Becoming A Millionaire by 40

Preparation is key

2012-02-07T02:00:00.000-08:00

Last week I posted about the magic card selling concept I had. What I didn’t mention is that I had this idea months ago, but I hadn’t taken a look at the economics of it. Then when the opportunity came up I went home and worked on it. It took me some time to put together exactly what I needed to charge. I called a couple other singles shops to figure out what they’re monthly revenue from magic singles sales were and did a Du Pont analysis to figure out whether what I was doing made financial sense.

I also spent some time creating the software that I’d use to set prices remotely. Once I had everything carefully figured out I went into talk to the owner today. He wasn’t in. Someone new was in. I spoke with him a little bit. It turns out he was hired to manage the Magic singles. Apparently my arguments were very convincing. So convincing they hired a guy to do it.

There’s a lesson here. That lesson is that if I had figured out whether or not this was profitable in advance, back when I originally had the idea, rather than after the opportunity presented itself. I would very likely have a new, largely passive, source of income right now.

If I had been prepared and been able to do this, and started my fortune in this fashion people might have said I was lucky to be in the right place at the right time. It didn’t happen because I wasn’t prepared. This happens to people all the time, everybody gets “lucky” sometime, most people (like me) just aren’t prepared when an opportunity comes along.

This isn’t all a total loss however, I may still be able to do the same thing at another location and now if it comes up I'm actually prepared.

Opportunities

2012-01-31T01:00:00.000-08:00

Sometimes opportunities drop into your lap when you least expect them to. For at least a decade I’ve played the trading card game “Magic: the Gathering”. I played it with my friends early in middle school. I picked it back up early in high school, and started going to tournaments. Then, I started playing again early in college. It seems I’m on a 4 year loop with this game as I started playing again at the end of this past summer. Anyway when I picked up the game again I didn’t really want to make a significant investment and thought that it’d probably be a good time to sell off the 5K+ or so cards that I had accumulated. I was able to sell most of what I had that I wasn’t using for about a total of $500. I still have more cards that I’m using that I could probably sell to stores or other resellers for about $200.

However, I recently went to a game store and found that they didn’t sell magic singles. As a quick aside, this isn’t a video game store, but a store that sells RPG titles (think Dungeons and Dragons), TCGs (like Magic), wargames (like Warhammer 40K), and other niche boardgames. In my experience it’s been very typical of the industry to sell magic singles. When I asked why they chose not to do it, I was told that in order to sell magic singles they’d need to hire a new full-time employee, and magic singles wouldn’t by themselves, generate the money necessary even to pay such an employee minimum wage. Additionally, they’d have to worry to make sure that the employee knew enough not to lose the store money before they even worried about being able to cut his paycheck with the profits.

Naturally I started to argue with the employee. (I don’t know when to keep my damn mouth shut). Mostly my (good natured) argument was that it couldn’t possibly be a 40 hour a week job to manage the magic singles. The employee claimed that, based on his experience, it was. A great deal of time is spent sorting and pricing cards. Especially because prices in Magic cards are very volatile, frequent repricing would be necessary. In addition to that the labor needs to be highly skilled, because the owner is entrusting this new employee to make significant purchasing decisions. I argued that there were ways to save labor on pricing, and this is when it hit me, clearly this was a service that I could provide. They don’t want to hire an employee, they don’t want to be exposed to investment risk.

The basic plan that hit me was this: I would buy and sell Magic cards through their location using a largely automated system that I would program. They’re employee would have to ring up the transactions, but I would provide a buylist, prices for all of the product, and most importantly the cash necessary to fund the whole operation. Their store would get a fee for each transaction (buy or sell) that they processed. This protects them from malinvestment risk, if I buy the wrong stuff at the wrong price, they make money. If I sell it at the wrong price, they make money. I could lose my ass and they’ll still walk away ahead. What’s better, if I do well, they make more money. This isn’t riskless for them. I could be some kind of scam artist. There might be some way I could steal from them (I honestly don’t see how).

The biggest question in my mind, however, was “Will this be a good investment?” I asked around. Turns out playing the same game for a decade will give you connections to people that sell that product. Furthermore, I found that not only was it feasible to get my time rewarded properly, I’d be able to make about a ~24% ROI over the first several thousand dollars of investment. There are big error bars on that number. But its interesting enough for me to get to work. I have no fixed costs, and if I need to liquidate I can do it fairly easily without losing a great deal of money. While this source of income isn’t truly passive. If I stop working the whole thing will slowly grind to a halt. It is however not very work intensive, and it is extremely scalable. After I write the initial code I just need to maintain my database of prices.

I therefore wrote up a 1 page-ish document that outlined what I was proposing as well as the reasons I thought it would be beneficial. I’m going to finish editing the document tomorrow, as well as talk to my previously mentioned contacts to make sure that they don’t mind if I join their competition. Then I go to the store to pitch my idea. I’ll be sure to let you guys know how it all goes!

