You Need To Aim Higher

Since I graduated from university years ago and decided not to get a job, I’ve spent a lot of time learning about two things in parallel. One was “online income”, with things such as PPC, affiliate marketing, and blogging. The other was a service business. My lifetime online income amounts to less than $10 (not counting a website that a bought for $1000 and barely made back the cost of purchase before it stopped earning an income). I decided years ago that the best use of my time was my other business which has provided a good income for my family and now employs several other people.

This might lead you to conclude that online income is just a pipe-dream promoted by hustlers who are looking for an easy audience to scam. While that’s certainly true in some cases I believe that the opposite applies to many others. Witness the many articles that talk about reaching 6 figures in online income like this is some kind of mythical unicorn that no one has seen.

The truth is that whatever you create, whether it’s a new blog with 1 post and 2 affiliate links or an empire of 50 sites that get 1m visitors per month, you are building a business. That business can do one or both of two things: sell your time to the highest bidder, wherever they are in the world, or sell something that doesn’t depend on your time. In both cases there is a lot of potential. Whatever you are selling there is someone, somewhere, who can make a lot of money from it and can pay you well.

The mistake most people make is that they compare this to income from a job. In that context someone who is young and earning $60-100,000/year might think they have reached the limit because that seems like a lot for a job. But when you realize that they are starting a business and not just a job numbers like that are too low to even be on the charts. A couple of years ago I went to visit a prospective client in the US, which was a company of 100 people. On my return a friend commented “over there, they call that a tiny startup”. Turn your thinking in this direction and the possibilities become much larger.

I don’t want to diminish anyone’s accomplishments. It is a great step to show that you can create something yourself and not rely on a narrowly-defined job. I’m cheering for anyone who does this since I’ve never been able to live by someone else’s rules. For some people that is enough, and a good place to stop. But thinking that there is some kind of inherent limit in numbers like that is a big mistake. There are always people who are willing to pay more for what you sell and many others who want to buy it if you can find a way to scale up.

Whether you know it or not, when you create something where you don’t have a boss you are creating a business. It could be a marketing businesses, a trading businesses, a retail businesses, a trend-following businesses, a service businesses, or a business-to-business business. And in the world of business, bringing in $100,00/year is the table stakes. Unless your business is so big that your name is printed in the newspaper every day there are many ways you could grow your income by 10x.

Of course that’s before expenses which are everywhere in business and frequently overlooked when people talk about online income. You need to make sure you are establishing a sustainable profit margin in your business. Otherwise you are just giving away your work. At times you may accept a lower profit margin to grow faster but you need to know that it will be worth it in the long run.

I’m not someone who needs a $1m income just to get by. In fact that that rate I expect I would need to work less than a year in my life. But if such a need comes up I know the pathways to get there. Learn the ways of business and you will have no limits.

Passive Income Update: Still Waiting to Start

My original passive income goal set back in August was to build up to a level of $500/month, starting from $223/month. In the time since my last update I have kept doing what I do well and gotten up to $325.69/month. This is the current status of each part of that original goal:

• Investment portfolio and interest income: this counts for $324.69/month. By the time of the deadline this should be producing at least $375/month, or higher if we can invest a bit more along the way. This is going well because we’ve been doing it for a while and we know how to step it up. The other things are going slowly because I don’t know them as well yet.
• My blog with adsense: the $3 click I got a few months ago was an anomaly. So far this is worth about $1/month. I haven’t been active on the blog or the Twitter marketing I’m trying out but I should be freeing up more time to write regularly and increase the traffic (and thus the revenue).
• Product #1 (partnership with blogger): a couple of months ago I learned that the blogger I was working with was no longer interested in launching this product under his brand. I understand this because it’s not really like the things he’s doing now and he has a lot of other opportunities to pursue. If he’s interested in using the product personally and setting up an affiliate deal I would still be happy to do that since the marketing exposure would be hard to beat. Since this was close to being ready I made a few final changes and released it last week. This means it’s available to buy but I haven’t gotten anyone to the website yet. My first marketing attempt was selling through another website that takes a 60%+ fee. I was rejected from there so I will carry on with the rest of my marketing plan. If I sell just 3 copies of this every month it will easily make up the gap to hit my goal.
• Product #2 (service for small businesses): this is a lower priority at the moment. Once I run out of productive things to do on other projects I will come back to this. In thinking about it I remember what a potential customer said about a similar problem they were having. This gave me an idea for another related product that is much simpler to create and easier to sell (it directly makes them more money instead of just saving their time like the old idea). I think I will lead with that and then offer the original product as an add-on. This could be generating a bit of revenue by year-end.

