“Money often costs too much.” — Ralph Waldo Emerson

You can make more money, flow more value, and expand yourself.  It all starts with a simple question:

… How much is an hour of your time worth?

One of the best ways to change your game is to change the value you put on an hour of your time. Why? Because it helps you focus and make trade-offs in how you spend your time. If you make $5 an hour, chances are that the activities that would make you $50 an hour are very different. In fact, it might not just a different skill set … it’s a different mindset, and a different set of expectations. It’s also a different set of jobs and experiences, and a different life style. If you want to make $50 an hour, then you do less of the $5 an hour things, and start doing more of the $50 an hour things.

Don’t get hung up on the money part.  Instead, use your hourly rate as a gauge and a yardstick to grow your capabilities and prioritize your time.  Also, use it to improve your efficiency and effectiveness, while driving from your life style, and finding creative ways to spend more time doing what you love.  And, always remember that you climb better ladders if you stay true to you.

How Much is Your Hour Worth?

How much are you selling your time for?  If you’re paid by the hour, you already know how much you are selling your time for. But that doesn’t mean that’s how much your time is worth. My first surprise was many moons ago during my early consulting days, when I found out I was being billed out at $100 an hour. I remember I wasn’t being paid that, but I was surprised that somebody thought my time was worth $100. Then I found out others were earning more, but working less … Hmmm, I thought to myself, “I’m doing something wrong.”

A friend of mine taught me a quick trick for figuring out how much your hourly rate is. He said, if you’re on salary, simply chop off the thousands and divide it in half. For example, if you make $20,000 per year, then, take 20 and divide it in half, so you are paid $10 per hour. If you make $40,000 per year, then take $40 and divide it in half, so you are paid, $20 an hour. If you make $100,000 per year, then take $100 and divide it in half, so you are paid $50 an hour. It’s not an exact science, but it gives you a working ballpark.

Is Your Time Worth More

I remember one of my friends asking the question, should Bill Gates pick up a penny? … or a dime? The default response is, “Of course” or “Why not?” Aside from the philosophical perspective, the point behind the question was that Bill Gates’ time is worth so much, that it costs him more to pick up a penny then spend that same time thinking up the next best thing. In other words, it’s a distraction, and it undermines spending his time on more valuable things.

How many metaphorical pennies do you pick up each day?

Asking the Question, Starts the Process

Simply by asking the question, what are $50 an hour activities? What are $100 an hour activities? What are $10,000 an hour activities, you start to see patterns and opportunities. For example, some coaches like Tony Robbins have charged $10,000 an hour. You can ask yourself, what sort of problems did he help solve that were worth that much?

If you start looking around, you can find models and examples of people that make more per hour. You can look at career paths and possibilities and you can see how much different types of jobs make per hour. More importantly, you can see the limits and limitations. For example, would it be realistic to expect to make $10,000 an hour waiting tables? If so, then where? If not, then what are some other paths, if making $10,000 an hour is an important benchmark for you.

The point is to cast a wide net and explore the paths, know the baseline, and know the ceilings of what’s possible. This will help you adjust your own expectations, as well as pick better paths.

It’s a Minimum, Not a Maximum

The point is to expand yourself and put more value on your time. After all, some say, time is all we’ve got. Just because you set your eyes on $100 per hour, means you should limit yourself to $100 per hour. In fact, you may find it easier to make $100 per hour, by going for $10,000 per hour. In the words of Bruce Lee, “Aim past your target.”

To do this, it means getting clarity on a few things. What is the market value of XYZ? For example, how much are people paying to do XYZ today? It means figuring out what skills you already have are undervalued, or you are not making the most from them. It also means getting clarity on what skills or experience you need to grow to move up the stack. The beauty is that models are everywhere, once you start looking for them.

In order to play this game though, it does mean you have to experiment and it does mean you have to play in arenas where you aren’t limited in what you can make. For example, as an entrepreneur or an Infopreneur in today’s world, you can test creating amazing products that change the world, while you’re changing your game. As a consultant or freelancer, you can test upping the ante on people paying a premium for your service or time. You can test splitting your offerings, by having a lower priced offer for one market, and a premium offer for another. Regardless, the point is to make it possible to explore what’s possible.

The Difference that Makes the Difference

The difference between the $10 an hour or the $100 an hour or the $10,000 an hour, might not be what you expect. While part of it might be skills and experience, a bigger part of it may in fact be how you build perception. At the end of the day, it’s not the intrinsic value, but the “perceived value” that people will pay for. And perception is reality. That’s why brand is such an extreme way to change the game. If two things are created equal, the better brand wins.

If you keep brand simple and think in terms of the three, five, or seven attributes that you want to be about (quality, value, beauty, etc.) then you can bake those into what you do. The other key is to make sure these align with your own values so that you can be authentic and play to your natural strengths. This is a more sustainable way, and by aligning your values, you gain advantage in terms of energy, passion, and ultimately personal power.

Don’t be surprised if when you start looking through this lens that you see many people working less, but making more. All your preconceptions about how much something should be worth, may be vastly different than what the market pays, or the perceptions that people have built. Don’t be blinded by your own assumptions, and don’t be blind-sided by how the market works. Especially don’t be surprised that by simply changing your arena or your container can suddenly boost your hourly rate. For example, your skill might be worth $10 in one part of the country, but $100 in another. The reverse is also true. In fact, the Web makes this especially interesting because it’s a world wide market. What you do for $100 an hour, somebody in the world might do for $10. But remember too, it’s not just the intrinsic value, it’s the market value, the perception, and the brand.

So the keys that make the difference, aside from changing your own mindset, beliefs, and assumptions, and expanding your skills and experience, is testing arenas, and testing possibilities, and exploring the models that are already out there, while coming up with some models of your own.

Getting Started with Your New Hourly Rate

A great place to start is to start from where you already are. To do so, try this …

1. Figure out your current hourly rate. If you’re already paid by the hour, then good, you already know this number. If you’re paid by salary, then chop off the thousands, and divide it in two. For example, $60,000 is $30 an hour.
2. Identify what you want your hourly rate to be.
3. Explore the options and possibilities of how you can pull that off. Find some examples to model from and test. When you get stuck find mentors and people in your life that can help you see what you don’t see.

