I really wish people on the covers of finance books would stop pointing at me.

Nevertheless, 4 Steps to Financial Freedom by Sean Toh is a good ebook. It sells for $18.90, but you can get it for free from Saiful’s blog. (Click that link, then click the picture of the ebook at the bottom of the post).

And this ebook really should have been free from the start. It’s good, but it’s not the kind of thing that you’d want to pay $18.90 for considering what’s already available on the internet for free.

Here are Sean’s 4 steps:

1. Get Healthy And Strive For Great Health

2. Adopt An Open Mindset To Learn

3. Invest Your Time In Financial And Health Education

4. Enjoy The Wealth That You Have Created

What I enjoyed most was Sean’s personal story of how he rose from humble beginnings to financial freedom. I love stuff like that.

One warning, though. This ebook is pretty long at 158 pages, and completely unfocused. It jumps all over the place, from bodybuilding to nutrition to mental health to putting together a financial plan to changing your mindset to the different types of income to how to trade stocks online in Singapore, etc. He has a lot of good stuff here, but I would have split it up into several more tightly focused ebooks.

I guess Sean’s breadth of knowledge comes from all the different experiences he’s had. For example, his jobs have included being a waiter, dishwasher, painter, construction worker, promoter, salesman, technician, flight attendant, lighting designer, engineer, personal trainer, educator, competitive bodybuilder, and model. Different experiences make life interesting, and I guess they also make for interesting ebooks, if you can handle the twists and turns.

Erica Douglass has written a nice post about the current U.S. real estate market, When Should You Buy Real Estate — And When Is It Better to Rent? It should be especially interesting to anyone who’s thinking about buying a house now, or anyone who’s concerned about housing prices.

She looks at two metrics (house prices as a multiple of median income, and house prices as a multiple of monthly rent), and concludes that houses are still overpriced in her city (San Jose). She also predicts that the housing market will reach the bottom in late 2010 to 2013.

I always pay attention when someone analyzes house prices with numbers instead of feelings. But one thing to keep in mind is that every situation is different, so be sure to plug in your own numbers. Whenever I see someone say that now isn’t a good time to buy, renting is better than buying right now, buying is always a bad deal, etc., I plug in my own numbers and confirm that I would have been crazy to rent instead of buying. I realize that for some people in some markets it’s better to rent, but that’s never been true for me.

By the way, why does it matter if it’s a good time to buy? Most likely, you’d be selling one house in order to buy another. If it’s a good time to buy, it’s a bad time to sell, and vice versa. You win one, you lose one.

The main exceptions are if you’re entering or exiting the market. If you’re buying your first house, you definitely want a buying opportunity. If you’re selling your house and renting, you definitely want a selling opportunity. Other exceptions are if you’re trading way up or way down, or if you’re buying and selling in completely different markets. But other than that, do you really care about house prices?

Are ebooks worth the money?

About three months ago I recommended an ebook called Learn More, Study Less by Scott Young, priced at $39.95.

A lot of people complained about the price, but this is by no means the most expensive ebook out there. One that comes to mind is Desperate Buyers Only (which I haven’t read) by Alexis Dawes, priced at $77. And there are yet more expensive ebooks out there, some well over $100.

But this is the internet age. With so much free stuff out there, can an ebook ever be worth the money? Absolutely!

What Is Money Really Worth?

First, I think we need to look at some conflicting beliefs people have about money.

Whenever someone writes a post about how money isn’t that important, almost everyone jumps on board and says “Yeah! That’s right! All that matters is [choose from family, health, happiness, etc].” But when it comes time for them to buy something, they do a complete 180 and attach far too much importance to their money, being unwilling to part with just a few dollars for something that can be worth much more.

It’s not a good idea to waste money, but it’s also not a good idea to hoard it. Money is meant to be spent on things that improve your life. What kind of a world do we live in where people will drop $20 for a pair of tickets to Sex and the City, yet balk at the cost of a $20 ebook?

Many people who read blogs think they’re getting such a good deal…all this information for free. But nothing is free. What is your time worth? $5 an hour? $50 an hour? How many thousands of dollars do you spend each year by using your time to read “free” information?