You may be wondering why I don’t include the business opportunity I found recently in this list. Although that could potentially generate enough extra income this year to completely crush my goal without cutting into time devoted to other income-generating activities, it does look like it would require ongoing maintenance.

For my passive income goal I want to count only things that can generate a consistent (or slowly declining) level of income with very little upkeep once they are created. Anything else, along with the new services I want to launch in my main business to increase revenues, are just additional bonuses.

Business Opportunities Are Everywhere

Sometimes you hear stories of people who quickly create a profitable business seemingly out of nothing and make a lot of money. Are these one in a million stories, or scams? Is a unique skill that no one else has? No – a lot of them are just people who opened their eyes to the possibilities. I may have come across something like this recently in a perfect example of the type of unexpected opportunities that have launched many good businesses. With a little persistence you can find these just about anywhere.

I’m moving my business into an office but we’re in a very tight real-estate market so it’s been hard to find something available. It’s even harder because the space we need is too small for many property managers to bother leasing. I considered the possibility of getting a larger office and then setting up a co-working space, renting out desks or rooms to freelancers and small businesses, since those are becoming popular in many cities.

I decided not to do that for several reasons. Signing a long-term lease or buying a building is a major expense I can’t take on now. I don’t have a lot of time to market and promote a co-working space and try to build a community with events to attract people. The margins seemed small since everything was expensive already and it would be hard to pass on an even higher price to customers.

So I decided I would just look for an office suitable for my business. Finally after trying some slightly unconventional tactics I found something that shouldn’t exist: a large unused space in a great downtown location where I can rent a small portion at a very low cost (no more than half the market rates) without needing a long-term lease. That’s one example of a deal that you just can’t get… unless you look a bit.

It gets better though. Another place I looked at was a co-working space someone else was setting up, at a location I had considered a few months earlier and rejected. I thought the prices they were talking about were well above the market rate, but I recently heard that it quickly filled up.

All of this adds up to a very interesting opportunity. I can rent office space at less than half the market rate, and it’s clear that there is demand from others who are willing to pay above market rate for individual rooms or smaller spaces. I don’t need to tie up $500,000 or $1M to buy a building because no one is using the space now, so I can work out a deal to only pay for the parts that are actually generating revenue. My friend is renting out a few offices in her building and I’ve learned what she does to keep them occupied so I can probably find customers without spending a lot of time.

I still need to test my assumptions but this is looking like a very interesting business opportunity. It may evaporate in a few years if demand dies down, but if I can make a profit with very little risk that’s worth a try. This kind of opportunity isn’t easy to find but if you know where to look sometimes it does come up. You just need to be aware of the problems that you and other people have. My difficulty in finding an office space shows the demand in the market, and a building owner who doesn’t have time to manage it creates a unique supply.

A deal like this exists on the margins of what is possible and may not last for long. But once you start down that path it becomes easier to leverage what you have into different suppliers, customers, and/or products to create a business that can go much further. An example of that is documented in The Fish That Ate The Whale, which tells the story of an immigrant who started off by selling a product that was about to be discarded after noticing it on a dock one day and grew from there to control the majority of the market (not to mention overthrowing a few pesky governments, which led to the term “banana republic”).

I’m not interested in commercial real estate management at the moment so I have no grandiose plans. I’ll just take the easy profit while it lasts. All the same I might learn more about profitable ways to put my future capital to work. If you look at this there are all kinds of reasons to believe that it doesn’t exist or it can’t work. Many well-known businesses today are a testament to the fact that such popular views are wrong.

Making Saving More Exciting: Early Results Are Good

One of the biggest reasons people don’t manage their finances well is that it takes a long time to see the payoff. Most people can understand the idea of investing for the future but when you start off and you’re getting $0.30/month from your investments while your friends are whipping out their iPhones that’s not very motivating.

This year I came up with the idea of combining smaller wins with an old fundraising tool. I started to track an estimated income from our investments and used a spreadsheet to make a “thermometer chart” to show how much of our expenses this covers. It’s more of a brick than a thermometer but it shows our progress.

That’s still not very motivating since no one gets excited about being 3% of the way there so I moved the goal line. Instead of tracking it against all our expenses I started off comparing it to our utility bills (heating, water, power, tv/internet, and phones). And then I added a running start by including the full value of the bills and adding a monthly re-payment from my business (since I use some of these for business with my home office) to our investment income.

