Rob Minton - Income for Life

What do you see?

Posted by Rob Minton
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In the county where I live, near the home of a person on my team, is a pretty visible symbol of this real estate downturn we're in.

It's a development that was to be three dozen or so residential lots, many of them desirable lakefront properties. Where homes were going to start in the $700,000 range and most likely surpass $1 million in some instances. "Villa Grande," it was to be called -- a gated community with lake views and access to a private beach club.

Today, it is little more than a sparse patch of land overgrown with weeds. Only two houses were ever built, builders' models, and only one was sold. The entire development is in foreclosure, and the developer went bankrupt. The once-glorious project is now a victim of the real estate bubble burst.

Here is what the development looks like today (click on the photo to see larger size):

     

The question is: When you look at these pictures, what do you see?

Many will answer that you see a deserted piece of once-prime real estate. Others might say it's a sad sight. But a few will look at this property and see opportunity.

Yes, things went awry for this project. Yes, it's in a bit of disrepair. But it's still lakefront property in an area where lakefront property is at a premium. It's going to take work and money, but somebody is going to purchase this property at a deep discount, and that somebody will be rewarded eventually. There are rumors, in fact, that the original owner of the land is attempting to buy it from the banks ... for less than what he sold it to the developer for a few years ago.

That is the kind of opportunity that is out there in this real estate market. It's opportunity for all of us, whether we're buying a nice single-family home or an entire gated community.

The question is do you see the opportunity when it's there?

Nine steps to financial independence

Posted by Rob Minton
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In the past, I have written about the book "Your Money or Your Life," by Joe Dominguez and Vicki Robin. The book is about how people trade their time -- their lives, piece by piece -- for money.

I highly recommend this book and cannot give it justice here. But I do want to share with you the nine steps for financial independence that were outlined in this book. If you are concerned about being dependent on a job, you need to read these nine steps.

Step One: Make Peace with the Past
Calculate how much you have earned in your life. Find out your total lifetime earnings — the sum of your gross income, from the first penny you ever earned to your most recent paycheck. What have you got to show for it? Find out your net worth by creating a personal balance sheet of assets and liabilities — everything you own and everything you owe.

Step Two: Being in the Present — Tracking Your Life Energy
How much are you trading your life for? Establish the actual costs in time and money required to maintain your job, and compute your real hourly wage. Keep track of every cent that comes into or goes out of your life.

Step Three: Where is it All Going? (The Monthly Tabulation)
Every month create a table of all income and expenses within categories generated by your own unique spending pattern. Balance your monthly income and outgo totals. Convert dollars spent in each category to hours of life energy, using your real hourly wage as computed in Step 2.

Step Four: Three Questions that Will Transform Your Life
Ask these questions on each expenditure category expressed in hours of life energy:

1. Did I receive fulfillment, satisfaction and value in proportion to life energy spent?
2. Is this expenditure of life energy in alignment with my values and life purpose?
3. How might this expenditure change if I didn’t have to work for a living?

Step Five: Make Life Energy Visible
Create a large wall chart plotting the total monthly income and total monthly expenses from your monthly tabulation. Put it where you will see it every day.

Step Six: Valuing Your Life Energy — Minimizing Spending
Learn and practice intelligent use of your life energy (money), which will result in lowering your expenses and increasing your savings. This will create greater fulfillment, integrity and alignment in your life.

Step Seven: Valuing Your Life Energy — Maximizing Income
Respect the life energy you are putting into your job. Money is simply something you trade your life energy for. Trade it with purpose and integrity for increased earnings.

Step Eight: Capital and The Crossover Point
Each month, determine what your monthly net passive income is from your investments. Post the monthly independence income as a separate line on your Wall Chart.

Step Nine: Managing Your Finances
The final step to financial independence: Become knowledgeable and sophisticated about long-term income-producing investments. Invest your capital in such a way as to provide an absolute safe income, sufficient to meet your basic needs for the rest of your life.

