Do you know why nine out of ten startups fail? It is very simple: founders have an idea and they ‘ASSUME’ (read: ASS-U-ME – “asses are you and me as founders if we assume”) that whatever they came up with will be profitable without seeking constant feedback from potential customers from the very beginning.
They lock themselves down in the war bunker and rush to develop their idea into software, product or business model and they burn through a lot of money and waste time unnecessarily without getting out and asking their potential customers first if they desperately need their miracle solution and if they would pay for it. Some say that startup founders do it this way because they don’t know any better – I disagree, I think this happens because of pride and ego.
Many are full of pride and that is why they refuse to be humble and go find their future customer, his needs and pains first and then develop a profitable business model. They assume they have a profitable business model first and they build a business without checking if there is a demand for it.
This is a paradox: the fear of being told they are wrong stops many from doing the customer discovery work first. As a result the mistake becomes amplified and more painful down the road. Being wrong is the important part of the startup process: have an idea – go out and validate it by talking to customers – modify it until you make it work or trash it if you can’t. You are in this to make money, not to be proven right or wrong – nobody cares about it but your ego.
There is no room for pride here, you have to be humble and admit if the assumptions were wrong and bend them until you find a problem with enough demand and provide a solution for it that makes a profit. Here are few (not all) of the reasons startups fail:
- Arrogance: we know there is a demand and we don’t need anybody else to prove it. (as pointed out by a friend, this is true for things like a cure for cancer and perpetuum mobile)
- Fear of your idea being stolen: your idea is worthless – the execution is the key (inventions are an exception here). I can’t prove it to you in one sentence here, Steve Blank did it a lot better in this excellent post: Someone Stole My Startup Idea.
Idea of customer development is not just a theoretical assumption, Steve Blank has been there, done that for twenty years and speaks from personal experience. His book “The Four Steps to the Epiphany” breaks the process of finding out if there is a demand for the startup idea down to every single detail and explains each step clearly – there is no room for unnesessary waste of time and money if you follow the steps outlined in the book.
The Four Steps to Epiphany is a very detailed and practical book that will help you to avoid many pitfalls when starting a business and it is worth a lot more than its price – this is a practical knowledge for life.
P.S. I recommend you read first Millionaire Fastlane book for general money management and startup advice.
One of the important points I took away from an excellent book Millionaire Fastlane is that if your life savings are small (less than $1million), don’t try to get rich in stocks or by investing it. It is going to take you a long time to get rich that way and you might not see the results of it if planned ‘richness’ is 40 years away.
Rich people use stocks, bonds, commodities and real estate to diversify and to preserve their wealth, not to get rich with it. Why do people who have $10,000 or $100,000 put it in a stock market? To get an average annual return of 8%? During a period of a few years it can be negative % return in the stock market depending on market trend. Get rich first then diversify. Compound interest works when the initial capital is big.
If you have $5,000,000 in the bank, 5% annual interest is $250,000 – you can live very comfortably on this amount. When you have $50,000 in the bank, 5% annual interest is $2,500. See the difference?
The phrase “Get Rich Quick” has become a synonym for a scam, swindle or a false promise. For most people these days this phrase carries a negative meaning. It got beaten to death by a lot of peddlers and snake oil salesman selling seminars, courses and what not. They are getting rich by selling you those easy promises: for only $99 buy this five book and twenty DVD course and be on your way to riches!
If one could get rich by paying $99 and spending ten hours of one’s time reading and watching a seminar, everybody would be rich! These types of courses and seminars make fortunes for the people who sell them because a promise of easy reaches always works. Our lazy nature wants to believe that we can get rich by reading a book, taking a course or seminar.
“Get Rich Quick” should mean five to ten years of dedicated work building your own business. On a big scale of things ten years to being rich and retired sounds a lot better than penny pinching for forty years.
On how to start and build your business, the best roadmap to date is a book The Millionaire Fastlane by MJ DeMarco. It is under $15 and money well spent in my opinion.
Nine out of ten books about money making and personal finance suck. This book is one out of ten that rocks! I just finished reading “The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime” by MJ DeMarco last weekend. I read it in one sitting, just couldn’t stop.