Good luck and may your skills be with you.

My Related Posts

• The 8 Steps to Wealth
• The Good Life
• Time is the Limiting Factor

Photo by TheRitters.

“Don’t ask what the world needs. Ask what makes you come alive, and go do it. Because what the world needs is people who have come alive.” — Howard Thurman

Editor’s note: This is a guest post by Pat Flynn of Smart Passive Income.com.  Here’s what I like about Pat — he goes above and beyond and he keeps things real.   I first stumbled across Pat while doing some research about really making a passive income online.  I think it’s a skill more people will need as the world we know changes under our feet.  As I read through Pat’s posts, it was clear that Pat lives and breathes his passion and he genuinely wants to help people succeed.  I like that … I like that a lot.

I also like Pat’s bio …  “I didn’t win the lottery, I don’t drive a fancy car, and I’m not a millionaire. What I do have is a beautiful wife, an awesome baby boy, a loving family, awesome friends, and a line of work that allows me to spend all of my time with them.” … Pat is leading an extraordinary life and loving it along the way and that is success in action.

I have to say, this is truly one of the most amazing posts I’ve read on how to make a living on the Web.  I’m blown away.  Rather than a step-by-step approach, it’s a set of timeless principles and patterns.  Pat has distilled an incredible set of insights that he’s learned from actually making money online and walking his talk.  Without further ado, here’s Pat on how to make a living on the Internet …

This post is not intended to be a step-by-step guide on how to make a living on the Internet. Think of it as a compendium of the lessons I’ve learned since starting a number of online businesses – lessons that I hope will be far more useful to you than any “system” I could possibly teach. The fact is that there are thousands of different business models one could choose from if you do want to make a living online, but it’s the core principles and motivations behind them that determine whether or not it will be successful and long-lasting, or just a waste of your time.

Lesson 1: Internet Business is Not For Everyone

This might seem like a weird first lesson to you, but it’s absolutely true – Internet business is not for everyone. Although I feel very fortunate to be living how I am today, working from home for yourself does have its drawbacks:

• You Make ALL of the Decisions: Yes, this is the very reason why many people begin to work for themselves – to become their own boss and not answer to anyone else, but people fail to realize that this involves making business decisions that before (working 9 to 5) you would never even have to expend energy to figure out. With things like taxes, legal matters and healthcare, it can be too overwhelming for some to handle.
• Your Schedule Isn’t Set in Stone: Again, this is exactly what you want, right? A flexible schedule with the ability to work when you want? Yes, but a lot of discipline needs to come along with it in order for this to work. One problem that many Internet entrepreneurs have, including myself at times, is having the discipline to stop working and enjoy life. There is always more work that can be done, and it’s really easy to just step into the home office or open up the laptop and continue working.
• It’s Harder to Get Into Work Mode: Along the same lines, there are many distractions at home and online that can stop an Internet entrepreneur from doing work that needs to be done. I’m sure you can think of a few yourself.
• No Co-Workers: Having co-workers to talk to and become friends with is probably what I miss most about working 9 to 5. Luckily, there are things like Twitter, Facebook and Skype that help me stay connected with people while working from home, but talking about Monday night’s football game isn’t quite the same anymore.

I do love working from home, don’t get me wrong, but its not exactly all fun and games. It may or may not be the right thing for you.

Lesson 2: Strive to Make the Internet a Better Place

With whatever you want to do online, if you’re not doing something that makes the Internet a better place – if you’re not creating something of value that people can appreciate and say, “This makes my life better”, then you’re not going to see any long-term success. I’ve experimented with a number of various methods to make money online, and what has always given me the best results and the most ROI for my time and money (not to mention what gives me the most fulfillment) are those projects and websites that actually help people – businesses that if for any reason were to disappear tomorrow, people would notice. My website at greenexamacademy.com, for example, helps people study for a small exam in the building and design industry. One day in 2009, my servers went down and my website was unavailable. That day, I remember receiving over 50 emails from people who were using my website asking me when it was going to be back up. This just shows the kind of value I was providing, which is a good reason why this particular business has consistently earned thousands of dollars for me each and every month for over two years.

Lesson 3: The Passive Income Business Model

As I mentioned before, there are several ways to make money online, but the business model that I’m about to share with you is the one that I use because of how much work is needed by me in order to make things run.

Here’s a flow chart of how things basically work, starting from the top: The driving force behind all of this is automation. As you can see, the only part of the equation that YOU are involved in is at the receiving end of a payment. Things can happen without you having to do anything, as long as it’s setup properly.

People can arrive to your website, purchase a product and have it automatically delivered to them without having to lift a finger. What’s nice about doing business online, especially today, is that there are so many different tools, services and resources available that make this passive income model possible. And, if there are tasks in your business that do need the human touch, you can easily find someone else to do those things for you, on the cheap. On my site at greenexamacademy.com, I sell eBook and audio study guides that I created to help people pass the LEED exam. I purposely choose to only sell digital products because I can use a service like e-junkie.com to accept payments and automatically deliver these electronic goods without having to take the time and worry about going to the post office or shipping and handling. Furthermore, because my business is online, my “store” is open 24 hours, 7 days a week, 365 days a year and is open to the entire world. Just to give you an idea of what passive income can do for you, in March of 2009 I had worked a total of 8 hours the entire month. Most of my time was spent in Hawaii with my wife on our honeymoon and just settling into a new apartment. This month happened to also be my most profitable month ever, grossing $30,328.48. It’s an amazing feeling to know that you have businesses setup working for you, instead of the other way around. Obviously, however, you can’t take yourself totally out of the equation (since you may need to answer emails and deal with customer service), but you can get really close. As Tim Ferriss, author of The 4-Hour Work Week says, “I am not a tollbooth through which anything needs to pass. I am more like a police officer on the side of the road who can step in if need be…” What’s nice about this business model is that it’s something that you can setup in your spare time and continue to have while working a 9 to 5 job if you want. Also, since things are mostly run on autopilot, you can use that extra time to do the things that you want, whether it’s travel the world, stay at home with the family, or even work on setting up new passive income streams.