The Value of an Ebook

The reason ebooks cost money while blog posts are free is simply because ebooks are much better. Not every ebook is going to be for you, but if a particular ebook is what you need, it should have a lot of useful, insightful, original information, perfectly targeted for its niche, impeccably presented, and instantly delivered. Not to mention that it’s probably from someone you know.

No spending countless hours combing the web for free information that may or may not be out there somewhere. No getting in your car and burning gas to get to the bookstore, only to pick up something that will clutter your home for the rest of your life. No buying a book from an author you know nothing about, only to find out you don’t like their style.

Of course, not every ebook delivers. I just read an ebook that normally costs $19, but I got it for free. It’s fine as a free ebook, but it’s sure not worth $19. That’s why it’s important to know the author or get a referral from someone you know. You can do this by reading blogs (yes, even though our time is precious, there are lots of blogs worth reading).

So why do I think that one ebook is overpriced at $19, while I think “Learn More, Study Less” is worth $39.95? Simply because ebooks are not a commodity. The difference in prices is miniscule compared to the difference in value. While double the price of the $19 ebook, the $39.95 ebook has a free preview, a money-back guarantee, and a 50% affiliate program (so the ebook is free if you refer two people). It’s also by an author who has acquired thousands of readers with his unique ideas. It’s also well presented and beautifully laid out and illustrated. And now having read it, I can say that the information it contains just doesn’t exist anywhere else, as far as I know.

What about p-books? (By p-books, I mean “paper books.” As e-books become more popular, it becomes more important to make a distinction.) Why are p-books often cheaper than e-books? It’s because the p-book publishers know they’ll sell millions of copies, so they can afford to sell them dirt cheap and still make millions of dollars. Bloggers don’t have nearly as large a market, so they’d be crazy to sell their ebooks for pennies above cost like the big book publishers do.

Support Your Favorite Bloggers

In fact, many people severely overestimate the income of bloggers. Did you know that only 1 blog in 1,000 makes $20 a month? Even Scott Young, author of “Learn More, Study Less,” who is in the Technorati top 4,000 blogs out of 2 million, only expects his blog to earn roughly $15,000 – $25,000 in 2008. An impressive accomplishment for sure, but hardly a princely sum.

A lot of bloggers have a donate button where you can send them a little money to support their efforts, which is perfectly reasonable, seeing as how their earnings almost always work out to be less than minimum wage. I like to support my favorite bloggers, but instead of just making a donation, I prefer to buy their e-books (or p-books if they have them). That way, it’s mutually beneficial.

Yesterday I bought Randy’s Pausch’s p-book The Last Lecture and Darren Rowse’s p-book ProBlogger: Secrets for Blogging Your Way to a Six-Figure Income. Do they need the money? No, not really. Darren supposedly makes over $20,000 a month just from his two blogs, plus he has his book proceeds and his income as VP of Blogger Training for b5media. Randy’s a smart guy and I’m sure he has enough life insurance, plus Hyperion paid $6.7 million for the right to publish his book (I don’t know what Randy’s cut was). They don’t need the money, but I like supporting them because of the work they’ve done. Besides, my blog is mentioned in The Last Lecture, page 184!

I think that buying an ebook can very well be a good investment. You have to do your homework and buy wisely, but an ebook can give you instant access to the latest information that may not exist anywhere else, presented in a style that resonates with you (or you wouldn’t read their blog), in a format that doesn’t take up space, while letting you support a deserving blogger. Isn’t that worth a few dollars?

I’m going to have to switch my bracelet to do this, but I have to complain about taxes, as I do every year. What’s up with these income tax rebates?

The last time we got rebates to stimulate the economy, the IRS spent a lot of money to send the checks out. I’m not talking about the value of the checks; I’m talking about the cost of mailing the envelopes. I forget exactly how much it cost, but it was at least $100 million.

Not a lot of money for a big country, you say? With a $9.5 trillion debt, I don’t think we can afford to throw away pennies. Besides, isn’t there some program that could use the money for better things than paper, ink, stamps, envelopes, stamp lickers, and envelope sealers?