I know title sounds cheesy, but don’t let it fool you. Don’t think it is one of those get-rich-easy books or a teaser to an expensive course or seminar. MJ has no hidden agenda and he tells it the way it is – in easy to understand words. There is no fluff on any of 336 pages.
Beginning is a bit slow as he tells his story, where he comes from and how he got to where he is now.
Most of the concepts in the book are “un-common common sense”. He proves his points with simple to understand breakdowns and examples. You would think: “A-ha, how come I never thought about it this way?”
The main point of the book – MJ proves wrong the widely accepted premise in our society: get good expensive education – get good job – then get into a 30-year mortgage debt and work for 40 years penny-pinching in the process in hopes to retire wealthy. Then he gives you a new mindset and teaches you how to make money.
Do you realize that with a 30-year mortgage you would pay around triple of what the house price originally was? And how having all that debt over your shoulders for those years wears you down, ties you up to a place and makes you miss good opportunities?
Why do we do that? – Because we want it now and we cannot wait. Because we don’t know any better and we do it like other sheep around us. Instant gratification, compulsive shopping and brain-washing by society to keep you as a worker-bee are some of the reasons.
What if you die before you retire?
What if the market crashes and you can’t retire like many baby boomers now?
What if the dollar devaluates and can’t support your lifestyle with those savings?
I hope this book answers many of your questions, it answered mine. He tells you exactly how do you need to think and what exactly to do to become wealthy without waiting for retirement. Instead of giving you a fish, he makes you a fisherman!
Does it sound too good to be true? The only way to find out is to read it. I consider the few dollars I spent on this book the money well spent.
I started this blog with an idea of exploring good and wise money saving habits and extra income generating ideas. Then I realized that it would not matter if you lack discipline. This post is about laying a good foundation for everything in life, not just about saving money.
Recently I got curious about the meaning of the word “fool” and I asked few friends on what does it mean to them. The answers were similar and vague: one who lacks common sense; one who makes unwise decisions; one who is naive and easily fooled. But all these descriptions are biased because they are based on each individual personal opinion – some decision might seem foolish to one and wise to another.
Then yesterday I was looking at my notes from 2008 futures trading seminar, back then I went for a private tutoring with trader Joe Ross in Texas. Joe is in his 70s and one of the most respected mentors in the trading industry. I came across Joe’s definition of a fool written in my notes and it started me thinking. I don’t remember how we came onto this topic, but I remember Joe saying: “For me, a fool is a person who cannot follow his own advice and who blabs about his affairs to anybody who would listen.” I wrote it down.
I completely agree with Joe’s definition. Think about it: if you know what is the right thing to do but then you go ahead and still do a wrong thing, then you are a fool. Many would call this a self-sabotage or a lack of discipline, it is both in fact and many other things, but how would you call such a person? What if somebody tells you: you know this guy, he did this foolish thing knowing it was bad, then if you agree, you say, right, he is a …
The second part of Joe’s definition is about blabbing. This one is simple, if you don’t tell anybody about what you are doing, then there will be no embarrassing if things don’t work out. By keeping your mouth shut, you keep your ego in check and your priorities straight. On the big scheme of things, talking about one’s affairs without other party expressing interest about it first, is a a lack of discipline.
Further thinking got me to the conclusion that a fool generally lacks self-discipline. For myself, I changed Joe’s definition to a simpler one: ” A fool is a person who lacks self-discipline.” Everything else can be derived from that. You know it is right not to eat three pieces of birthday cake but you do; you know it is not right to tell your criticizing pessimistic uncle about your new project, but you still do and get an avalanche of negative comments on why it wouldn’t work which make you almost quit… List can be endless…
Now, let’s get to the next logical question. How do you stop being a fool? The answer is simple: become disciplined. Don’t tell anybody about it, and I mean nobody. Do it for yourself. You will see that things will start changing. Take one baby step at a time. Say no to a piece of cake just once. Fool yourself – tell yourself you will have two pieces next time. You will like the feeling of raising self-esteem if you don’t eat it and you will forget the two piece promise. If somebody insists on you having it, do not explain anything to anybody, just say that you don’t want it and politely decline. You see, a lot of people like to put other people down. And if you tell such a person that you don’t want the cake because you started new diet or trying to lose weight, they will sabotage you by saying something similar to: ” Oh, just this once, it won’t hurt you.” Do it with everything when building self-discipline.