I’m well aware of how much I’m cheating here but the results are accurate. This shows us how much of our utility bills we still need to work for. I organized these from smallest to largest so we could knock off a few quick ones. For example we could say early on that we never had to work to pay for the heat or water again. At first our plan was that everything but our phone bills would be covered by the end of this year and our additional savings next year would cover that.

We’ve managed to take a few extra steps this year and got ahead of the plan. By the end of the month we’ll be more than half-way through the amount needed to cover the phone bills and we’ll reach that full amount in another 6 months just from automatic transfers. If we do anything extra we’ll get there even sooner.

We look at the chart every 1-2 months so it’s been a constant reminder of how things are moving forward. I’m not sure exactly how much it helped since I am naturally motivated to invest. But seeing visible progress every few months made it more real and gave us results that are easier to see and understand.

Once we reach an amount high enough to cover all our utility bills that will give us a real accomplishment to celebrate even if we still need to work for another decade or more. At that point I’ll expand the chart to include some more expenses. I think an ideal would be to make the next target twice as high so I’ll find a few more categories to reach that.

Food would be a natural next step since it’s important but our current food spending is about 50% higher than our utility bills so that might be too big to add now. We’re hoping to reduce that average cost so maybe it would work. Or the new goal could be a combination of smaller things such as property taxes, regular car expenses, and personal care. That would create more steps to reach along the way even if it adds up to the same amount.

Still food may be the best thing to add. If we can say in a couple of years that our investments are enough to pay for our bills and our food, that doesn’t leave a lot of ongoing essential expenses. Having a bigger goal like that would be a motivation and a challenge to do more which makes sense since we still have a long way to go and we need to work hard for it. It might even lead us to spend less so we can move the goal closer.

Overall this is a great way to track your progress and even more useful when you have to explain it to someone else and help them to share in your motivation. Maybe it’s the long-awaited trick to help reach smart goals after someone has paid off their debts. Paying off a $20,000 credit card balance in 2 years is easy to understand. Paying off a mortgage is harder but still a visible goal. When you set goals this way you can pay off all your living expenses one by one and then truthfully say that you never need to work for them again.

Starting a Business is Easy

Many people think that it’s hard to start a business and you need a brilliant idea. I have mostly followed an approach that’s pretty much the opposite of that. I recently joined a mastermind group with others who are dedicated to pursuing the easy approach to business so we can further refine and practice these ideas.

The “business ideas” you see on TV that seem like a lot of work and a big struggle are really just examples of bad business ideas. The reason they are so hard to do is that people do a lot of work before even knowing if anyone cares so most of their work is wasted. And as a result they are very likely to end up going down a path with results that are mediocre at best. Lots of work + weak results = bad idea.

The way I approach it turns everything around. As Ramit Sethi likes to say you don’t need a business card, a website, or a twitter account. All you need to do is talk to people until you find someone who needs help and will pay for it. Once the first person pays you, you have a business.

Then you keep telling stories about how you have helped people. By doing this you will find more people asking for help. Over time as you get a better idea of what people need you for and the demand grows, you can raise prices. If you discover new needs along the way you figure out a way to sell something for that. When things are really rolling along you can start hiring people to help you and make sure you have the right profit margin to support that.

Keep doing this and you’ll get steady growth in your business. Keep up the steady growth and you can get it to any size you want. There are challenges along the way, but if you keep an open mind and you stay as flexible as you can for as long as you can, you can take it anywhere you want. Keep trying new ideas along the way and you can build up new lines of business to grow faster. Even large corporations will go down quickly if they forget these principles.

And that’s all you need to know about starting a business in 300 words.

Improving Our Ratios

A couple of months ago I wrote a post that identified some financial ratios I’m starting to measure. These are great indicators of how well the plan is progressing so I like to see them go up. I’m already getting a chance to make that happen.