Feel-good story of the week

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As I write this, I am looking at the Dow "ticker" on a financial web site. It's down 183 points right now, mostly because of news this morning that the unemployment rate in the U.S. rose to 9.5 percent in June, after a month of higher-than-expected unemployment claims.

To balance this downer, I am going to share with you a recession story that is more uplifting.

Where I live, in Northeast Ohio, one of the few bright spots in our economy is our vast and renowned health care system. The world-famous Cleveland Clinic is the City of Cleveland's largest employer. Last December, it announced a wage freeze and restricted hiring. The president and CEO even asked employees to do what they could to save the Clinic money, as that, in turn, would save jobs.

According to a Cleveland.com article this morning, the belt-tightening worked. The Clinic announced that beginning in August, it would start issuing pay raises to its employees. The move will amount to $60 million in salary increases, and it comes after a concerted effort by the company's employees to cut costs.

From the article:

Physicians began booking more appointments during the day, giving up research and office time. Catered lunches turned into brown-bag gatherings. Overtime was cut, positions went unfilled and vendor contracts were renegotiated, a Clinic spokeswoman said.

On Wednesday, [Clinic CEO Toby] Cosgrove said it was "a pleasure to recognize those efforts."

"I am incredibly proud of each employee and physician who committed themselves personally, to doing what was necessary to reduce expenses so we could preserve jobs and provide great care to patients," he said in an e-mailed statement.

The company also restricted travel and delayed expansion projects on two buildings. In an era of recent corporate excess, this is a true company success story.

Not long ago, we had to read about private jet trips that CEOs of bailed-out automakers made, and about the huge bonuses Wall Street heads accepted while their companies either went under or were propped up by our tax dollars. So, to me, this news of a concerted effort by this region's largest employer to cut costs TOGETHER, from the top to the bottom, is truly inspiring.

Everybody made an effort -- brown-bagging lunches, working harder during business hours without overtime -- and the company flourished. Revenues went up even as costs went down, and now Cleveland's struggling economy should benefit as the largest employer's personnel all receive a little more money in their pockets.

Who says a business can't prosper in this economy?

Self-financing Investments

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On numberous occasions, I have written about John Jacob Astor, one of the greatest investors in history. His investments became “self-financing.” Income from leases went into acquiring more property.

Lately, as people are having to rebuild their finances, I have thought a great deal about self-financing investments. What does self-financing really mean with regard to investing? Here are two ways to think about self-financing investments:

• Investments that pay for themselves from income generated by the investment

• Investments that provide enough income to buy additional investments

The key to self-financing investments seems to be investments that provide recurring income.
What investment choices do we have that are truly self-financing? Let’s take a look at a few of the most popular investments people make to see if they are self-financing:

STOCKS:  For the most part, stocks are not self-financing because they do not regularly pay income to the investor. Only stocks that regularly pay dividends would fit our description as self-financing. And to pay for themselves, they'd have to pay large dividends or be held for a long period of time or both.

MUTUAL FUNDS: In most cases, these investments are not self-financing. They do not regularly pay income to their shareholders. Yes, some do, but most don’t.

BONDS/CDs/MONEY MARKET ACCOUNTS: The majority of bonds pay interest income to the investor. These bonds would be self-financing. The challenge with these investments is that they usually don’t pay a very high rate of return, and some don't pay interest until maturity.

LENDING MONEY: Loaning money to others would be self-financing if your borrower paid interest each month. The interest income you received could be used to loan additional funds to other borrowers. Lending money is risky if you don’t acquire some form of protection, such as a lien, on their property. However, with this higher risk, you’ll find higher rates of return. The other downside to lending money is the lack of investment appreciation. Throughout the loan payment period, your profits are tapped out at the interest rate charged.

REAL ESTATE (HELD FOR RENT): Now, I’m obviously biased on this investment choice. But real estate is one of the best self-financing investments you can make. This is because it pays for itself and, in many cases, it provides additional income that can be used to purchase additional investments. While this is happening, the investor also profits from price appreciation.

MOBILE HOMES: Buying and re-selling mobile homes with owner financing is another excellent self- financing investment. This, in my humble opinion, is even better than loaning money to others because you get to profit from appreciation. In many cases, you can sell the mobile home for double what you pay for it. You then get to collect attractive interest rates on this higher sale price.