Peter Clemens has this great post on his blog PickTheBrain.com: “Self-discipline involves acting according to what you think instead of how you feel in the moment.” Completely agree, he also gives many nice pointers on how to start building self-discipline in this post.
If you are serious about the subject, I highly recommend this book: “Self-Discipline in 10 Days: How to Go from Thinking to Doing” by Theodore Bryant. This book is more a workbook with exercises than a treatise. It walks you through the fear types that hold us back and teaches you how to overcome them at the moment when action is needed. Take it on faith and just do the exercises.
Good luck on your journey!
If you would like to learn how to teach your kids the proper way to treat money in less than ten minutes - this post is for you. I aim to give you a general idea with few pointers that will help you in most common life situations.
Kids must learn how to delay the gratitude in our spoiled world of credit cards and instant gratification! By teaching your kids to be patient, work for and manage their money from young age, you will not only teach them wise saving habits and value of the money, but patience and perseverance in life in general. You must teach them because our society or educational system won’t! It is your duty as a parent! Sometimes it might feel that your words fall on deaf ear, which is not true! Kids remember what they’ve been taught!
[Side note: The most important part of raising kids is to respect them. If you do, everything else will fall in place. Do not shove your orders down their throats without an explanation; they will surely have poor self-esteem later in life. Give them options! Ask for their opinion! Include them in the discussion and decision processes! Please remember that kids take the words literally. If you call them names or make a remark that you think is innocent ("you cannot do anything right") - you might scar them for life. A tip: when my son does something that irritates me, I imagine he is my boss at work and I try to use the language and the tone of voice I would use with my boss at work (it can be any personality that you respect and don't want to offend).]
Kids learn not by listening but by doing. Create real life situations that will give them hands-on experiences. Have you ever wondered why when we are young adults we refuse all good advice, even if we realize it is the right thing to do, and instead we stubbornly do it our own way (most likely wrong)? Our personalities are already formed by then and if we didn’t live through and experienced a particular life situation before, we have no example in our memory bank and being young and impatient, most spring chickens will choose by default the easy (read – wrong) road.
Kids will not only remember what you teach them but what you do as well. If you are a compulsive shopper, they will see it – and if your message on prudent saving conflicts with your actions, the child will get confused. Be consistent.
If at any age child is fixated on some big item purchase, be it a gaming console, expensive remote controlled car model or $100 sneakers, don’t buy it straight away. For younger children, buy it for their birthdays or Christmas. Make older children (after 6 y.o.) participate by saving for part of the price. They can save part of their allowances and do one time jobs to earn towards it. In case of $100 sneakers, you can use a limit, let’s say $50 maximum on shoes and have the kid pay the rest. After saving diligently for it, child will rarely add more than $30-$40 and will learn not to buy latest overpriced fashion items. This example is taken from a great book “Raising Money Smart Kids” by Janet Bodnar.
Your child is just born. It is a good idea to start a college fund at child’s birth. You can keep it secret and have a nice surprise for him or her when the time comes. Imagine your child develops real passion for something exotic and you will be able to send him or her to study in a prestigious university at home or abroad. Or you can make them aware of college fund when they are older and get them involved by having them to contribute small percentage of their allowance and/or chores money to the fund.
At what age to start teaching kids about money? At the age kids are able to grasp the money and related value concepts and start asking questions on the subject. This is usually around the age of 6-8 years. Normally, preschool kids cannot distinguish between the value of paper bills and coins and a $10 bill is the same for them as a $1 bill, so money allowance is out of question. At this age kids will happily spend whatever you give them.
Famous shopping tantrums, which parent does not dread them? Keep the children busy by asking them to help you and letting them choose between two kinds of the same product. Never give in and buy the item child demands. Praise and reward them for good behavior.
If child throws a tantrum, don’t react in anger and try to distract the child. Set the rule in advance of having only one small treat with a set maximum price and enforce it. You can collect all the treats child wants and in the end let them choose only one. This will keep them calm till the end. There are no set rules on how to deal with tantrums and you should try different tactics to see which one works for you.