Between finalizing things for this year and planning to pay myself a bit more from my business every month (and investing that entire extra amount), I expect our monthly ratios to improve in January. As compared to the start of October, they will soon be:

• Investment savings (actual investment amounts and mortgage principal payments, all of which reduce our future income needs): 48.6% of net income (was 44.6%)
• Total savings (investment savings plus things such as saving for the next vehicle we will need and the anticipated monthly increase in our general cash account): 60.9% of net income (was 57.8%)
• Core living expenses (what we would need each month to live a normal life without mortgage payments or extras such as vacations): 27.7% of net income (was 29.8%)
• Investment savings / core living expenses (what we invest compared to what we spend on ordinary living expenses): 175.5% (was 149.6%)
• Housing costs / gross income (similar to the GDS used to qualify for a mortgage): 16.4% (was 17.4%)

At the end of the year I also estimate that we will hit the following ratios, again compared to the start of October:

• Investment portfolio total value / mortgage balance (how close we are to having investments worth more than our loans): 30.3% (was 24.3%)
• Estimated investment income / core spending (how close we are to paying the bills without working, not counting the mortgage): 13.2% (was 11.0%)
• Net worth gain over the last year: 53.9% (was 55.2%)

Only one of those values, the net worth gain, hasn’t improved. And that’s not bad because it’s still at a great level and the comparison point for the gain (our net worth one year ago) keeps increasing which makes the percentages smaller. The dollar value that produces that 53% gain is actually a lot more than the one that made a 55% gain.

This can also be compared to different approaches. By the time we have lived here for 2 years we will have built up an investment portfolio worth more than 1/3 of the value of the mortgage. That shows that if we just focused on paying off the mortgage first, it would be gone in under 6 years (maybe closer to 5 counting the interest saved). Of course I’m much more comfortable with putting that all into a portfolio while we enjoy low interest rates. The portfolio should hopefully end up covering a lot more than the amount of the mortgage within a few years. It interest rates stay low enough we can keep the mortgage for the rest of the 16 years we currently have left. If not we can annihilate it at any time.

The first ratio is the one I would like to work on a bit more. If we can get our investment savings up to 50% of our net income that will put us in the range of some very respectable bloggers. Unfortunately even investing more didn’t put us there since it took a higher income to do that. I think we’re pushing things far enough already that it would be hard to increase the investments further without having more income but we’ll see what we can do. However that’s just counting the regular monthly amounts. With a few one-time additions we’ll be just over 50% in total for 2012 and may do better next year.

This will take a bit of caution though. If I start getting a lot of extra income from passive income projects, half of the after-tax income will need to be invested to keep up the ratios. Preferably all of it will be invested after reaching my special income goal. If not, this will crash the ratios and make us look bad.

All the Cool Kids Are Frugal

One of the persistent threats to financial common sense is the fear of rejection. People think that if they buy the cheap option instead of spending as much as everyone else they won’t fit in. This is an illusion and the perfect example just came up.

Joe at Timeless Finance recently pointed out how Canadian retailers do a cheap imitation of Black Friday, using it as a marketing event rather than an actual sale. In his post he mentions something written by another blogger about a sale:

“Zegna black military inspired coats with a zip-out lining were $1,499 from $3,595.”

Now high-priced fashion is nothing new. We know there’s a world where people consider it acceptable to spend thousands of dollars on otherwise ordinary clothing items. But the thing that caught my attention is the “military-inspired” coats. What’s going on here?

This must be very desirable item if it can sell for nearly $4,000. But why is it “military-inspired”? Do military uniforms have a tradition of using only the finest silk? Unless this is the new wave of supporting the troops I’m guessing that it’s imitating a recent style. That means it’s military-inspired because someone else was wearing a military-inspired coat or an actual military coat. In turn they were probably following someone else who did it first.

Who was the person that started the trend? Most likely someone who couldn’t scrape together $100 to buy the current fashion at the time and had to resort to doing something inconceivable to the average person just to get wearable clothes, like shopping at army surplus stores or deep-discount vintage stores (as opposed to the high-markup vintage stores). This was so unusual that people noticed it and decided it was cool.

At last we come to the true story: the highest priced clothing is an imitation of people who can’t afford to buy even ordinary clothes! For $3,600 you don’t just get something fashionable, you also get a big serving of irony to make you even cooler.

It turns out that the regular TV show joke where someone makes a “fake” fashion line consisting of people wearing actual garbage and it turns out to be wildly popular is not that far from the truth. That’s not to say that frugality means living in a trash heap. It just shows that people will mock things one day and then spend the average family’s annual salary on them the next year.

Want to be ahead of the trend? Just find ways to spend less! Frugality is not the new fanciness, it’s the old fanciness that has always been around. This actually fits very well with the rock star approach to life. Frugality combined with a little creativity is a great way to stand out when everyone else is chasing the latest high-priced fashion.