May the Tiger Year bring you progress in your financial journey.
Over the past several weeks, Aunty Scroogey has seen hordes of people queuing up at the Toto booth, hoping to strike the jackpot. The Aunty just hope that these winners are equipped with adequate knowledge of how to manage their ‘big money’.
Click on these links to read about lottery winners who are eventually left penniless (or almost).
We’ve talked about how to handle small money – that is, money that you earn on a regular, recurring basis, which may not be large in amount (eg monthly salary). And the best way to handle this would be to apportion it in the ratios 70%, 20%, 10% (http://thepeonies.com/relativity/) or whatever ratios that you are currently living on, say 60%, 20%, 20% or 80%, 10%, 10%.
How then do we handle big money such as bonus, lottery winnings or a windfall gain from selling your house? Assuming no debts to settle, it would be sensible to apportion it in the reverse of your small money ratio. In Aunty Scroogey’s case (where the small money ratio is 70: 20: 10), the Aunty typically uses her annual bonus in the following way: 70% – savings/investments, 20% – payment of income tax & charity donation, 10% – for purchase of frivolous items. The key point is, make sure you have a plan of how to deal with your big money before you lay your hands on it. Without a plan, you might just lose track of the amount you spent and before you know it, there’s hardly anything left. Do remember – financial planning is not an option, it is a responsibility.
This week, something happened. Something important – one of our regular supermarket clients Mrs Bagel (who owns a bagel shop) was chatting with our supervisor. Her landlord is about to increase the rent for her bagel shop by $500 to $4,000. It turned out that the landlord in question is neither a high flying white collar executive nor a scion of a rich family. He is a middle aged guy selling granny clothes next door (well you know, old fashioned clothes that only grannies would dare wear out). Doesn’t this remind you of the fruits seller?
I bet many of you out there feel frustrated that you can’t do any “proper” investments because you do not have the luck to receive big money such as the 8-months bonus payout your cousin Linda gets, or the humongous commission your brother John, who is a top grossing insurance agent, earns. And you’re probably vexed that your savings ratio (say 10% on $2,000), comes up to only $200 every month and you’re thinking: what in the world can $200 do in terms of investment? If that’s really how you feel, chances are you just might have overlooked the power of small money.
In finance, you need to remember a very important concept – wealth takes time to grow. This concept forms one of the most basic fundamentals of successful financial planning. Over a period of 30 months or 2.5 years, your $200 a month would’ve turned into $6,000. If market risk type of investment appeals to you and you’ve taken advantage of the opportunity of low stock prices brought about by the collapse of Lehman Brothers, and bought say, the shares of Olam International Ltd, which were trading at less than $1 a share at the peak of the crisis, you would have gotten 6 lots of shares (1 lot = 1,000 shares, for simplicity we’ve rounded up figures and assumed no brokerage charges). Olam shares are now at more than $2.50, which means that you have a gain of $9,000. Not bad for $200 a month eh?
Scroogey greetings to all of you and here’s wishing that 2010 will be a better year if 2009 had not been. And since its the first Scroogey post of the year, Aunty Scroogey thought it will be great to start off with something positive. How about talking about the power of debt?
Debt? Positive? You must be thinking – did something go wrong somewhere? How can debts be considered positive? Ah well….. that depends on what you do with the debt. You see, financial debt is a very powerful thing; and its a double-edged sword. It can crush you and take over your life or it can help to make you rich. VERY rich.
If you’re a guy, think of it as a razor blade, which you can use to shave unsightly stubs and make yourself look clean shaven and attractive. But if not careful, you could cut yourself and end up with a scar. Same goes for debt. If you take on credit card debts or other form of financial debts as a means of financing (meaning you don’t pay in full when bill is due) for consumption such as buying new tech gadgets, branded goods, travelling, etc, then that’s akin to cutting yourself with the razor blade.
However, it’s a different story if you use debts for making a good investment, that is, acquire a good asset that generates enough recurring cashflow to service your debt and at the same time, provide you with positive leftover cashflow. Eg. a vending machine with remaining life of 12 years costs $5,000. You put $1,000 as a downpayment and finance the balance $4,000 with a 3-year loan that charges you 8% per annum, making loan repayment just under $140 per month. Total takings from the machine averages $400 a month, and servicing costs is $500 per annum. Assuming no other costs, your net cashflow is $2,620 per year.
The above example has been made simple to show you the use of debt to help increase your cashflow. The additional cashflow of $2,620 is only from 1 machine, but assuming that you have 10 of the same machines averaging $400 sales a month, it works out to $26,200 a year. A vending machine might not have any upside potential (meaning sell it at a higher price), but if the asset in question is a piece of real estate that not only gives you positive net cashflow every month, but also the chance to sell it off at a higher price down the road, would you still think of having debt as a negative thing? In fact, this is exactly how the rich gets richer – that is, with the help of debt.
A young lad whom The Aunty spoke to recently said he wanted to be a real estate tycoon when he reaches 50. And I asked how does he plan on achieving that? He says he will start by buying the tallest office building in the central business district. I told him those things cost lots of money (something like a few hundred million) and he says it doesn’t matter, he will save till he has enough to buy.