Age 7 to 12
When child understands the value of different coins and bills and what they can buy and he is old enough to manage it, weekly allowance should be started. This is usually started when child starts going to school. Sit down together and figure out how much weekly allowance to give and what purchases it will include or not. Movie tickets, video arcade games, birthday gifts for friends, school snacks and any other regular expenses should be considered.
Most child psychologists recommend that you don’t have your children do regular house chores for allowance money and I agree. Child should learn responsibility and make up his bed, clean his room, do the dishes, take out the garbage and do any other regular house chores without any monetary reward. Allowance should be tied to financial responsibility by assigning regular purchases to the allowance money and letting the child manage it without you micromanaging him or her. If your child needs extra money from time to time, you can invent a one-time house chore and pay for it. Never pay for regular work child is supposed to do around the house!
The same goes for school grades, do not tie allowance to it. The good method is to reward good grades with a gift, some privilege or verbal praise but not with money.
As for dollar amounts, it is hard to give uniform advice. Allowance should be slowly and gradually increased with age. No bailouts or loans are allowed! At the beginning the kids will surely blow their whole allowance a few times. If you keep firm and not give them extra money, they will learn how to pace their allowance for the duration of it.
As your children grow older, the allowance should increase and include more financial responsibilities, like school supplies and lunches, toiletries, cloth and whatever else you settled upon. The amount should be bigger than regular purchases, some money for saving, gifts and entertainment should be accounted in. Keeping a ledger is a great idea to help them see where the money is spent, but don’t micromanage them, let them figure it out on their own and only intervene when it is necessary. Set simple and tangible saving goals that are achievable in four to six week period. Longer than that is an eternity for kids.
It is also a good idea that the child starts and manages his own savings account around the same time the allowance starts. The principles described in the post How to Save Money: the Only Way That Works apply. Percentage of the money designated for saving has to be deducted first from allowance before anything else. The structure of the savings has to be easily understood by the child. For example, 70-20-10 rule: 70% for spending, 20% for the future big ticket items and 10% for long-term saving.
For example, you can discuss it with your kid and explain in detail what a retirement fund is and that the money cannot be touched until very old age (I think around 7-8 y.o. is the right age to explain this). When your children are twenty years old and they have been doing it since eight years old, they most likely will keep the habit for the rest of their lives.
To give you a simple idea on power of time and compound interest, if child starts putting in savings account an average of $5 a month from the age of 7 to the age of 18 and then a $100 a month from 18 years old on, at a 6% annual interest and by reinvesting principal and the interest payments, at the age of 65 he or she will have around $330,000; and at a 10% interest the amount will be $1,422,000.
You can offer an incentive to save more by matching any extra-curriculum deposits. For example, if child didn’t spend $10 and wants to put it in his long term savings account, you could match it by $10.
As kids grow, their toys, hobbies, cloth and activities become more expensive as well. Their responsibilities should grow too. It might be a good idea to expand the allowance to cover all their expenses: clothing, lunches, gifts, hobbies, savings, etc. Usually kids earn substantial sums from jobs at this age as well. Managing all their expenses will give teenagers a sense of responsibility.
Now you can give them allowance monthly instead of weekly and include bigger priced items. For example, give them the amount of cash allocated for their clothing this season and let them buy it themselves. Explain upfront what items and in which quantity they should buy. If they spend all the money on one expensive jacket, then they will have to suffer the consequences and either earn extra cash or use it from their allowance money at the expense of entertainment to buy the necessary cloth. Do not let them use their savings for this.
If your teen son wants an expensive gaming console which is out of question, don’t deny it to him outright. You might compromise by contributing a $100 to it and by helping him with ideas on how to earn extra money to get it. Your son will appreciate it more and treat it with much more care. But the greatest lesson would be the prudence in spending.
When my son reaches teen years, I plan to teach him how to invest in stocks. I would like him to start a simple ledger where he can keep track of his income, savings and expenses by the age of eight. So when he is thirteen, he will have some savings already and we can start learning how to invest with real money.
Credit Cards – I think teenage kids shouldn’t have them. You must explain them though how credit cards work. I discuss credit card use in detail in a previous post here.
