Investment Playground.NET

We read about the world’s richest people and how many billions of dollars they have. Meanwhile - you and me are tracking our net worth statement and excited that we’re into the four-digit zone perhaps. So what are they doing so different than us? How do we become millionaires?

I’ll oversimplify the question - but the general answer is that it’s not all that hard. A quick 3 step guide you can apply right away and be on track to ultimate wealth.

1) Work hard. I’m serious. People who became billionaires got their by working hard and working smart. They exceeded expectations every step of the way. That means delivering results to your bosses and also to your subordinates. The more income you have - the more you get to do #3 below. Especially in your early years. When you’re young and fresh out of school - get a second job with your spare time (if you have any) that makes you an extra $100 a week or so. A better idea however is to spend that time on your current day job - making a career out of what you do and climbing your way up the corporate ladder. I’ve doubled my salary in four years by doing that. Bottom line - don’t cut corners - just work through them.

2) Spend less than you earn; save as much as possible. I know it sounds quite basic - but this is a key second step. No matter how hard you work - you have to be sure to live within your means and not overspend. There are thousands of people who work hard, earn six digits, but spend most of it on a regular basis. Home loans, car loans, student loans, boat loan - etc. It’s easy to justify a $40,000 expense, for example, when you do the math and realize its only $500 per month for five years. However, this is precisely the wrong formula to spending less. What is better is to purchase an asset with plenty of cash and finance for about $200 per month for only three years. The key to becoming wealthy involves investing regular amounts of money wisely - and you won’t get any capital to invest unless you save appropriately.

3) Invest wisely and consistently for long-term. Selecting good investments that earn double digit returns is fundamental to this plan. Invest wisely - allocate properly, reduce your risk profile when possible, and adjust when adjustments are needed. Investing consistently is also key. If you drop $5000 into a great stock today and just let your returns gain - you won’t gain nearly as much than if you were to drop $200 per month into other good stable investments. Automatic investing on a consistent and long-term basis make achieving wealth much easier than hoping for the next big win. Here’s the math for you: $5000 invested today and earning 10% per year (a conservative but realistic assumption) will have earned a total of $13,535 at the end of just ten years. A great investment with a great return. But an even better investment would be if $200 were deposited every month for ten years, earnings 10% per year. Total value: $41,000. In fact even a mere $75 per month would earn higher than your original $13,535.

The path to wealth creation is slow and long. But if you play your cards right, follow the three above rules on a daily basis, and be patient in your endeavors, wealth will be yours.

After my son was born three weeks ago - a thought occurred to me. Life is only now beginning. And I’m referring to the financial definition of “life”. Sure I’ve had tons of expenses up to today, but now is when money all of a sudden seems to disappear. I’ve had student loans, car loans, rent, and whatever else - but tack on college fund ($100 p month), diapers ($125 p month), doctor visits ($20 copay once p month), and once they get older - swim lessons (ridiculous amount per hour), tennis lessons (don’t get me started), and so on and so forth. So - all my hard earned money is only now getting thrown out the window.

Saving for investment takes the priority over any expense you can have. I made a decision within a few days after my son was born - a decision that was long overdue. I have to stop saving massive amounts, and start investing those funds. The reason is because returns grow exponentially over time. Every day you do not invest is a day you lose on huge compounded returns.

I bought stock into the T. Rowe Price Africa and Middle East Fund. It’s an emerging market fund, so risks are a little high, but nonetheless I’ve done my analysis and I’m comfortable with management and my money. I’m thrilled that I am finally securing some returns. My first real major investments were trading stocks. I’ve made several hundred dollars per year - but nothing crazy. Shortly thereafter, I bought an investment property. $182,000 with a value I estimated to be about $200k. And now, I’m continuing my stock investments and beginning my fund investments.

By making a few good stock picks, you may be raking in a few hundred dollars once in a while. Fast money, high stakes, great trades. We all know the game. But are you really building wealth? No - you’re not. A couple fast trades off of quick stock drops might buy you a few extra toys, but not wealth. I trade stocks because I enjoy it and because I love valuation analysis (label DORK here). I’m buying mutual funds to build wealth. Here are the numbers.

Saving a palsy $50 today will become $373 in twenty years by earning 10% (basically throwing it into an index fund and forgetting about it). And imagine with $5000… $37,254. That’s a one time expense for you and a 645% return (try that in stock-picking). Funds generally require about $2500 minimum. This may be a lot for some people, which is why I love T. Rowe Price’s Automatic Asset Builder plan. Minimum $50 per month, and you just keep growing your assets slow and steadily. I haven’t found anyone else that waives the $2500 minimum. But eventually you’ll get your $2500 and start to look at Vanguard, Fidelity, and American Funds. If you invest $100 per month into a fund earning 10%, you’ll have accrued $21k in ten years, only $12k of that is actually what you put in. And if you’re a bit younger and looking for higher risk higher reward (i.e. global stocks and emerging markets), a 20% return earns you $39k. $40,000 just for putting away $100 per month. At that point even if you stop putting money in and just let your returns build up more and more - you’ll have a million dollars by retirement. A million LIQUID dollars just for focusing on $100 per month for ten years in a good stable fund. Of course, all investments carry risk - but the longer your outlook - the better advantaged you are as your risk lessens.