YOUR OWN BUSINESS: A business you own can also be a very good self-financing investment. I’m obviously assuming that your business is generating monthly income. For most people, they launch “side” businesses in their spare time. These side businesses usually pay for themselves and then provide extra income for the owner. Many of these businesses provide regular, routine services. Examples might be house cleaning services, painting services, handyman services, consulting services and more.

If your business was launched from your home, you don’t usually incur significant start-up costs. Most of the income from the business can be used to invest into additional self-financing investments.

Another potential benefit of starting your own business is that you might be able to sell your business at some point down the road. This means you should be able to profit from the appreciation in the value of the business.

Why is this idea of self-financing so important for investors? It is important because self-financing investments help you build wealth faster. In the non self-financing investments summarized in this article, you need to use your own money to acquire more of the investment. With a self-financing investment, you can use income from the investment to acquire  additional investments.

Now, if you continue to use your own money to buy more self-financing investments, like you would a mutual fund, your wealth snowballs. Self-financing investments are like coupons — you buy one and get the second one free.

I guess the question we should all consider before making ANY investment is:

Is this investment self-financing or will this investment have the ability to pay for itself?

If we don’t, we just might find ourselves saving for years without any significant wealth accumulation.

A recent Kiplinger article summarized how much money an individual would have to save with an 8-percent return in order to have a million dollars at age 65. A 25-year-old would have to save $286 a month for 40 years. A 35-year-old would have to save $671 a month for 30 years. A 45-year-old would have to save $1,698 a month for 20 years. A 55-year-old would have to save $5,466 a year for 10 years.

Or you could simply buy a few single-family homes and have your tenants pay for your retirement. This basically comes down working smarter, not harder.

Time is on our side?

Posted by Rob Minton
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I stumbled across an article on the Web this morning about retirement plans and this recession. The article's headline was "Time is on Your Side."

The gist of the article was that investors who have retirement in their sights but have been derailed by their retirement plans' losses shouldn't worry -- "adding just one or two more years on the job can put them on pace for retirement," the article says.

"Just" one or two more years working for somebody else. Like it's a good thing.

I have always said that time is our most valuable asset. Money can be replaced; time can't. This article really puts into perspective the real loss the financial crisis has caused. According to the article, a 60-year-old who makes $100,000 per year at his job and was going to retire at 65, now must work until he's almost 68.

The article makes it sound like it's no big deal. But this sort of news would be devastating to me. I think that it's terrible for someone who WAS just five years away from being able to relax and enjoy his family, maybe spend time with his grandkids or travel, gets told "Boom, you gotta work for almost three more years now."

It's a perfect example of why we all need to work toward financial freedom. At whatever age. It's never too early to start, and it's never too late. I know I hated being dependent on a job in my late 20s. To be dependent on a job at 68 would be unfathomable to me.

The thing is, this sort of article should really hit home with people ... but it won't. As sad as it is that so many folks nearing retirement age are going to remain dependent on a pay check for longer than they wanted to be, it probably won't be the financial lesson it should be.

People see retirement as a long way off, and they keep procrastinating when it comes to their financial freedom. But the truth is that the longer they wait to take their financial freedom into their own hands, the further they put themselves away from retirement. The article's headline is wrong.

Time is precious, yes, but it is NOT on your side.

Stay focused on your wealth-building plans

Posted by Rob Minton
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After an interview I once did with Stan Richelson, he said something to me that I’ll never forget. He said:

“You can have anything you want in life. You just can’t have everything.”

What does this mean to you? For me, it means that we have a big choice to make with our lives. Do we want toys or financial independence? Do we want stuff, or monthly income? Because you can’t have both. You can only have one. Which one do you want? Most people try to have both and struggle year after year.

I happen to think that was a big part of what caused this recession's severity. So many people used their primary residences to fund big lifestyles -- using home equity to purchase cars and boats and go on fancy vacations.