Lesson 4: Take Action

In other words – just do it.

We all have business ideas (or ideas that will improve our existing businesses), but ideas mean nothing unless they are put into action. We can plan as much as we want, but planning is just that – a plan. It’s the doing that actually gets you somewhere. I consider myself pretty lucky that I was laid off. It wasn’t a good feeling, that’s for sure, but looking back, my lay off (and the terrible economy which made it virtually impossible to land another job in the architecture industry) is what forced me to take that action. I really had no choice, which is why I think I’m where I’m at today. It can be tough to take action when it’s not totally necessary, which is why I use the following “mind hacks” to make sure I get things done:

1. I always set a deadline. I find that I’m more focused when I work under pressure, and if I know something has to be done by a certain time, I’ll make sure that it happens. This goes for items both big and small.
2. I get others to hold me accountable. Sometimes, all this requires is announcing or telling people what I want to do. This forces me to take action because I don’t want to say I’ll do something and not follow through.

Lesson 5: Take BOLD Actions

To expand on lesson #4, not only should you take action, but you should take bold actions that will make a big difference. It’s like in golf. When you’re putting, if you swing your club and hit the ball but it never even reaches the hole, you’re not giving yourself a chance to sink the putt. It’s impossible. If you take a strong stroke and your ball rolls past the hole, then at least you gave yourself a chance to sink the putt. Another way to look at bold actions is to compare it to some advice I learned from Ramit Sethi of iwillteachyoutoberich.com. He says that in the personal finance game, it’s always better to go for “the big wins”. He explains that being frugal and saving money by brown bagging your lunch or cutting down the number of non-fat grande white chocolate mochas you drink is virtually pointless. Although you will save money little by little, you can have more money in your life by going for the “big wins” like finding the lowest interest rate, negotiating down the price of your next car, or even starting your own business, and you can even still enjoy your non-fat mocha whatsits. When I first started doing business online, I was making money through advertisements on my blog, but it was after spending two months writing my first eBook study guide that I saw my income skyrocket from $250 a month, to over $8,000.00 a month. Then, instead of working on small things for my business, I took another bold action and added an audio guide to my product line. $1400 for a voice talent and another month later I took that product live and I began to see upwards of $15,000 to $20,000 a month. Bold actions = big results.

Lesson 6: Stop Worrying About Being Perfect

I have worked with so many people who are starting online businesses who take forever to get things rolling because they want things to be perfect, and what happens is they end up missing out on valuable opportunities or chances to really make some good money online. Like I said before – just do it! As long as your product, website or whatever it is you’re doing online has value and the message comes across clearly, all of that perfection stuff doesn’t even matter. Many people use perfection as an excuse. “I want things to be perfect” is just another way of saying “I’m too scared to really do this.” You don’t have to be perfect to be profitable! Get something out there now and you can worry about perfecting it later. It takes time for things to happen, so the longer you keep “making things perfect”, the longer it will take for you to see results.

Lesson 7: The King and Queen of Online Business

Content is King. Content, or what you write or publish online and in your products, is the driving factor behind any successful online business. Not only because original and desirable content matters to people, but because it matters to the search engines and their algorithms for what pages rank higher than others as well. You will hear many Internet marketers preach the phrase “Content is King” quite often. Not many of them, however, have taken on the idea that Design is just as important, but it is. Design is the Queen, and as we all know (especially if you’re married), sometimes the Queen has more of a say. This is why companies like Apple go over-the-top on the design of their products, because they know that there are people out there who really care about what something looks like, sometimes even more than what the product actually does. If you’re going to sell an eBook or audio product online, you should always include a high-qualty digital representation of the product on your sales page. There are companies out there (like coveractionpro) that are dedicated to doing just that – creating high-quality eBook and CD covers – because they know that design matters too.

Lesson 8: Specialize

When I ask people who their target audience is, the worst thing they can respond with is “everybody”. If you try to cater to everyone, you’re going to sell to no one. At most of the malls here in San Diego, there are at least 5 or 6 different types of shoe stores. There’s a store for athletic shoes, casual shoes, dressy shoes, walking shoes, and even one that sells only sandals. So why isn’t there one “all-kinds of shoes” store at the mall which could just tear the little competitors apart? Because it wouldn’t. Businesses know that the more you can cater to a specific type of person, the more likely it is that that person will buy from you. If someone is shopping for some serious basketball shoes, which store do you think they would visit: All Shoes Company, the shoe store that has all different kinds of shoes, or The Athletic Foot Company, a store that specializes in shoes for athletes. Of course, the Athletic Foot Company, since they would probably know more about basketball shoes and have a better selection than All Shoes Company. This “specialization” is even more important online, which is why you must really narrow down your niche and figure out exactly who your target audience is. There are over 6 billion people in this world, and you don’t need to build a business for all of them. In fact, you shouldn’t. Even a small, tiny niche like the LEED exam can be very profitable, and it’s even at your advantage to stay narrow, because you’ll run into less competition, both in terms of number of competing companies, and ranking in the search engines.

Lesson 9: Join a Mastermind Group

One of the smartest things I’ve ever done is join a mastermind group. For those of you who don’t know, a mastermind group is just a fancy term for a group of people with a common goal that meet (in person, on the phone, via Skype, chatrooms, meeting software, etc.) to share and learn to improve what they do. Think of it as a show and tell (and ask) for highly motivated individuals who want to get things done. In these meetings, members of the group share their ideas, questions, triumphs and downfalls. Members with questions get immediate feedback from the others, while everyone learns from everyone else’s experience and wisdom. I’m involved in two separate mastermind groups, both made up of other Internet entrepreneurs and business people who are all looking to improve what they do online. I’ve learned so much from these groups that I am confident in saying that if it were not for them, I would not be living like I am today. It’s not one single person, but rather the group as a whole that provide the advice and encouragement I need to get results. And, at the same time, I can give back a little bit of the knowledge that I know to help other people and their businesses succeed as well. You may know a group of people with similar interests who you may be able to get together with and start a mastermind group already, but if you don’t, and you’re interested, you might be able to find a group of people through Meetup.com or other online communities.