January Results

2012-01-31T00:59:00.000-08:00

For January here is the result of my budget:

Fast Food: $210
Groceries: $139
Restaurants: $106
Vacations: $100
Gifts: $50
Electronics and Software: $100
Rent: $350
Movies: $17
Internet: $15
TV: $10
Cell Phone: $100
Gas: $85
Utilities: $50
Furnishings: $20
Home Improvement: $10
Clothing: $10
Books: $10
Home Supplies: $10
Sporting Goods: $50
ATM Fees: $7
Other: $15
Total: $1,464
Income: $1,890

My total investment contribution: $426
Prosper: $70
Brokerage: $300
Liquid Cash: $56

Investment value last month: $5850.00
Current value of Investments: $6358.95
Gain: 508.95
Gain attributable to my deposit: $426
Gain attributable to investment growth: $82.95

I can't really count on this sort of return. Sometimes my portfolio will outperform or underperform my expectation, very rarely will I actually hit my expectation of a 2/3% return per month on my investments. The largest expense was food at about $455 this month, I'm hoping to lower that to about $200-$250, which should save me about $200 to $250 a month. I should add that several of the categories, for example the vacation or electronics and software budget, are amortized so they won't vary.

Candy Machines

2012-01-24T01:00:00.000-08:00

If you google passive income you’ll find several articles, largely they spout identical advice. Real-Estate, Invest (stocks/bonds), Peer to peer lending. The trouble is that these are capital intensive. Many of them make suggestions for less capital intensive projects, but they are mostly related. One common suggestion is rental unit management where you convince rental unit owners to let you manage their property for a portion of the rental unit income. Unless you have some compelling skills or experience in the area, its not really something you can just pick up. If you can also convince people to let you manage your investment, this works too. (There may be some legal hurdles for both of these things).

One common suggestion that never occurred to me was to buy those small quarter candy machines. Apparently these cost about $200 and produce on average about $25 per month in profit. The return-on-investment (ROI) with these machines is massive (with these numbers) is 150%. This comes at a price, first of all you have to be able to place the machines in locations. This means a lot of cold-calling to business owners. You can’t really pay them enough to justify them caring. The best your could reasonably offer them is something in the single digits. $6 a month isn’t going to convince anybody. The common answer is to give a proportion of the revenue to charity. This is common enough that some charities have programs ready made for candy machines.

While one of these would be good at handling my $5.61 shortfall next month, it seems to have a certain quality of sceminess to it. Cold-calling isn’t my forte’ and I don’t know how to justify the business owner using my machine over simply buying their own. It appears to me that several self-proclaimed “passive-income guides” mention this as a strategy. It’s so off the wall my suspicion is that some blog did it first then the other passive income guides just picked up on it.

I’ll go ahead and try to scope out possible locations where I could do this. If I get any bites I’ll go ahead and try to do it. There are surely better ways to accomplish a $5.61 monthly passive income stream. Other passive income streams that don’t directly involve buying assets generally require some time input in order to get set up. This blog for example. While its likely that this will never amount to an income stream of more than a gumball a month. People do invest time into blogs like these in order to develop income streams, though its hardly passive.

How to be a millionaire by forty

2012-01-17T15:32:00.000-08:00

I'm 23 (and a half) and I took a look at some arithmetic and found that with thrift, becoming a millionaire just isn't that hard. Over the course of this blog I'm going outline exactly how I make a million dollars. I will keep as much detail as possible in my attempts to make money. Insomuch as I can maintain my privacy (and make sure none of my ideas get scooped) I'll explain my business ventures, budget, investments, and savings plan.

I'll begin by explaining my current budget and savings plan.
I make about $32000 per year, after taxes and contributions for my health, dental, and life insurances I take home $1890 per month.
I use www.mint.com to track my budget and a typical month amounts to:

Rent: $350
Food: $550
Vacations: $100
Electronics and software: $100
Investment: $300
Cell phone: $100
Utilities and internet/tv bills: $45
Cell Phone: $100
Gas: $125
Gifts: $50
Home Upkeep (supplies, improvement and furnishing): $50
Books: $20

Most of my discretionary income is taken up in food. In order to become a millionaire by 40 in 15 years I need to invest $3,600 a month every month until I’m 40 assuming an 8% rate of return. In order to accomplish this, frankly I need to make more money. If we can get the rate of return up to 12% then I can reduce the monthly investment to about $2,800. At my current monthly investment it’ll take me a 40% rate of return on my investment. I don’t think its realistic that I’ll be able to accomplish that level of return. To make 3,200 more a month I’ll need to go from making $32,000 a year to about $60,000 tomorrow. That isn’t terribly realistic either. If I don’t account for my rate of return I need to invest about $5,045 a month including my returns from my investments. If I grow the amount I invest monthly at a steady rate from now until 40. I created an excel spreadsheet which assumes I constantly increase my pre-interest income. I can start out at $400 and I’ll need to invest $9,642 on the last month. Every month I need to increase the amount invested by about $47 to get there.

Next, I discount the expected earnings that my current investments will provide. This can include my income from my investments. Next month I have to invest $446.91. If I can manage a 8% (annualized) return (say 0.66% per month for simplicity). I currently have have $6,194 invested. This means I can count $41.3 as long as I reinvest it. I’ll need to cut $5.61 from the food budget next month for investment or figure out another way to earn an extra $5.61. It’ll be better if there is a way to make this recurring. Over the course of this month I’ll have to figure out a way to earn an extra $5.61/month for the next 15 years. That is the goal this month, I could instead manage to come up with an extra $841 next month to invest which would produce $5.61/month. The goal of these articles this month will therefore be to scrounge an increase to my income by $46.91/month in a permanent fashion every month. Due to the increase in investment income each month I can increase my savings by 30 cents less. This means that the amount I have to invest from outside peaks at $3,476 after 142 months of investing. This means that the most I will ever have to invest will happen in November 2023 when I am 34.