If you choose financial independence, you must create a wealth plan and follow it relentlessly. You must stay completely focused on your plan. You must eliminate distractions. Distractions to your wealth plan include:

Speculative Investment Opportunities (examples include hot stock tips, commodities deals and more)

Expensive Stuff  (examples include new cars, ultra-expensive vacations, boats, clothes, etc. Things that go down in value after your purchase.)

The more I observe people, the more I realize that they live without a wealth plan. Or, if they do have a plan for wealth, they get easily distracted from their plan. In Income for Life, some members buy their first investment property and have great success, but then lose focus. They move on to other things. This is a BIG mistake.

Consider this quote from Tony Robbins:

“One reason so few of us achieve what we truly want is that we never direct our focus; we never concentrate our power. Most people dabble their way through life, never deciding to master anything in particular.”

Are you focused on your wealth-building plan? Have you been distracted? A lot of investors have because of this tough economy. If so, now just might be the time to focus again.

What have you done this month to work your plan? What are you going to do next month to work your wealth-building plan?

The Income for Life Wealth-Building Plan has three stages. Here they are:

Accumulate Assets
Pay Off Assets
Enjoy Income for Life (Financial Independence)

Many Income for Life members are in Stage No. 1, the asset accumulation phase. A few are in Stage No.  2. The faster you move through Stage No. 1, the faster you’ll get to Financial Independence (Stage No. 3). Remember, money does follow speed.

One of the keys to moving quickly through the first stage is focus. If you lose focus on your goal, you will not make any forward progress. For example, if you start chasing hot stock tips for the next three or four months, you’ll end up way behind in your IFL wealth-building plan.

You must focus upon your goal each and every day. It must be your dominant thought. A great question to ask yourself is: “What can I do today to move closer to my Income for Life goal?”

I’ll be willing to bet that your life will change dramatically if you start asking yourself this question, each and every day.

Do you have a investing manifesto?

Posted by Rob Minton
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In June's issue of Kiplinger's Personal Finance, one of the leading money magazines in the country, Editor-in-Chief Knight Kiplinger wrote a piece titled "An Investor's Manifesto." It is a 20-item list of guidelines for his personal investing.

I don't want to reprint the entire piece, but you can see it in whole form here.

Dictionary.com defines "manifesto" as:

"a public declaration of intentions, opinions, objectives, or motives, as one issued by a government, sovereign, or organization."

So Kiplinger's manifesto is a public declaration of opinions, objectives and motives for his investing. Do you have an investor's manifesto? After I read this piece, I thought that every investor should probably have a documented list of personal objectives, principles and guidelines that he or she follows.

Some of the highlights from Kiplinger's 20-item manifesto:

I know that higher returns entail higher risk, in every kind of asset.

I accept those risks, but I mitigate them by owning a diversity of assets.

I stick with my game plan. I do not check the value of my investments every day or even every week.

I try to keep my cool when other folks are losing theirs.

But maybe his No. 1 rule, which he does put at the top of his list:

I am an investor. I do not trade my assets frequently. That's speculation, not investing.

I think this is one of the most important things we, as investors, need to remember. Jumping into and out of the next "hot" thing IS speculation. We need to remind ourselves some times that investing is a process, not an event. It's long-term. This requires discipline, so having a written reminder is a good tool.

And Kiplinger lists "I am an investor" at the top of his guiding principles, but No. 20, the final one, is "I remind myself often: I am an investor." For him, it begins and ends with that simple principle.

His other rules have probably kept Kiplinger in decent financial health during this financial crisis we are in. He tries to keep his cool when other folks are losing theirs. He sticks with his game plan. He views his home as a place to live, not a replacement for a retirement savings plan.

Pretty smart rules to invest by. What are yours?

 

Don't make permanent decisions from temporary situations

Posted by Rob Minton
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In an Income for Life Newsletter, I once shared a story of a man who committed suicide because his wife filed for divorce. This man was a multi-millionaire. There were many lessons from this sad story. One of the most important lessons is that we should never make permanent decisions from temporary situations.

In my opinion, divorce is temporary. I should know, my father has been divorced three times.