Lesson 10: Don’t Give Up

If you do decide to want to start something online, please understand that it will not be easy, and results don’t happen right away. There is no such thing as “get rich quick”, so don’t expect that. You will struggle and you will fail. That is what you can expect, and instead of giving up, learn from your mistakes and failures and just keep going. I’ve failed a number of times and I’m not afraid to admit that, but each failure brings me one step closer to a success. In all of my online businesses, I’ve wanted to give up at one point or another, but I’m really glad that I didn’t. Remember what your goals are, and take things one step at a time on your way there. And lastly, know that I’m not anyone special. I don’t consider myself an expert, and I only attribute my success to working hard, working smart and being confident that I could really make it happen.

BONUS Lesson 11: Always Over Deliver

To get even more results and leave a long lasting impression with your audience, one that will keep them coming back for more, you should always overdeliver on your promise. Always. Seth Godin simply describes this as “the free prize inside”. With my free eBook that you can get at ebooksthesmartway.com, I made sure to really go over the top with it. I’ve had people email me saying that I’m crazy for not selling it, and that it’s one of the best eBooks they have ever read (both paid and free). I did go crazy with it. I spent 2 months writing (and designing!) it to make sure that anyone who wants to publish, market and automate their own eBook could do it too. I went all out with it because I knew I was going to give it away for free, and that if I did that, people would be happy to pass it along and I’d be able to reach more people in the long run.

Thank You!

Before I go, I just wanted to say thanks to J.D. for allowing me to share a little bit of what I know and a bit of my story too. If you have any specific questions about my businesses or what I do online, you can leave a comment here and I will respond, or you can find me on my blog, Facebook or Twitter if you’d prefer that instead. I wish you nothing less than success. Cheers!

Editor’s note: I promised to add more financial advice this year and I want you to hear from the experts.  This is a guest post from Linda P. Jones, a real-world wealth builder.  Her super skill is simplifying financial advice and helping people build wealth.  She knows her stuff.  Linda both walks the talk … and … talks the walk, as an author, speaker and coach.

What I like about Linda is not just her real-world experience, but that she comes from the right place.  She likes to share what she knows and she likes to see people succeed.  I also like the fact that she’s not focused on get-rich-quick, but instead, get-wealth-smart … through changing your mindset, modeling success, and learning from the best.

Without further ado, here’s Linda on the 8 Steps to Wealth …

Have you ever been fascinated by how to build wealth?  Wondered why some people become wealthy and others don’t?  From a young age, I read and studied millionaires and investing, looking for the answers to those questions.  I read Think and Grow Rich when I was 10 years old.  I got a Business degree, became a Certified Financial Planner (CFP), and spent 28 years in the financial industry, because I wanted to know how to build wealth.

Although I learned a lot about investing from my education and work experience, it didn’t teach me how to accelerate wealth building.  If it had, then every stockbroker and financial planner would be wealthy.  I learned a lot from reading books by famous millionaires like John D. Rockefeller, Andrew Carnegie, and J. Paul Getty, and I noticed they had eight steps in common while building wealth.  Interestingly, some of the principles I learned from the famous millionaires were opposite to what I learned in the financial industry.

At age 27, I wrote down the 8 steps and created my own “8 step wealth blueprint” that mapped out how I would become rich.  I followed the steps, and by age 38 I was worth a million dollars. The following year, I made a million dollars in one year.

The 8 Steps to Wealth

Although it requires time and effort to really master this, I will tell you The 8 Steps to Wealth and let you know how you can learn more.  They are:

1. Develop a Wealthy Mindset
2. Build a Nest Egg
3. Find a Mentor
4. Invest in a Money Engine
5. Compound at a High Rate
6. Leverage for Higher Returns
7. Protect Your Wealth
8. Give It Away & Create Your Legacy

STEP 1.  DEVELOP A WEALTHY MINDSET

Having a wealthy mindset is the first and most important step, because it is the foundation.  What you believe about wealth is your reality.  If you don’t believe you can become rich, you can’t.  If you believe you can, you can.  It’s that simple, but it’s not easy.
There are many pieces to having a wealthy mindset.  You must make a decision you will become wealthy, have persistence, change your mental blocks, live outside your comfort zone, visualize the end in mind, and have an attitude of gratitude.

Making a decision is the starting point that propels you into action, but you must be decisive and committed.  A recent example is Donald Trump.  When he was asked what would happen if he lost his all money, he responded, “I’m always going to be rich and that’s that.  Next question.”  As you can see, he has zero doubt.  He is decisive and committed to being rich.

Many people start on the road to wanting to become rich, and then they give up.
THAT is exactly what separates the rich from the non-rich.  Persistence.  Losing faith that you can do it is a common problem with those who are not rich.  They never really believed they could do it, so they sabotage themselves and sell their stock low, quit their dream, stop writing the book, declare bankruptcy, etc.

One example of visualizing the end goal in mind is the actor Jim Carrey.  Before he was famous, he took a check from his checkbook, made it out to himself for $10 million, and put a date on it a few years into the future.  He carried it in his wallet and looked at it every day.  A few years later, he reportedly was offered $10 million for a movie role at almost the exact date he had written on his check!

I’m not saying all you have to do is think about it. If you’re starting a journey, you must  take the first step to get going. You can always revise your path later if you get off course.  Don’t expect success to happen in a straight line, or perfectly, or that it will be easy.  You will be tested to see if you are willing to do what it takes to get rich and in so doing, you have to face fears, get out of your comfort zone (which creates major mental blocks), and improve yourself and your skills. Just get started!