I don’t remember how they handled the rebates last time, but here’s what they’re doing now. First, they sent out letters to everyone, telling them they might get a rebate. Next, they’re going to send out letters to the people that qualify, telling them that their check is coming. Then they’re going to actually send the checks. How much is this going to cost? Why not just reduce the tax rates and not send any letters?

And another thing, the government wants us to spend the rebates. How is that supposed to stimulate the economy? I don’t see how we can spend our way into this mess, and also spend our way out of it. But it is what it is. I don’t work for the IRS, I just have to deal with them. So I’m off my soapbox…until next April.

Note: I’m away on vacation right now. I’ll respond to comments when I return.

Steve at brip blap tipped me off to Revolution Money Exchange. This is Steve Case’s attempt to weaken the PayPal monopoly by doing the same thing with lower fees. I don’t know if it will take off, but if you sign up by April 15th you get a $25 sign up bonus. That was enough for me to give it a go.

You get $10 for referring other people by April 15th, but unfortunately the referral link contains your email address. Since I didn’t want to put my email address out there for spiders to harvest, these links aren’t affiliate links. Of course, if you want to add my email address to the end of the link before signing up, that would be nice! (Update: encoded the link with tinyurl.)

I did a quick search to see what people were saying about Revolution Money Exchange, and they seem to like the idea in general. The biggest complaint is that they require your SSN, but what bank doesn’t? Some people also said they wouldn’t feel as well protected as they do with PayPal. I’m sure each service will have its fans and critics, but I’ll just collect my $25 while I wait for them to duke it out.

Check out my guest post When Good People Give Bad Financial Advice on Early Retirement Extreme. It’s about a situation where I received advice from someone who meant well but didn’t know what they were talking about. While written specifically about finance, it could just as easily be applied to any other type of advice.

Early Retirement Extreme is a very interesting personal finance blog where Jacob shares his story of achieving financial independence in five years. He did this not by making tons of money, but by focusing on values and efficiency. While many of his tips are too extreme for me (and believe me, they’re extreme), I’ve benefited from observing Jacob’s unique perspective on wants and needs, and seeing what’s possible for someone who is truly committed.

Early Retirement Extreme placed 7th on my list of The 10 Most Readable Blogs (That I Like).

Photo by action datsun

“Where have all the dollars gone?
Long time passing
Where have all the dollars gone?
Long time ago
Where have all the dollars gone?
Gone to Starbucks, every one
When will I ever learn?
When will I ever learn?”

- Pete Seeger, “Where Have All The Flowers Gone?” (paraphrased)

To balance your household budget, you have to be able to accurately track your expenses. So you might make a spreadsheet listing your taxes, 401(k) and IRA contributions, mortgage, insurance, food, utilities, etc., and add them up to find your total expenses. When you see that your expenses are less than your income, you breathe a sigh of relief. You’re in the black! Or are you?

There’s an invisible force wreaking havoc on many household budgets, turning black ink to red ink and vanishing with hardly a trace. They call it The Latte Factor. David Bach, author of The Automatic Millionaire, coined this term to refer to our many small expenses that add up to large amounts over time. A coffee here, a magazine there, and before you know it, you’ve spent a staggering amount of money without realizing it.

When I finished school and landed my first job, I whipped up a spreadsheet to track my expenses. I entered every expense I could think of, and they all added up to less than my salary, so I thought I was running a profit. And yet, that didn’t seem to be the case when I saw my bank account balance dropping every month. On closer inspection, I found that I had missed $600 of monthly expenses in my spreadsheet.

I decided that I needed a better system to see where the dollars were really going. I needed two spreadsheets, one to track my budget (a high level view of where my money was going), and one to track my expenses (the amount I was actually spending). Open up the sample worksheets Budget.xls and Expenses.xls, or follow along with the HTML versions at the bottom of this post.

These are hypothetical numbers for a single person. I have no idea if they’re reasonable, but they’ll get the point across. Of course, you’ll need to replace them with your own numbers.