This rule does not just pertain to marriage. It pertains to everything in life. We all have temporary setbacks. The problem occurs when we make permanent decisions in the midst of temporary problems.

You may have a temporary situation at work that is causing you stress and anxiety. Temporary situations like this have led thousands of people to quit their jobs. They go in search of a new job that sounds better than the old stressful one. However, as is the case with most things in life, they quickly find out that the new job isn’t all what it was cracked up to be. Now they regret leaving their first job. Regret is a painful feeling. Regret usually occurs when we make permanent decisions from temporary situations.

Here is another example: I could evict a tenant from one of my homes and end up with thousands of dollars in repairs (I just did). For many investors, this temporary situation may cause them to make a permanent decision — not to invest in any more homes. They could say: “I’m done investing in real estate.” This is another example of making a permanent decision because of a temporary situation.

Back in 2000, I lost over $50,000 investing in the stock market. I got so fed up with my losses that I swore off the stock market for good. This was a mistake. I now invest into the stock market through my company’s 401k plan. You can probably see that it only took me 7 years to learn the rule I am sharing with you today.

The problem we all face is that temporary “bad” situations distort our thinking. We tend to make incorrect decisions based upon this distorted thinking.

Is there an alternative?

Of course. The alternative is to simply ask yourself, is this situation temporary or permanent? If the situation is temporary, you should avoid making permanent decisions. Temporary decisions for temporary problems are okay. Permanent decisions are not.

When I used to be an accountant, my job required that I travel a great deal. For many clients, I was forced to drive two to three hours a day without pay. I would literally have to leave home at 6:30 a.m. in order to get to a client’s offices by 8 a.m. I did get reimbursed for gasoline and car-related expenses. However, I wasn’t paid for my driving time. This meant that I had to pay three hours of my time just for the opportunity to work for the day.  

Unfortunately, these situations are normal in public accounting. They occur each and every year. This simply meant that the situation was permanent. I, therefore, made a permanent decision to leave the accounting world. This decision was correct because it was made based upon a permanent situation.

My decision to exit the stock market for seven years was incorrect because it was based upon a temporary situation. It would have been a thousand times better for me to learn why I lost $50,000. It was my fault. I had all of my money on Internet stocks. I let greed control my thinking. However, at the time, I couldn’t see the problem as temporary. I also couldn’t see that I created the situation and that I was responsible for the loss.

Here is my suggestion for you: Before making any major decision in your life, think about your life goals. How does this situation or the decision you’re contemplating relate to your life’s goals? Keep your eyes on the big picture. Permanent decisions should only be made based upon your life’s major goals. 

Strange days, indeed

Posted by Rob Minton
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This recession has certainly had it's share of head-scratchers. We've seen strange things happen in this economy that we haven't seen before. Especially with banks.

Everybody seems to put the blame on the banks. With their "creative" financing of real estate, the risky subprime loans that have created such a mess, it's easy to see why banks take the heat. On top of that, they seem backwards in their thinking, "modifying" mortgages to help those who stop paying but turning down refinances and yanking home equity lines of credit from those who DO pay.

And, you hear stories of banks accepting ridiculously low offers on short sales or foreclosed homes they have taken and listed for sale. At the same time, they're getting TARP money to cover their losses on their bad assets. Do you get the feeling that banks really don't know what they're doing, like they're in over their heads?

Consider the following excerpt from a story in the metropolitan newspaper in my town, Cleveland, Ohio. It's about an attorney, Marc Strauss, who bought a country club that had been foreclosed upon:

"Strauss, managing partner of Tanglewood National Golf Club LLC, had twice tried to buy the property, roughly 130 acres that includes the course, a country club and a pro shop. The longtime country club was foreclosed in 2007. The property, owned by Huntington National Bank, has been operating as a public golf course under the management of a court-appointed receiver.

In June 2008, Strauss offered $2 million for the property, in a deal that later fell apart as the nation's banking system crumbled. In March, he offered Huntington $1.2 million, which the bank rejected. During a public auction Saturday, Strauss won the bidding with an offer of $950,000 -- less than half of the course's appraised value, according to Geauga County property records."