STEP 2. BUILD A NEST EGG

You must have a plan to get where you want to go. The plan will begin with deciding how much wealth you want to have, how you plan to get it, when you will have it, what you plan to give in return.  You must begin to accumulate or borrow capital for your nest egg to start your wealth building.  John D. Rockefeller worked as an accountant and although he made a meager living, he was able to save a sizable nest egg to begin building his fortune.

STEP 3. FIND A MENTOR

Finding a mentor or guide is one of the secrets that can shorten your road to wealth.  Imagine you wanted to go to a foreign country.  You’ve never been there before.  They don’t speak English and you don’t speak their language.  You plan to stay for a month and look forward to seeing the best sites and eating in the best restaurants.  How much easier would you be able to find your destinations if you had a translator?  Would it not make the difference between enjoying yourself and being completely frustrated and lost?  Would it not cut the learning time dramatically?  That’s what it’s like to have a mentor or guide.  Someone to translate for you, shorten the learning curve, and show you the ropes.  They help you avoid making dumb mistakes and getting lost.

Find a mentor or guide who is a millionaire (or billionaire) and learn from them by reading their books, following them on Twitter and Facebook, and hiring them to coach you (likely online).  Invest in yourself and your financial education, it’s worth it and so are you.

STEP 4. INVEST IN A MONEY ENGINE

Investing is simply the “money engine” to take you to your destination.  There are many different types of investment vehicles that are money engines and there is no “right” one.  Just like if you want to get from Los Angeles to New York City, you can ride different vehicles like a motorcycle, car, train, bus, or plane.  The speed with which you will arrive at your destination depends on which vehicle you choose and how fast it is traveling or, in this case, growing.  If you’re in a hurry, look for a low cost/high return money engine, like an internet business which can compound your money at a high return.  To build wealth quickly, you want the investment you choose to create a high rate of return.  That rate times your “nest egg”, compounded, is what will grow your wealth.

Andrew Carnegie said, “The way to become rich is to put all your eggs in one basket and then watch that basket.”  Think oil in the 80’s, technology in the 90’s, and real estate in the 2000’s.  Investors that were concentrated in the right sector created huge wealth.  Those who concentrated in the bubble while it was growing made a fortune.  The difficulty is knowing when to sell. There are signs when bubbles are topping, you just have to learn how to see them.

Historically, most millionaires made their first million in their own business or in real estate, but also in stocks, stock options, oil, and commodities. It depends on the timing of the trends and business cycles.  Don’t look to the past for the next high growth money engine, look to future trends.

Two angel investors formerly from Google concentrated their cash in what they knew — search technology, mobile computing, and the consumer Internet: Twitter, backed by former Google executive Chris Sacca, is the hottest startup in Silicon Valley, pioneering a new field of real-time communications and search provider Powerset, backed by Aydin Senkut, a former Senior Manager at Google, was acquired by Microsoft in 2008, and its technology became a key part of the Bing search engine.

STEP 5. COMPOUND AT A HIGH RATE

Einstein was right, compound interest is the “Eighth Wonder of the World!“ Compounding  means your money earns interest, and the money you earn on your money earns interest.  The formula is: Money x Time x Compounding rate = Wealth.  Compounding starts out slowly, then becomes a parabolic curve.  The more time you have, or the higher the rate you can compound money consistently, the faster you will build wealth.  Even a small amount like $10,000, when compounded at 100% (yes it’s possible), will become $1 million in only eight years.

STEP 6. LEVERAGE FOR HIGHER RETURNS

Leverage or borrowing money and using other people’s money, increases the compounding rate.  For example, if you have $10,000 to invest and it increases by $1,000, you have a 10% return.  But if you put $10,000 down on a $100,000 property and it grows by 10% to $110,000, you’ve made 100% (a $10,000 gain on $10,000 invested).  So leverage can dramatically raise your rate of return and hence, compound your money quicker.   You need to use leverage sparingly, time it right, and be prepared to “de-leverage” quickly if necessary.

STEP 7. PROTECT YOUR WEALTH

A wealth builder can leverage to build their wealth, but once it’s built, they need to eliminate the leverage to keep and protect their wealth. Once you’ve achieved wealth, it’s important to pay off your debt and diversify.  It’s a two-edged sword.  If you’re leveraged and your investment declines, it can go down twice as fast.

Like the disaster that happened to Aubrey McClendon, CEO of Chesapeake Energy in 2008.  Fortune magazine listed his wealth at $2.1 billion, almost all of it in his company’s stock.  He borrowed money from a brokerage firm’s margin account and leveraged 30 million shares of his company’s stock.  In the first 6 months, the stock skyrocketed from an average cost of $55 to $74.  But soon the natural gas market collapsed and he received margin calls, forcing him to sell his stock to pay off his loan.  The stock slipped to $11 in only 90 days and he lost more than a billion dollars almost overnight.  He built wealth by concentrating and leveraging, but didn’t protect his wealth.

STEP 8. GIVE IT AWAY & CREATE YOUR LEGACY

Giving money away to the less fortunate attracts more money back to you.  You are signaling to God, the divine, or the Universe that you have more than enough and you can be trusted to be given more to do good things for others. In turn, it will bless you with more money for your giving.

Why do you think the wealthy usually have charitable foundations?  Besides the tax benefits, they know this to be true.  In addition to money, give away time, free items, free consulting, etc. and watch the money flow back to you!  Focus on how you can help others, not what you can get.  When you feel you have enough to give, and you give to others, you feel more abundant, and you will attract more money.

Using your passion to help others is another way of giving back. It’s my passion to share my life’s work with others and guide them how to build, protect, and maintain wealth.  The financial industry has made wealth building much harder than it needs to be.  It’s my pleasure to share with others how to make it more simple.

The 8 Steps to Wealth became my blueprint for creating wealth and I’m sharing it with you so you can too.

If you are interested in learning more about how to build wealth using The 8 Steps to Wealth, visit http://VisionaryWealthNow.com, and follow me at http://Twitter.com/LindaPJones, and  http://Facebook.com/TheVisionaryInvestor .