First let’s look at Budget.xls. At the top we have our monthly salary of $5,000. Then the monthly expenses are split into two parts. The first part consists of our fixed expenses. These are things that are fixed in the short term, like taxes, mortgage, and insurance. (I also put 401(k) and Roth IRA contributions here. While technically not fixed, everyone should strive to max out on these). Everything is expressed as a monthly value regardless of how frequently the bill is actually paid.

The second part of the expenses consists of our variable expenses. These are the discretionary expenses that vary according to our spending habits each month: electricity, food, gas, etc. I like to separate these from the fixed expenses because we have control over them in the present moment; every day we make choices that determine our variable expenses. To estimate them, just take your best guess based on your most recent bills.

Now you see the problem. The expenses we’ve entered here are not everything we’re spending. We’ve forgotten all the lattes, scones, movie tickets, etc., and maybe a few big expenses such as car maintenance.

That’s why we have a line item called “Miscellaneous.” This is a magical fudge factor, defined as all variable expenses not already listed, which is $346.16 in this case. Let’s come back to this later. For now, just assume that $346.16 is correct.

Now we can calculate our total expenses, and by subtracting expenses from income we see that we have $85.51 left at the end of the month. Had we not accounted for The Latte Factor we would have come up with $431.67. Our $85.51 may be less encouraging, but it’s much more accurate.

In addition to seeing how much money is left at the end of the month, we might like to see what percent of our income we’re saving. Our investments here consist of a 401(k) and a Roth IRA, and I assumed a 401(k) match of 5% of our salary (if you want to get technical, the 5% 401(k) match should be counted in the Income section at the top, but we won’t do that here). This works out to us investing 39.2% of our income. (At this point I’m seeing that these numbers aren’t realistic, but like I said, they’re just hypothetical numbers to make a point.) Considering our investments plus the $85.51 we have left at the end of the month, we’re saving 40.9% of our income.

Now, back to that magical fudge factor, the $364.16 in miscellaneous expenses. Where did we get that number from? That’s what the expenses spreadsheet is for.

Open up Expenses.xls. This is a list of our monthly variable expenses over the last 12 months. We want to look at the average over the last 12 months to smooth out any anomalies such as holiday spending. To find your expenses for a given month, just look at your checkbook. Add up every check you wrote and every electronic debit you made during that month, but don’t count fixed expenses like your mortgage payment.

Expenses.xls tells us that our average monthly variable expenses are $836.16. Now look at Budget.xls. If we did our budget perfectly, the variable expenses we listed would add up to exactly $836.16. But of course, there’s no way we accounted for everything. Surely we missed some things, and that’s why we need to set the miscellaneous expenses to [$836.16 - the variable expenses we've accounted for = $364.16]. It’s set up as a formula in Excel, so it will automatically update to reflect any changes we make to our expenses, and the total expenses will come out exactly right. That’s why I called it magical.

Now Budget.xls accurately reflects how much money we’re spending, only we don’t know exactly where the $364.16 in miscellaneous expenses is going. But if we think about it and realize that we spend $150 a month on lattes, we can add a new line item for lattes, and then the miscellaneous expenses amount will automatically drop to $214.16. The closer we get the miscellaneous expenses to $0, the better we can see exactly what we’re spending money on, but the “remaining income” value is accurate no matter what.

After I got my budget under control, I eventually stopped tracking my expenses so carefully, and I haven’t used these spreadsheets in years. However, back when I was bleeding red ink and not knowing why, I found this system to be very helpful in answering the question: Where have all the dollars gone?

Budget.xls

Important: the “miscellaneous” line item is determined by setting up an Excel formula to calculate [average monthly variable expenses - those variable expenses already listed]. The value for the average monthly variable expenses comes from the expenses spreadsheet.

Expenses.xls

(Excluding fixed expenses)

(This post appeared in Carnival of Personal Finance #142 – The Homeless Edition, hosted by The Bag Lady.)

This is the first addition to the Resources page: The Science of Getting Rich by Wallace D. Wattles. Published in 1910, one year before the author’s death, this book went on to inspire Rhonda Byrne’s The Secret nearly a century later. Not much is known about Wallace Wattles, but we know that he was prosperous in his later years after living most of his life in poverty.