Ahem…. assuming he is going to save $20,000 a month (errr…..yeah I know, but let’s assume shall we?), he will need to save for 10,000 months or 833 years just to buy an office block that costs $200 million. I am dead sure he won’t live that long. And we have not even factored in inflation yet during that 833 years.
While it may sound like getting a loan to finance a good asset providing decent cashflow sounds like the sensible thing to do, one must not simply jump into it without the use of a secret weapon – that is, financial knowledge. Remember, debt is a double-edged sword. I can’t emphasize enough how important it is to equip oneself with the necessary financial knowledge in order to use such a powerful tool. In the real word, lives have been lost, businesses folded up and families torn apart when people who do not have adequate knowledge use the sword wrongly.
How about you – is the debt you have making money for you or do you fall on the wrong side of it? How about setting a new year resolution this year to start your financial education if you have not done so? Regardless of what profession you’re in, a financial education is useful when it comes to planning your own financial journey.
Here is an interesting video to summarize what Aunty Scroogey wrote in this blog entry.
Aunty Scroogey has always emphasized that financial planning it not an option, it’s a responsibility. Just last week, the Aunty came across a Business Times article about the retirement village concept. One particular line caught her attention – A recent study by the Lien Foundation revealed that Singaporeans’ greatest fear is to be a burden to their family and friends. Among their top five wishes is to spend their final days at home, but with medical and nursing support nearby.
If you’re like me, and prefer not to add on to the financial burden of your loved ones when you’re in old age, then what better time to prepare yourself for it than now, when you’re robust and healthy? For those who have taken the first step, good for you. For those who would like to start planning but are unsure of what to do, a good way to kick start would be setting aside some money every month as savings. You’ll need a structured, discipline approach to it rather than saving money by the I’ll-see-what’s-left-at- the-end-of-the-month-after-all-my-spendings method. Refer back to this for the 70% 20% 10% method of allocating your hard earned money.
Then there are some of us who have gotten a little further ahead and have accumulated a nice tidy sum from the monthly savings set aside. What do you do with the money in order to make it grow? Well….. until you can answer these questions here , neither you nor your financial advisor/planner can determine what sort of investments would be appropriate for you? Would you much prefer to take market risks or credit risks?
Managing your own money isn’t any rocket science; it just takes lots of discipline – there are people out there who are not highly educated but yet manage to grow their networth to a comfortable level. People such as the secretary and the fruits seller.
And in the midst of all these, if you feel that you’ve benefited from someone’s actions/money/teachings/advice, let’s not forget those who are struggling to earn a living. You might want to think about how you can give back to society, and if you are making monetary contributions, you should ideally, formulate your own guidelines as to what sort of beneficiaries you would like to donate to.
This is Aunty Scroogey’s final blog entry for 2009. In the coming year, the Aunty will be writing more specific topics such as equity investments, bonds, property, charity, etc. Live well, and have fun while on your financial journey.
This may sound odd to some people but the fact is, giving is also a part of the wealth equation. Personally, Aunty Scroogey feels that all she has, is by the grace of other people, and it is therefore important to give back to society. Throughout the years, other people’s actions / money / teachings / advice have benefited her; likewise, she would like her actions / money / teachings / advice to benefit other people as well. One doesn’t need to be filthy rich like Bill Gates in order to make a contribution to charity; there are no hard and fast rules as to how much to contribute so long as it is a comfortable amount to the donor.
Aunty Scroogey has her own set of guidelines when choosing a charity to contribute to. For example, the Aunty doesn’t donate to individual needy persons but prefers to donate to organizations working towards a specific cause to benefit the general public. Of course, you will need to know and feel comfortable with the organization in question on how they handle donations.
Giving back to society also does not stop at just monetary contribution. It could also be in some other forms such as volunteering your time for a cause. Aunty Scroogey’s neighbour – an energetic young girl gifted in photography and design – volunteers her time and skills to design websites for charity groups free of charge. One of the reasons that Aunty Scroogey writes this column is to reach out to people who keep falling onto the wrong side of debt and help them break out of the poverty cycle.
Here’s an exercise: take a moment and reflect, while you are on your financial journey, in what ways (yes, I’m sure there are more than one) are you able to make someone else’s life better?
This is an article about saving money on electricity. Question: How do you like
(a) the idea of having your food cooked while you’re sleeping/shopping/at work etc?
(b) Better still, how do you like idea of (a) above and at the same time incurring little/no electricity charges or gas usage while your food is being cooked?
Yeap, such a thing exists in real life. It’s called a thermal pot, and it basically works like a huge thermos flask.
Aunty Scroogey loves soups and frequently uses one to cook soup. All you need to do is put your ingredients into the pot, bring it to a boil and then put the whole pot into the thermal container (if you’re paranoid, you may want to simmer for another 10-20 mins before removing from fire). Soup is ready a few hours later; but I usually leave it to cook overnight. If you’re like me and like your soup piping hot, just bring it to a boil again before serving.
