from zero to flying speed with minimal time for pre-flight preparation as AJC contacted me out of the wild blue yonder offering an opportunity to be launched as the Alert-7MIT.  I spent a great deal of time considering this commitment and what it would require of me.  I also realized that you should never pass up an opportunity for success.

Let’s see, a successful millionaire has just invited me to take part in his mentoring experiment…this one’s a no brainer…I’m in.

While I’m not in a flying job right now, this week has been filled with many of the same emotions of excitement, anticipation, rush, and the feeling of “Please God, don’t let me mess this up” that accompanies an alert launch.  I’m currently in Belgium on business, rapidly gathering my thoughts and my numbers so I can crank out this first post and step into the gap Debbie is leaving behind.

Debbie, I wish you much success and hope I do you proud.

Many of you may recognize me as that guy with the really big head, sunglasses and cheesy mustache who comments way too much.    I feel a bit behind the power curve and I hope each of you will be patient with me as I play catch up.  I’ve completed many of AJC’s exercises so I think I’ll be in the same piece of sky as the rest of you just not at the same altitude.

Before I summarize my 7MIT data, I’d like to tell you more about who I am.  I grew up in the mid-west (Kansas City to be exact) and graduated with a BS in Aerospace Engineering from the University of Kansas (Rock Chalk Jayhawk, Lee!);  I’m an Officer and Naval Aviator in the US Navy, have done three, six-month deployments and have over 2,000 hours in F-18 Hornet aircraft.  I’ve been married to the love of my life for the last 14 years and have two of the best children on the face of this Earth.

Enough fluff about me.  My 7MIT Data is what most of you are more interested in reviewing.

My life’s purpose stems from the fact that during my military career in the Navy I’ve learned to be a leader and truly love building and leading the teams of sailors and fighter pilots I’ve been honored to work with.

My life’s purpose is to lead and empower others and teach them to do the same.  Or more succinctly, I’m on this Earth to lead people and develop leaders.

My number is $10 Million in 10 Years and I’m calling the date Jan 01, 2019.

Initial calculations yielded a number of $10M and my Lee’s list results in a number that is in the ballpark ($11.4 Million), however, I have a military pension in my future of ~$50K/year adjusted for inflation that is going to help.  I figure that pension is roughly worth $1.0M in assets and what’s another $400K amongst friends.  So I have decided to call it an even $10M.

My current net worth is roughly $383,000 and has taken a pretty big hit since it’s high of $448K earlier this year.  Regardless of the decrease, my required compound growth rate (up 2% now to 38%) is still in between needing to use real estate and stocks or real estate, stocks and a small business to achieve my number.

Keeping the bar high, I’m going to pursue the stocks, real estate, and small business route.

My current financial situation is actually not too bad.  However, I am not satisfied with it (that’s why I’m here), but am proud of the hard work and discipline my wife and I have demonstrated to get where we are today.

My family’s annual income is in the ballpark of $105K and our yearly living expenses are approximately $45K with another $24K going to the mortgage.  The remaining $36K goes to cash savings (money market) and investments throughout the year.   We are currently maxing out two Roth IRAs, significantly contributing to a 401K (that’s not matched) and funding two college education 529 accounts.

For me, MM101 is complete.  I have no debt (aside from my home mortgage), I spend much less than I earn and have my basic savings and investment strategies on autopilot.  I think I’m firmly in MM201 territory.

My MM201 strategies currently surround real estate investment and online money making efforts.

In the short term I plan to buy a new home in Boston (associated with a new job in March) and rent out my current home in Virginia.  I also have several irons in the fire trying to dip my bucket into the river of cash that is flowing freely on the internet.  Through a combination of advertising on my own blog about money management and personal finance, pay per click advertising and affiliate marketing I’m sticking my toes in the water.

My medium term plans entail trying to generate at least $50K of income between real estate and online marketing within the next few years.  That amount in addition to a military pension will put me in a position to leave the service (if I choose to) and live without working so that I can pursue my long term objectives full time.

That should cover most of the basics for now.  I look forward to becoming an integral member of the 7MIT Team and achieving success with each of you.

AJC, consider this post my salute, I’m ready to launch as the Alert-7MIT.

-Jeff

“Please God don’t let me mess this up.”

Jeff: you’re now airborne, free and soaring … thanks for agreeing to join us for this 7 year journey! AJC.