Regardless of how much you have - start plowing it into some finely selected funds right away. If you’re a recent college grad - how much I want to just grab you by the shoulders and scream at you - DO THIS. It’s hard to think about the future when it’s more fun to think about today - but a little careful planning now could set you on the path to financial freedom tomorrow.

Let me tell you why I started this blog to begin with…

I am a scatterbrain. I’m a creative scatterbrain. I have the world’s greatest ideas and a ton of motivation. I started to invest in the market at the age of 11 (nothing to brag about because I lost everything an 11 year old had at the time). As a child and eventual teenager - I opened businesses and made part time money on the side. I loved eBay when it came out. But the problem is that my interest in eBay faded, as did the interest in my lemonade stands.

The only way to make your investments succeed is by following through on them. The only way that any plan in life will succeed is by perseverance and determination until one of two things happen - success or failure.

So I began to notice my areas for improvement. I find great stocks to invest in - and I don’t follow through on my research (leading to poor choices). I have many great entrepreneurial ideas. But usually one great thought is replaced by another great thought. Therefore - nothing surfaces. Nothing amounts to success. Then I discovered blogging.

Essentially - my blog serves three purposes. 1) As a list. I list and will continue to list my investment ideas. Keeping track of them in my head isn’t easy. 2) As an attack plan. I’ll monitor my progress by writing about it. 3) As a teaching tool. My enthusiasm isn’t some selfish act where all I want to do is make money. I do this because it’s fun. And I like teaching others as well - because it’s fun to me.

So as of today - this blog will take on a new approach. I will go back to the basics - and use this blog as a tool for my investments and entrepreneurial ventures. I know I’ll succeed if I follow a detailed and organized methodology of investing. The only thing I don’t necessarily know is when.

Join me on my path of solving scatterbrainness - and let’s make millions doing it. My name is Ali - and I’m an investor.

I’m always a believer that it takes capital to earn capital. All of my investments success are calculated using ROI (or return on investment). Meaning if I put $10,000 to use and it earns me $2000 per year, I have a 20% ROI. The key question that most people ask me is - “naveedsmind how do I get to $10,000 in the first place??”

Bottom line - saving money on a consistent basis is the first step to successful investing. Allocating a certain dollar value or percentage to your savings account is fundamental. We all have dreams of being real estate owners, brilliant stock pickers, building and buying businesses, having pricey vacations, living off of huge dividends — none of it happens without saving money to invest first. Most people work just so they can pay the bills. Maintenance of life takes a priority over frivolous saving - they tell me. “How am I supposed to save money when my car payment takes up anything extra?” or “naveedsmind you don’t have three kids and alimony charges - what do you know??”

All I know is that the longer you focus on maintaining your day-to-day lifestyle instead of saving – you’re not doing anything to better your lifestyle either.

Rule #1 – Instill in your head that I will save a flat amount of money out of each paycheck by any means necessary

Rule #2 – Start small but consistent. Ask yourself – if I were to start losing money – what’s the maximum I could “lose” before it kills me? Once you have that number – increase it by half. We’ll see if it really kills you in the long run (doubtful).

Rule #3 – Give up something in exchange to save money. Look at your monthly income/expenses – what can I go without. Let’s say you have three fancy dinners every month at about $35 each. Cut it down to two and immediately increase your saving by $35. Or cut down your bar nights by one in any given month and you probably will save almost $100.

Rule #4 – Save BEFORE paying your bills. I know this sounds ridiculous. But there’s a general understanding that if you pay everyone else before you pay yourself – there’ll be nothing leftover at the end. Somehow – every month – you run out of money and you have no idea how? Automating your saving is also a wise idea. Twice a month – on the same day that I get paid – a have a flat amount immediately transferred over to my savings account. This way I’m sure to pay myself first.

Rule #5 – Live like a pauper. People that know me likely think I’m flat broke. I seem to always “barely have enough money to pay bills”. It’s okay! They don’t realize that I’m building my egg in steady amounts before paying my bills – and because of that I am “broke”. Being broke while having a meaty savings account is a good thing.

Rule #6 – Be patient and consistent. $300 per month, or even $1200 per month may not buy you some monster investment. But you do this for just a year of your life – you’ve got $14k right there – or your $3600 if you’re at $300 per month. $3600 is not a bad starting investment. It’s enough for your high interest emergency fund – or its enough for one or two mutual funds of your pick.

Here’s some simple motivation for you. My first investment property was purchased with less than $7,000 in cash. Some discipline, patience, and commitment can go a long way.

I’m an investor. I target businesses and companies. I buy ownership of publicly traded companies, I invest into small businesses that I believe will succeed, or I buy undervalued assets and add value into them.

But that’s me.