Broadly speaking, investors are rewarded for 2 main types of risks that they take – market risk and credit risk:
Market risk
Very simply, market risk refers to risk of price movements of your investments. For example, the risk that share price of Company XYZ will plunge after you’ve bought its shares; or the risk of interest rate going through the roof after you’ve committed to a mortgage on an investment property. Or maybe you’ve converted some Singapore dollars into Australian dollars, and the exchange rate has now moved against your favour – that’s also market risk. If you are someone working in the financial world, one way to measure market risk is using the variance at risk or VaR technique. However, since this column is intended for retail investors who are largely laymen, we shall not be discussing the technique since it involves a great deal of complexity.
It should be noted that given the uncertainty of market directions in general (there is no guarantee that you will get your original capital back), the reward for engaging in market risk – that is, capital gain – typically far exceeds that of credit risk. As we mentioned in the last blog post, high returns normally accompany high risks, low risks low returns.
Many retail investors are familiar with the concept of market risk but few know how to deal with it. Most financial planners would advise that during your younger years, it would make sense to allocate a bigger proportion of your investments in taking market risks such as buying shares; reason being, you would most likely have time to ride out market volatility in the long term (that’s one of the ways to deal with market risk). Likewise, as you advance towards old age, it would make more sense to switch progressively into credit risk-type investments, given that there is limited time to withstand volatility.
Let’s assume you’ve amassed a modest sum of money from the amount of savings that you’ve set aside every month (presumably at least 10% of your monthly salary). What then do you do with it? Go for a holiday with the money? Buy the pair of shoes you’ve always wanted? Treat yourself to that expensive buffet at Shangri-la? If you’re thinking of all these…….. give yourself a slap in the face NOW. You should know by this time that all those items mentioned should be taken either from your living expenses budget, or your frivolous spending budget a la Miss Lala but NEVER from your savings/investment budget.
How then do you go about investing your hard-earned money? Before we get to there, you need to ask yourself a few basic questions. These questions form the basic plan of your investment strategy.
Have you ever wondered, why do rich people get richer and while the majority of the poor people remained almost as poor as before?
You’ve probably come across this before, maybe your mother was trying to tell you about the very capable daughter your Auntie Jane has because she got a $5,000 job right out of school….. or maybe your childhood friend just had a lottery windfall of $30,000. You see, for most laymen out there, when we think of how wealthy a person is, we tend to think of how much cash he/she holds. Whereas, when you read about the world’s richest people such as Bill Gates, Warren Buffet, Li Ka-shing, etc , notice that nothing is mentioned about how much cash they hold? Here is when you learn a new word “networth”.
In the context of personal finance, networth refers to the market value of all your assets less all liabilities/debts. If you have a huge collection of shoes, or a fleet of sports cars, or the latest tech gadget, these are NOT assets. And while we’re on the topic, note that networth also excludes the value of the house you are staying in. With so many exclusions, what then do you include? Basically, cash and all your investments. Refer back to this article for Aunty Scroogey’s definition of an investment.
Cash doesn’t grow very much (and you probably know that already), and even if it does grow via fixed deposits, it is usually hardly enough to beat inflation. So it is very important that we put our hard earned money into the right type of investments and let our networth grow. The rich folks out there don’t keep a large proportion of their wealth in cash – they make their money work for them through the investments they make.
From time to time we encounter the inevitable occasion of having to spend money on big ticket items. By “big ticket”, I mean a sum so large that your monthly spending budget is not enough to handle, or that even if the said budget could manage it, you end up not having anything money left for your monthly miscellaneous expenditure. Think washing machine, PDA, laptop, and you get what I mean.
Typically, for sake of good order, we match big ticket expenses with big ticket money – that is, a lump sum that does not happen on a monthly recurring basis, eg bonus, lottery, capital gains from stock market, monetary gift, etc. But then at times (say your P.C broke down), it’s a matter of life and death and we just do not have the luxury to wait. So what do you do? Such that you do not burden yourself with a sudden big amount that would upset the balance of your ratios?
This is when you learn a new word – amortize. As per the definition of an online dictionary, to amortize means to “write off gradually and systematically a given amount of money within a specific number of time periods.
Let’s put all these in simpleton terms.
Assuming Ms Lala’s monthly take home salary of $4,000 is divided into 70% living expenses ($2,800), 20% savings/investments ($800) and 10% spending money for frivolous items ($400). One fine day in March, her son decided that it was funny to wash his bake beans dinner in the washing machine. The poor old machine couldn’t take the abuse and broke down. A new washer would cost Ms Lala $550. To amortize, Miss A spreads out the $550 over a period of 5 months and it looks something like this:-
April 2009 – $150 ($100 from 70% money, and $50 from 10% money)
May – $100 (from 70% money)
June – $100 (from 70% money)
July – $100 (from 70% money)
Aug – $100 (from 70% money)
At the same time, from the period from April to Aug, her 70% money goes down by $100 every month to $2,700 (10% money also goes down by $50 in April). Assuming there are no further amortizations, living expenses returns to status quo at $2,800 by Sept. Spreading out the cost of a big ticket item over a period of time is certainly easier to live with, than to have to live with $550 less in a single month.