About Linda
Linda P. Jones, CFP®, is an author, speaker, wealth advocate, coach, and CEO of Visionary Wealth Now and the Global Institute of Visionary Wealth. She founded the Global Institute of Visionary Wealth and Visionary Wealth Now to follow her passion and to guide others how to build wealth.
Before starting her businesses, she was Regional Vice President of Institutional Funds, Mutual Funds, and Hedge Funds for a major stockbrokerage firm where she was responsible for territory sales of over $200 million annually.
Born and raised in Seattle, WA, Linda graduated from the University of Washington with a BA in Business.  She began her career in Financial Planning with Foster & Marshall/Shearson, and was promoted to their offices in San Francisco and New York City (where she had the pleasure of working in the World Trade Center).
Linda is a board and investment committee member for SightLife (a leader in cornea recovery and transplantation), an investment committee member of The Sunset Club, and a speaker and community advocate for the Living Legacy Foundation, a leader in organ donation.

If you know the cycle you’re in, you can make more effective decisions.  You can anticipate instead of react.  I’ve been trying to get a handle on the economy to know what to expect and to figure out what the best moves are.  The New Economy Cycle is apparently one of the most important financial planning cycles for your life, your investments, and your business.  It’s less about the day to day decisions, and more about the big structural decisions you make in your life, such as where to live, what jobs to do, what to learn in school, … etc.

The New Economy Cycle of today is 80 years. It used to be 58-60 years.  During the cycle, the economy moves through four seasons.  At a high level, the overall cycle starts with innovation in key niches.  Gradually, the changes move to mainstream, and there’s a growth boom.  Next, there is a shakeout which is an extreme downturn and economic correction. Finally, there is a maturity stage where prices stabilize.

In the book,The Great Depression Ahead: How to Prosper in the Crash Following the Greatest Boom in History , Harry S. Dent writes about today’s 80-year generation-based New Economy Cycle.   Whether or not his predictions are right, Dent makes me think and it’s a new lens for looking at the big picture.  What I think is interesting is that his fundamental model is based on demographics and trends.

Key Take Aways
Here are my key take aways:

• The seasons of the economy are largely predictable.   While you can’t anticipate disruptions and other surprises, you can look at the bigger picture in terms of the markets overall patterns for rising and falling.
• Think in terms of 4 seasons.  The four seasons are: Innovation Season, Growth Boom Season, Shakeout Season, and Maturity Boom Season.  The Innovation Season is where radical new technologies and products first move into niche markets.  It’s where inflation rates rise and peak.  The Growth Boom, follows the innovation season.  It’s where the innovative generation grows up and learns and spends more money while adopting new technologies into the mainstream.  The Shakeout Season is where deflation and depression set in.  The Maturity Boom is where the economy becomes fully saturated with the new technologies, and this triggers the next radical innovation and inflation cycle.
• Missing the changes in the seasons can be devastating.  If you don’t know you’re in a downward trend, you could be swimming upstream against the current instead of riding a wave.
• The previous New Economy Cycle was 58-60 years.  Before the early to mid-1900′s the old New Economy Cycle occurred every 58-60 years.
• Today’s New Economy Cycle is 80 years.  According to Dent, the rise in the middle-class populations from the Industrial Revolution stretched the old New Economy Cycle from the Kondratieff Wave, to the 80-year generation-based New Economy Cycle of today.  The Kondratieff Wave was simply made up of two 29-30 year Commodity Cycles.  The 80-year generation-based New Economy cycle includes two 40-year generation boom and bust cycles.

Wiped Out in 3 Years
You can lose more in the downturn, than you make in the upswing.  Dent writes:

You don’t have to catch all the corrections and crisis along the way in each major boom and bust to progress in your quality of life and your standard of living, but missing the changes in these seasons can be devastating.  The entire gains of the Roaring Twenties were wiped out in just three years.

The Seasons of the Economy are Largely Predictable
Dent writes:

… these seasons of the economy are largely predictable.  Thousands of years ago, we learned how to chart and predict the annual weather seasons with great implications for agricultural planning and advances in our standard of living.  Even before that we learned how to track migration cycles for animals and to make clothes and store food in preparation for winter when we ere in the hunting and gathering stage.  The most remarkable insight in modern times is of unprecedented scientific advances and expanded predictability in most arenas is that economists, politicians, businesses, and investors still don’t see clear seasons and cycles in our economy, stocks, bonds, real estate, and commodities – even though they follow similar longer-term seasons with regularity.

The 80-Year Generation Based New Economy Cycle
The New Economy Cycle used to be 58-60 years, but now it’s 80 years.  Dent writes:

In our lifetime, the New Economy Cycle has developed over about 80 years in four distinct seasons, but before the early to mid-1900′s it occurred about every 58 to 60 years.  Rising middle-class populations from the Industrial Revolution stretched the old New Economy Cycle from the Kondratieff Wave (which is simply compromised of two 29- to 30-year Commodity Cycles) to the 80-year generation boom and bust cycles) and we are likely to return to the 58- to 60-year cycle in the future as generational cycles recede in importance with falling birthrates around the world.

My Related Posts

• You Lose More Money When Stocks Go Down
• How Much Profitability Do You Need?
• The Five Small Business Success Formulas

Photo by woodleywonderworks.

Editor’s note: This is a guest post from Stephen L. Nelson on his top 5 small business formulas.  Stephen is the best-selling author of QuickBooks for Dummies (over 400,000 copies sold), of Quicken for Dummies (over 1,000,000 copies sold), and numerous other books about small business accounting, finance, project management, and technology.  He was once called the Louis L’Amour of computer books by the Wall Street Journal because he’s written more computer books (roughly 160 at last count) than any other author.  What I like about Stephen’s insight is that he gets to see what works and what doesn’t for a lot of people.  While I think Stephen’s lessons are timeless, I think they are especially valuable in today’s economic landscape as more people find themselves considering starting a small business for the first time.  

Thinking about starting or buying a small business? As someone who’s worked with and advised small businesses for, gosh, the last twenty-five years, I heartily endorse this idea. You can make great money and enjoy a wonderful time if you own and operate your own small business.