Part-time work is a double-edged sword. If grades start to suffer, it has to be stopped or hours have to be cut down. All the money earned should be treated in the same prudent way with savings and tracking of expenses. Two most child-suitable types of work are small family run retail businesses and babysitting. I can’t recommend work at fast food restaurants as this might instill bad eating habits.
The best credit card for college is no credit card. Allowance should be strictly in cash. If you applied the principles outlined earlier, by the time your kids are off to college, they would have solid money management skills and good saving habits.
The balance should be found between grandparents and their adult kids. By that I mean that grandparents should consult with parents first on big ticket presents. Small $5-$10 gifts are excluded as long as they comply with the house rules. Most often house rules are about food, for example, parents don’t eat chocolate because one of them is allergic to it or it is their belief is that chocolate is bad for you (this is just an example, it could be anything: Coca-Cola, greasy donuts, etc. – we all have our quirks). Grandparents should respect house rules.
Each child and family situation is unique. These rules are not written in stone and they should be adapted to your current situation. Remember, the best way children learn is by doing. By giving them responsibilities and by nurturing it without micromanaging, you will give your kids a big head start in life and the chances that they will have an enjoyable and financially secure life are much better.
If you would like to learn more, I recommend the book by Janet Bodnar, Raising Money Smart Kids, it stands out by head and shoulders over other two books I’ve read on the subject. This book is filled with practical advice and with huge amount of real life examples for children of all ages and for any possible kind of situation that might arise. Janet has been writing a column for Kiplinger on this topic for longer than two decades and she has raised three kids of her own whom she used as a testing ground for money education ideas (poor kids!).
Please do not hesitate to comment if your opinion is different or if you have a good real life story that teaches a good lesson.
How To Save Money Theory
I am forty years old now and when I look back at my life I wish I knew how to save money when I was in my early twenties. The basic principle is that the amount of money coming in must be bigger than the amount of money going out. Easy, right? Easy in theory, but not in practice, unless you know and practice this one simple rule: put savings aside first – before anything else.
In this post I want to help you get started saving money by explaining how it worked for our family to switch to a saving way of life. I have always hated debt and managed to never get myself into deep trouble. I’ll write a post later on how to get out of debt in the fastest way possible.
Saving money is a skill. This and prudent money management are not taught in schools and your parents must teach you how to do it throughout your childhood and early teen years with real life examples. If they don’t, then by the time you’re out of the family nest, it’s too late and you’ll have to learn via the school of hard knocks.
Expenses Fill The Available Budget
There is a saying I heard somewhere: “expenses fill the available budget” - and it’s true. A lot of people think that they’ll start saving when they start making more money. If you make $2,ooo a month right now and if you think: “When I make $4,000, I will save $2,000″ - you are self-delusional because when you make more you will spend more. You will try to live up to your new social status by buying more expensive things and services.
It was hard for me and my wife psychologically to start saving at the beginning. We had to change our lifestyle and certain habits to be able to free up money for saving.
At the beginning we decided to save 20% of what we make and the first month we put the 20% aside first but we kept it at home, so at the end of the month, when we ran out of money prematurely, we spent it. We had no discipline and no plan.
Second month we opened a joint savings bank account that had no online access, no debit card and we had a special rule set up with the bank that we could only make withdrawals when both of us were present at the teller. This made it so hard for us to withdraw that money because of our busy schedules – getting together to the bank at the same time was a real hassle. Since then we stopped doing it, but for the first six months this was the key that helped us to stick to our plan. Now we save 50% of our income! And you can too – read on.
A few month later, after we accumulated some money, we came to the conclusion that we had to have a plan. By plan I mean you have to decide what are you saving for and how much percentage-wise. After a few months of changes and tweaks we came up with this structure:
Income – 100%
Expenses – total 50%:
30% – Living Expenses (house, food, gas, internet, phones, electricity, TV, etc.) – This used to be 55% of our income at the beginning! We got rid of a few subscriptions, canceled others and we are always on lookout to spot where we can reduce our living expenses even more. I will be explaining in detail in future posts on how to reduce these expenses without sacrificing quality.