This book is about the law of attraction, although it doesn’t call it by that name. It’s very similar to The Secret, but of course it focuses purely on the financial aspects. One notable way in which it differs from The Secret is by placing much greater emphasis on taking action instead of just waiting for the universe to deliver. To quote Wattles:

“A person must not only think, but his personal action must supplement his thought. By thought you can cause the gold in the hearts of the mountains to be impelled toward you, but it will not mine itself, refine itself, coin itself into double eagles, and come rolling along the roads, seeking its way into your pocket…Your pocketbook is not going to be transformed into a Fortunata’s purse, which shall be always full of money without effort on your part. This is the crucial point in the science of getting rich — right here, where thought and personal action must be combined.”

One of the biggest complaints about The Secret is that it completely glosses over the importance of hard work, saying only that “action will sometimes be required.” This was my only major complaint about The Secret, so I was glad to see the need for action being stressed in The Science of Getting Rich.

I’ve heard several people complain that Robert Kiyosaki refers to people who don’t want to be rich as “hamsters.” Those people would probably not like to hear Wattles say this:

“It is perfectly right that you should give your best attention to the science of getting rich, for it is the noblest and most necessary of all studies. If you neglect this study, you are derelict in your duty to yourself, to God and humanity, for you can render to God and humanity no greater service than to make the most of yourself.”

It’s really not surprising that Wattles was ejected from his position in the Methodist Church for heresy.

This is definitely a recommended book, especially for the bargain price of free. The copyright has expired, and the book is now in the public domain. The other books in this series are The Science of Being Well and The Science of Being Great.

Note that this particular copy of the ebook contains an advertising link at the top of each page, and then several more at the end. I’m not affiliated with any of these links, I haven’t researched them, and I have no recommendation either for or against them.

Please share your thoughts on The Science of Getting Rich in the comments.

Photo by Tracy O

Admit it, you think that headline is complete hype, don’t you? I can’t blame you. People who think they’re financial experts go on and on about how creating a six figure residual income is impossible, and anyone who says otherwise must be promoting a scam. When you see enough of this, you might start to believe it.

It’s a shame, though. Creating a six figure residual income is actually quite easy, if you have enough time to wait. So easy, in fact, that I decided to make the challenge a little tougher. I’m going to show you how to realistically create a seven figure residual income, without any smoke and mirrors.

If you have Microsoft Excel on your computer, you can open the spreadsheet stocks.xls. Otherwise, you can see the HTML version at the bottom of this post. Yes, we’re going to create our seven figure income with common stocks.

From 1928 to 2002, large cap stocks averaged a 10.8% annual return, and small cap stocks averaged a 12.5% annual return (source). We’re going to assume a 10% annual return for this example. You can think of our hypothetical portfolio as a mix of large caps and small caps, with taxes paid on distributions.

We’re going to assume that we’re starting at age 22, right out of college. I know you’re probably older, but you can change the age and other parameters later. We’re also going to assume that we have a job with an above average salary (like an engineer), and we’re willing to forgo some consumption today in order to invest for the future. This will let us invest $1,000 a month (for simplicity, we’ll assume a single investment of $12,000 is made each year, with the distributions reinvested). Now realistically, this is more than a 22 year old engineer can invest, but I think it’s a fair assumption because it won’t be too many years before they can invest much more than $1,000 a month.

Let’s take a look at our spreadsheet. We have one column showing our age. I’ve entered 22 for the age in the first row, and it automatically increments from there. Off to the right, we have two other parameters: our annual investment ($12,000), and our rate of return (10%).

The two other columns are Portfolio Value and Est. Annual “Income.” Portfolio Value refers to the amount we’ve accumulated over the years by investing $12,000 a year at a 10% rate of return. Est. Annual “Income” refers to the amount of residual income that’s generated annually from our portfolio. Our money gives us a 10% return just by sitting there.