But there’s something weird about successful small businesses–something you should know before you take the leap. Most successful small businesses use one of five, easy-to-describe “formulas” for achieving profitability. And if you’re thinking about starting or buying (or even going to work in) a small business, you want to understand how the formulas produce profits and where the risks reside in a particular formula.

The Five Small Business Success Formulas
Here’s a summary of the five small business success formulas:

• Formula #1: “It’s Almost Just a Job” Businesses
• Formula #2: “All Leveraged Up” Businesses
• Formula #3: “Early Bird” Businesses
• Formula #4: “External Solution” Businesses
• Formula #5: “Secret Sauce” Businesses

Formula #1: “It’s Almost Just a Job” Businesses
I want to start by describing the most common and lowest risk small business success formula–the “it’s almost just a job” business. No kidding. I think close to fifty percent of the small businesses that I see in my practice fall into this category.

Job businesses amount to the owner selling his or her time. Someone who’s worked for corporation as a programmer, for example, might become a contract programmer. A former corporate accountant might start selling hourly controllership services. A graphic designer recently laid off might–well, you get the picture, right?

Job businesses work because the owner sells hours of time at reasonable hourly rate. Hopefully some hourly rate several dollars more (maybe many dollars more) than the person’s former hourly wage. Sell enough hours and the job business works pretty darn well.

In my experience–and I think I’ve seen thousands of successful businesses over the last few years–you work hard in a “job” business. But if you can get through the first couple of years and to the point where you’ve built relationships with a handful of decent customers, you’re there. You’ll have a low risk, reasonably profitable venture.

And one note: by “low risk” I don’t only mean relative to other entrepreneurs, I mean relative to anybody who’s working. Someone with a corporate job is very likely to at some point find themselves laid off. With a “job” business, yes, customers come and go. But you would almost never lose all your customers one Friday afternoon.

Formula #2: “All Leveraged Up” Businesses
A powerful but more risky small business success formula rests on financial leverage. And in my experience perhaps twenty percent of small businesses–especially those that employ lots of expensive fixed assets–use this success formula. But let me explain.

On average, small businesses produce profits equal to roughly 40% of the business’s value. In other words, if you buy a small business for, say, $100,000, you would on average expect the business to produce $40,000 of cash profit. And, yes, if you buy a small business for, say, $1,000,000, you would expect the business to produce $400,000 in cash profit. (My source for this generalization about small business profitability is the BizComps database, a listing of several thousand small businesses that have been sold over the last decade or two.)

Now here’s where the return on a small business stuff gets interesting… In many cases, banks and the people selling the small business will finance much or all of the purchase price of the business at low interest rate. Or leasing companies will furnish much or all of the purchase price of the assets used in the business at low interest rates. When this occurs, the business owner makes out like a bandit because of the difference between the cost of borrowing and the return on the business investment.
For example, if you can borrow money at a 10% interest rate and you reinvest those funds in a business or assets earning 40%, you make 30% on whatever money you can borrow.

If all this sounds vaguely familiar to what real estate investors do, you’re right. Leverage is often what makes real estate investments work. But the leveraged small businesses work better than leveraged real estate investments because the interest rate spread is so much bigger with small businesses.

Note again that the example I’ve used here produces a 30% “leverage profit.”

As a comparison, real estate investments often produce returns of 10% (including appreciation). If you borrow money for 6% and reinvest those funds in something earning 10%, you pick up 4% of profit through leverage. That’s great. But 4% is nowhere near 30%.

One caution about leverage: The “all leveraged up” formula only works most of the time. Perhaps (and here I’m generalizing based on what I see in my practice) a “leveraged” business works great four out of five years. Or maybe a “leveraged” business works nine out of ten years.

Eventually, however, some internal shock (like the departure of your key employee) or an external shock (like a recession) means you’re not getting positive leverage. You may be paying more for the money you’re using in your business than you can make on that money. When these sorts of shocks to the system occur, the business that uses too much leverage fails.

Formula #3: “Early Bird” Businesses
The business formula that many people think of first is the idea of getting to some new or fast-growing market early. I guess that makes sense. The popular monthly business magazines tell one or two of these entrepreneurial success stories in every issue.

But here’s why these ventures make such good stories: If you start an early bird business in a market without strong established competitors, you may enjoy fast-growing revenues and profits for years or even decades. Not to be vulgar or anything, but if you succeed in an early bird business, you may find yourself shopping for a private jet.

The reason that early bird businesses work so well is maybe obvious. If you enter a market growing at, say, 100% each year, you have a great shot at growing your business by 100% a year. Grow your business at, for example, 100% a year for five years and you’ll go from $1,000,000 to $30,000,000 in sales. Yikes.

The “early bird” formula, unfortunately, suffers from a weakness–at least from the individual entrepreneur’s point of view: Potentially fast-growing markets are often well-known, highly-anticipated, and over-crowded with veteran entrepreneurs and venture capitalists. Furthermore, you get many “false positives”… opportunities that start out looking terribly promising but later fail to deliver.

Peter Drucker discusses these points at some length in his seminal work, “Innovation and Entrepreneurship.” But to sum up Drucker, early bird opportunities probably aren’t that practical for individual entrepreneurs to pursue. The odds for individual success are too low. Nevertheless, if you find and pursue one of these opportunities and you succeed, well, expect to see your picture on some magazine covers.

A final comment: While many people and perhaps especially refugees from super-successful entrepreneurial ventures like Microsoft and Google try the early bird formula, I really don’t see very entrepreneurs succeed in small business settings using this formula. In fact, I would guess less than five percent of my business clients successfully use this tactical approach.

Formula #4: “External Solution” Businesses
The “external solution” business formula may be the most surprising small business opportunity–at least to new entrepreneurs. But I’ll bet ten to twenty percent of the successful small businesses I see fall into this category. So let me explain.