5% – Monthly ”Unexpected” Fund (this is the money we keep handy for things like car repairs, medical bills, etc) – We gradually accumulated it to a $2,000, and then everything over that goes to the investment fund! If an expense occurs, like last month we had to pay $240 to replace the window motor in the car, then we fill it up to $2,000 again.
10% – Entertainment/Shopping Money (movies, dining out, weekend trips, “oh, my God, I love these shoes” compulsive spending money, etc) - We run out of this money, we stay and play at home or visit friends! Included in this are our individual adult “allowance” money – for small indulgences. If we don’t spend it all – we carry it over to the next month. A single friend of mine pointed out that this percentage is very low as singles go out a lot more. Well, this is just an example. You should set the percentages the way it works for you!
5% – Planned Shopping (items we need from time to time: clothing, household appliances, etc.)
Savings – total 50%:
20% – Retirement Fund (this is money that we don’t touch until we decide to retire and this money cannot be used for risky investments) – You max your IRA account and if you have extra, save it in liquid money investments like bank CDs, short term bonds, etc. These don’t pay much interest but are safe and liquid.
20% – Investment Fund (stocks, real estate, etc.) More on this later…
5% – Education Fund (our son is only one year old and we decided when he was born that we will start saving for his college now)
5% – Travel Fund (when vacation time comes, we see how much we saved and where we can go for that money) – If we have a special place we want to go to and we don’t have enough money for that, we postpone that till the next year and go somewhere on the cheap instead spending a maximum of 50% of the travel funds that we have saved.
Emergency Money Fund
Before we started to put money towards any of our savings plans, we didn’t have the emergency money fund and had to save for it first. This is the fund that you must have available before you start saving for anything else. The bare minimum is to have six months worth of living expenses saved in case you lose your job or are unable to work due to illness or any other reasons. It is recommended by most experts to have one year minimum worth of living expenses saved.
We have six months worth of living expenses in our emergency money fund. We keep half of this money in dollars at home and the other half in one to three months term bank CDs which earn little but this money is easily available on demand. If, for example, living expenses are $2,ooo a month, then six months emergency fund is $12,000 and a one year fund is $24,000.
Compulsive Shopping And Credit Cards
The way you approach buying things changes when you have a budget. Below are some helpful examples on how to deal with credit cards, compulsive shopping and other dangers hidden beneath the surface that can sabotage your savings.
Years ago, I read an article about a research study where it was proven that we use 10 percent of the things we buy 90 percent of the time! I tried to find this article to post a link to show you the evidence here, but I googled in vain, you will have to take my word on it.
This means that 90 percent of the things we buy, we only use 10 percent of the time. Some of those things we never use after the initial excitement wears off! Have you ever dug up something and wondered why the heck you bought it in the first place? I recently took out of the closet a back massage machine, the one that you clip on the back of the chair. It cost a hundred bucks. It never properly fit on the very comfy chair that I have and it ended up in the closet. Now it is on its way to a new lucky owner who won it on eBay for $30.
There is one very helpful trick a friend of mine told me that helps him immensely to curb compulsive spending - walk away from any unplanned purchase of over $50 for 24 hours. Make it a rule. If after 24 hours you still think that you must have that thing and you will put it to good use, then by all means you go and get it. You will be surprised that quite often you will realize that this is a waste of money or you can live happily without it or there are cheaper alternatives. I am not proposing here a completely minimalistic approach to buying things, but taking your time and making rational decisions rather than getting tricked by clever advertising that pushes us to buy right at that moment.
One very important point is the use of credit cards. If you have the discipline to use them up to the available budget, then there are no objections. Get on a nice cash rebate, travel miles or any other plan and earn some extra cash. We had to lock them up at the beginning. Now we use them on a 1% cash back reward program. We prepay them. We deposit up front our monthly expenses (less house payments) and entertainment money and we check every day the available balance and once it goes to zero, we leave them at home! This requires discipline. If you don’t have the discipline - don’t carry credit cards with you – lock them up. Some might argue that you need to have the credit card with you all the time for emergencies. We carry $300 in cash from our monthly “unexpected” fund for that. If an emergency bigger than the amount of money in your monthly “unexpected” fund happens, you can always go and get them! These big emergencies are very rare.
I hope our experiences will help you. I would like to hear your stories please or if you have any tips on how to improve one’s saving habits.