You find our own streams of income. What this means is - find income streams outside of your regular day job. Your car payment of $400 per month - what can you do (think outside of the box) that can earn you $400 a month and offset that cost? You can respond with as simple as “I used to wait on tables. Two nights a month waiting tables earns me almost $400 per month. I can put up with two nights a month to get my car paid off.” There’s your added stream of income. You can use a high dividend or high interest paying account - say it gives you $50 per month - well that justifies your cell phone use.

Don’t let this website teach you every nook and cranny of how to target different income streams. Let naveedsmind and this website teach you how to think. Be creative. Here’s an example - I have a friend who’s an amateur photographer. He just does it for fun - always carrying around his camera. He says that he probably takes dozens of random photos per month. He prints several of them per month. And he says that he’s established himself enough where he actually sells about one piece of every month. He charges between $80 and $100 he says. 90% of them don’t sell, but one does. And there is his alternative income stream.

Find something you enjoy - and make money doing it.

Great! You’ve decided to start saving for an emergency fund. “But where do I put this money?”

You’re looking for a liquid account that earns a return higher than inflation. Your bank’s savings account probably offers one percent a year. Laugh at them and walk away. Look for a money market account that pays the highest rate you can find. Or simply a high interest savings account. Go to http://www.bankrate.com/ to find some of the best rates. I did the dirty work for you as below.

I have an account at http://www.igobanking.com/. A reliable division of Flushing Savings Bank. They’re paying 3.86%, which is definitely the highest I’ve seen, with no minimum deposit. The deposits and withdrawals are seemless and all done online. You’ll get credit to your account within two business days.

WTDirect is offering a great 3.91%. The only catch is that it’s a $10,000 minimum to earn such a great return. Their offer for below $10k sucks - it’s a half percent. But if you want a real nice insurance cushion - here you go. 3.91% will give you $400 after a year - not bad for no work.

Personally - for every dollar I save I like to put it towards earning $1.15. Savings accounts or money market accounts earning one or two percent just doesn’t cut it for me. As soon as I have any money - it’ll go to the best investment for me at that time. But - we still need to plan for life’s many unexpected curveballs. Always have a contingency plan.

This is the part I hate - when every money manager (or blog) tells me to always have an emergency fund of three to six months of your salary - just in case. Why should I save all that money aside when I can invest it? I feel your pain - I’d rather earn ten or twenty percent returns as well. But the truth is - you never know what kind of a curve ball you’ll get. The Consumer Federation of America states that the average family faces $2000 in unexpected bills every year. What about bigger things - you could lose your job tomorrow. Your company could get bought (consolidation is very common in a tough economy). Your furnace could blow tomorrow (it’s been a tough winter). Your car could start to make awful noises as you’re on the way to the bank. Let’s say you want to get married - let’s not let not having enough money stop that from happening. You need to have contingency plans set up every step of the way. That’s why every real investor has a certain portion allocated to cash or bonds. These are low risk and liquid avenues for the just-in-case scenario. Good investments are usually illiquid - this means that you can’t just pull your money out when you need it. If you found a great piece of income generating real estate - good for you - but your money is tied up for years to come.

To start up an emergency fund, start small. Set aside a small percentage of your paycheck and deposit it into a new account. Use automatic deposits into your savings account. $50 per week, $500 per month, whatever you can handle. You should look at your personal situation and say “If I needed some cash all of a sudden - what’s the best amount for me to have on hand?” A few thousand dollars is enough for some people. I wouldn’t suggest anything more than $8,000, and no less than $2,000. Start now and start small - don’t worry if it takes you a few months or longer to get there. If you’re married or have children, you might want a long-term goal of little more. Deposit any one-time extra income you get into the account - a small bonus, a birthday cash gift, your tax return, etc. Once it’s built up - it’s a cushion just in case something happens. Call it a so-you-can-rest-account. There’s not many better investments than those that give you a good night’s sleep.

For the record, I didn’t care too much for Rich Dad Poor Dad initially. It was too basic for me. But after some reflecting, I realized that the general population really needs this basic understanding. The average American essentially struggles to make ends meet - regardless of how much income they make. People with six figure salaries have more bills and debt that they can afford. So in hindsight, cheers to Robert Kiyosaki and the Rich Dad team for some basic and fundamental personal finance lessons.

My very quick summary of the book: invest your money and live by your returns. That’s basically it. We all have steady expenses every month. $300 for car payments, $500 credit card payments, $2000 on a mortgage, etc. What Rich Dad Poor Dad teaches is instead of letting all the monthly bills pile up faster than your income does, you should invest your money and earn a return higher than those expenses. For example - real estate (arguably the best long-term investment even today): if you make a solid purchase of an income generating property. So the property you purchase carries total monthly expenses including mortgage and tax of say $1500. And let’s say you rent it out for $2000, netting you $500 in monthly income. Great - there’s your justification for buying a nice car. So your actual expense doesn’t increase by purchasing this car if done so after purchasing an investment vehicle.

Clear enough for you? Now - just do it five times over to cover your total monthly expenses. It’s hard work - but a great long-term plan.