Click here for the entire article.

Yes, a guy who tried to buy this club for $2 million a year ago got it for $950,000 last week. If you're the bank, don't you do whatever it takes to get that deal through at appraised value last summer? Don't you accept the $1.2 million the guy offered in March? No and no, the bank said, and wound up with less money. Great business practices. And these are the guys we're bailing out.

Of course, this is a great deal for the buyer. For waiting about a year, he got a property for less than half what he was willing to pay. I say good for him.

Don't believe there aren't other stories like this one out there -- there certainly are. This one happens to be well-publicized, but banks are doing things like this. There are deals to be had once properties go into foreclosure. Could you wind up finding a great property for pennies on the dollar?

Stranger things have happened.

Focus on Investments You Control

Posted by Rob Minton
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Control is a very, very important part of wealth-building. There are lessons all over right now about what happens when you don't control your investments. The Bernie Madoff ponzi scheme and the failing of some 529 college savings plans are a couple of recent examples of what can happen when you give up control.

Let’s start out with my definition of control:

Investing Control: The ability to influence or impact the future value and net income of the investment.

Investing control is important for almost any type of investment.

For the stock market, this means controlling a majority of a company’s shares. Now, this is extremely difficult for average people, like you and me. This is why we should invest a smaller portion of our money into the stock market.

However, you could invest and obtain control of smaller, non-public companies. By having control, you can directly impact the growth, income and expenses of your investment.

For real estate, the best investors want active control over their properties. Active control can be obtained in partnerships and individual investments alike. Most people would rather be passive real estate investors. The tiny few who grow wealthy prefer to be active investors.

The majority of families focus their investments into assets they do not control. This is why they struggle to accumulate “real” wealth. This is also why many people will not have enough money accumulated when they retire.

In fact, it boggles my mind that most people prefer not to be in control of their investments. They would much rather have an mutual fund planner, stockbroker or someone else control their money. “Done for you” wealth is not available. You are going to have to do much of it yourself. You do it by controlling assets.

It is perfectly fine to invest a small portion of your money into investments you do not control. But I would be very careful investing large sums of your money into uncontrollable investments. I have investments into assets that I do not control. However, these investments represent a small portion of my net worth. I have control over the assets in which the majority of my money is invested.
These same assets also represent the largest portion of my net worth.

If you study wealthy people, you’ll quickly see that they do the exact opposite of everyone else. They desire, fight for and cherish control. Everyone else desires, cherishes and pays big money to have no control. Notice the difference.
I remember reading a biography on Kirk Kerkorian, a billionaire. In every single investment Kerkorian made, he fought for control. When he didn’t have control over an investment, he quickly divested himself of the investment. Same goes for Wayne Huzienga, who built three separate billion-dollar companies (Waste Management, Blockbuster and Republic Industries).

I believe most people prefer passive investments because they are easier. Passive investments allow the investor to invest without having to take any responsibility. Passive investments do not require the investor to be decisive. Passive investments do not require the investor get his hands dirty.

Control requires that you take responsibility for your investments. Control requires you to be active. Control requires that you pay attention. Control requires that you be decisive. Control requires you to roll up your sleeves and get dirty every once in awhile. Some believe control is risky. I believe lack of control is risky.

Once you have control of your investment, you should work hard to increase its value. You increase value by increasing its income.

One of the most valuable wealth-building skills you can have in life is the ability to increase the net income of your investments. With this skill, you can literally write your own ticket.

For example, Kerkorian purchased enough stock to control MGM Studios in the late 1960s. By the early 1970s, he had built the MGM Grand hotel in Las Vegas. This hotel and casino dramatically impacted the value of MGM’s stock. Guess what happened to Kirk’s wealth? Within three years, his wealth was in excess of $100 million.

This is how powerful control can be. Could Kerkorian have created $100 million if he wasn’t in control? No.

You must strive for control over your investments. Control is critical for true wealth. Don’t be lazy. Don’t copy the masses and happily turn over control to your hard earned money.