The reason I put “Income” in quotes is because some people would argue that it’s not income. I agree that it’s not realized income, meaning money that is actually paid to us as cash in the form of dividends and capital gains distributions. Most of the gains are unrealized, meaning they’re sitting in our investment account instead of in our hands. It’s still real money though, and I think making a distinction is splitting hairs for the purpose of this example.

Returning to the spreadsheet, we see that by age 46 we have a portfolio of $1.06 million, generating an income of $106,000 a year. By age 69 we have a portfolio of $10.5 million, generating an income of $1.05 million a year. Well lookie here—we’ve got a seven figure residual income at age 69! If we want to keep going, by age 80 (which really isn’t that old anymore) we have a portfolio of $30 million, generating an income of $3 million a year.

If you download the spreadsheet, you can change the parameters to fit your current situation. In the first row, set the age to your current age, and set the portfolio value to what you actually have invested in stocks. Change the rate of return if you wish, and play with the amount invested annually to see what it does to the numbers.

This really does work, but the obvious problem is that it takes a long time (47 years to get a seven figure income in our example). Older people won’t have enough time to create a seven figure income this way, but even younger people can’t spend their whole lives just sitting there waiting for the money to add up. That’s why this is just one strategy at our disposal, and not the be-all, end-all of personal finance.

But at least now we can put behind us all this bunk about a six or even seven figure residual income being impossible. It’s actually quite easy, given enough time and some ability to save.

(This post appeared in Carnival of Personal Finance 134: Building on the Basics, hosted by Mrs. Micah.)

Yes, that’s right, I won the lottery! Specifically, the Christmas Day drawing of Mega Millions. I matched one number plus the mega ball number to win $3.

Obviously, this is not a life changing sum, but it’s a good opportunity to reflect on my thoughts about the lottery.

I received ten $1 lottery tickets as a Christmas present. Seven of these tickets didn’t match any numbers. Two of them matched one number, but that doesn’t pay anything. And one of them matched one number plus the mega ball number, for a $3 payout.

Since the tickets were a gift, the $3 is pure profit. If I had bought the $1 ticket myself, it would have been a $2 profit. If I had bought all ten tickets myself, it would have been a $7 loss.

Two of the numbers on the winning ticket were only one off from a match. But even if I had been lucky enough to match three numbers and the mega ball, it would have only paid $150. A nice little bonus, but not much considering the chances of it happening are 1 in 13,781.

We all know the odds in the lottery are against us, but sometimes we forget just how much. The smallest significant prize is $10,000, and the odds of winning it are 1 in 689,065. This is less likely than the chances of being dealt a royal flush (1 in 649,739).

The smallest prize that could be considered life changing is $250,000, and the odds are 1 in 3,904,701. This is less likely than the chances that you’ll spot a UFO today (3,000,000 to 1).

The jackpot was $16 million, and the odds of winning it were 1 in 175,711,536. I wish I knew the odds up digging up $16 million worth of gold in your backyard.

The overall odds of winning any prize are 1 in 40. This is almost negligible compared to the odds of winning a prize on a hand of blackjack, which are roughly 1 in 2. Blackjack seems like a brilliant investment, by comparison.

Despite the odds, I think playing the lottery is OK if you see it as entertainment. If the fun and anticipation is worth $1 to you whether you win or not, then by all means do it. We all have entertainment expenses. Some lotteries supposedly support education, so if that’s true (and that’s a big “if”), and you want to support education, then that effectively reduces the cost of your entertainment.

But to me it’s not worth it. If I bought a $1 ticket, my fear of losing that dollar would be greater than the thrill of winning a modest prize.

I know this because I once participated in a Super Bowl pool at work (for the fun and camaraderie), paying $10 and winning a $100 payout for being randomly assigned numbers that matched the last digits of the scores at the end of the third quarter. The $90 profit was a nice feeling, but no match for my concern about losing $10.

The risk of the lottery dwarfs the risk of buying some stocks or starting a business. Any remotely reasonable investment is way, way more likely to pay off than the lottery, where a 100% loss is nearly certain on any given ticket. You’re also likely to learn something from the experience when you invest in something you have some control over. And people who win lottery jackpots are likely to lose it all.

Don’t invest in games of pure chance, invest in things that matter.