Very regularly, a large organization like a corporation or a government agency has a problem that it needs to solve. But the organization doesn’t have the right person to deliver the solution. In these cases, the big organization commonly says to an individual, “Listen, we’ve got s problem we need solved. We don’t have anybody internally on staff who can deal with this. So, how about we pay you, like, $500,000 a year in consulting fees for the next couple of years? Sure, it’s a lot of money. But we need this problem solved.”

That sounds sort of crazy. But a significant number of small businesses amount to such external solutions the entrepreneur creates for a single large customer or client. These businesses represent wonderful opportunities for the entrepreneur. For one thing, the “external solution” business can be immediately profitable–and often highly profitable. Furthermore, the business’s lifecycle can often be planned with a huge degree of certainly because the business probably ends when the “solution” is delivered.

If there’s a mistake that people make with “external solution” ventures, it’s this: Sometimes the entrepreneur doesn’t recognize that this success formula typically provides a very short-term opportunity. Eventually, for example, the bridge gets built or the oil refinery gets upgraded. As long as the entrepreneur expects and is ready for the business to “finish,” nothing bad happens. But the “external solution” small business gets into trouble if the entrepreneur implicitly expects there’s another bridge somewhere that needs to be built or oil refinery that needs to be upgraded.

Formula #5: “Secret Sauce” Businesses
Not every successful small business uses one of the preceding four success formulas. In fact, there’s at least one other terribly common success formula that small businesses use: the secret sauce formula.

Probably the best way to begin thinking about the secret sauce formula is by looking at a successful franchise operation–something like McDonalds Corporation.

Whatever you think about the eating at the “Golden Arches,” you probably agree that McDonalds Corporation supplies its franchisees with lots of expertise about how to locate, setup and operate a fast food hamburger restaurant. Probably every element of the operation from French fry cooking times to bathroom cleaning procedures has been carefully thought out and is regularly re-assessed. In combination, this collective knowledge amounts to a secret sauce that McDonalds’ franchisees use to jack up their profitability relative to competitors that lack this information.

Good franchisers supply a secret sauce formula to their franchisees. (For a franchise royalty, of course.) But some entrepreneurs have developed the same sort of secret sauce. For example, a restaurateur may have learned where to locate, how to setup and how to profitably operate Chinese food restaurants, fish-and-chips shops, or hotdog stands.

Secret sauce businesses won’t look like other businesses. Even a bit of due diligence or research will indicate that such a business isn’t a job business, that it isn’t all leveraged up, that it isn’t based on a single customer or client, and that the business works for a reason other than fast growth in the market it serves.

In fact, if you do look at (or build!) a secret sauce business, you’ll realize that the business success flows from dozens or maybe even hundreds of smart decisions and clever improvements. This collection of decisions and improvements probably means the risks of a business using this formula are fairly low. But of course the secret sauce formula needs to be continually refined and improved. Otherwise the sauce will lose its zest and grow stale.

Additional Resources

• StephenLNelson.com (Site)
• About Stephen Nelson (Bio)

Some of Stephen L. Nelson’s Small Business Do-it-yourself Resources

• Downloadable Limited Liability Company Kits
• Downloadable S Corporation Kits
• Downloadable and Free Business Planning Resources

“Profits, like sausages… are esteemed most by those who know least about what goes into them.” –  Alvin Toffler

How much profit do you really need to make?  You only have so much energy and time.  While the idea of making as much profit as possible sounds great, the reality is life’s full of trade-offs.  In the world of business, you need to know your minimum profitability to meet your objectives.  This helps you identify realistic goals and make more effective trade-offs. 

In The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, Peter Drucker, writes about identifying minimum profitability.

Key Take Aways
Here are my key take aways:

• Know the minimum profitability you need to survive.  You should know the minimum profitability you need to stay in business. 
• Know the minimum might be higher than you expected.  You should know that the minimum to meet your objectives might actually be higher than you expected.

I think we make better choices when we’re aware of a specific goal versus "as much as possible."

Plan for Minimum Profitability Over Profit Maximization
Plan for minimum profitability.  Focus on the minimum you need to make to stay in business:

Drucker Writes:

“… How much profitability do we need?  To attain any of the objectives entails high risks.  It requires effort, and that means cost.  Profit is, therefore, needed to pay for attainment of the objectives of the business.  Profit is a condition of survival.  It is the cost of the future, the cost of staying in business.  A business that obtains enough profit to satisfy its objectives in the key areas is a business that has the means of survival.  A business that falls short of the profitability demands made by its key objectives is a marginal and endangered business.  Profit planning is necessary.  But it is planning for a needed minimum profitability rather than for that meaningless shibboleth “profit maximization.”  The minimum needed may well turn out to be a good deal higher than the profit goals of many companies, let alone their actual profit costs.”

Photo by theritters.

My Nuggets
Here’s my nuggets so far …

• Emulate the Great

A Comparison of Buy-and-Hold and Trend Investing
Jim and Rich write the following:

“An investor who invested a dollar sixty years ago and stayed in the market at all times could have a portfolio worth about $17,000 today. But if he was out of the market for just the 20 best months in the sixty years, months when the stock market was doing very well, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth only $240.

What you are not told as a buy-and-hold investor is that if an investor was out of the market for just the twenty worst months when stocks were falling like a rock, his investment might be worth $1,700,000. Another Wall Street saying to remember is:

Investors can lose more money when stocks go down than they can mak when they go up.

Because the average investor can lose more money when stocks go down than they can make when they go up, a buy-and-hold strategy may not be the best way to invest during proloned bear markets, which have occured over the past few years. In fact, a period of falling stock and mutual fund prices can reduce a buy-and-hold investor’s annual returns over five years to less than those of a taxable money-market fund, and in many cases to an annual loss. As a result, individually managed accounts have become one of the fastest growing ways to invest. “

Key Take Aways
I’ve seen this first hand. When I joined Microsoft, a mentor told me there was a key difference between the well-off and the not-so-well-off. The well-off held on to their options when they invested. The not-so-well-off, cashed their options and lived beyond their means. I took this to mean that, as a rule, you should hold on forever. I later learned, that holding on forever is not the right strategy. You can in fact, lose more when the stocks go down than you make when they go up.