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Posts Tagged ‘Debt’

Money No Enough

It was over a nice relaxing coffee session with a good friend of mine that we happen to chance on the topic about investments.  I was rather animated and very excited (probably compounded by the fact I just had a double shot of espresso) about the great variety of bargain stocks currently available.  She sighed and lamented the fact that she was saving for a house and thus had little spare cash to invest.

Raising the Titanic

Raising the Titanic

Somehow I get the feeling that raising capital is a serious barrier to getting into equity investments.  I calmly said it was never “Money No Enough”, but rather “Not Enough Effort”.  My friend then had a look on her face that implied that raising the Titanic was probably a much easier feat than raising capital!  In order to repay my friend for a cup of coffee she so generously paid for me, I decided to share how easy raising capital can be.

Here are some methods to consider:

  1. Personal Savings (0% interest rate) – Take 10% of your current savings to invest.  It should be used rather than allowing it to sit idle in the banks drawing a miserable 0.2% annual interest rate and suffering losses from inflation.  Seriously, most folks can hardly notice a difference with 10% less in their cash savings
  2. Father-Mother Loans (Usually 0% interest rate)– Seriously, most parents never ask their kids for interests on any loans (secured or otherwise).  The only thing is that you need to justify your investments and learn to be prudent.  These are afterall your loved ones hard earned cash.  Did I mention interest free?
  3. Insurance Policy Loans (4% to 8% interest rate)– It is a capital raising tool that is frequently forgotten by most insured people.  Did you know that you can borrow up to 90% of the cash value of your insurance policies?  Hence, if you had a policy that is worth $10k in cash value (or otherwise known as surrender value), you can borrow up to $90k at 4% to 8% interest rate per annum.  The good part is that you are still insured by your policy as you take this loan from your cash value.  Superb!
  4. Credit Card Loans  (Nett 4.5% interest rate) – There are cheap loans on credit cards available that allows borrowers to repay the loan in 24 months.  These loans can amount to 2 times your monthly drawn salary and usually come disguised as “Interest Free Loans”.  Just remember to read the font size 1 terms and conditions to calculate the nett interest rates.
  5. Housing Loans (3% to 6% interest rate) – This is a rather complex, but interesting capital raising tool for people who owns property.  The key is to take a housing loan that is bigger than what you need.  The excess funds will then be available for us pegged at the housing loan rates, which are one of the most attractive interest rates in town.  While this sounds attractive compared to Lines of Credit loans or the complicated Car Loans, the complexity and paperwork is quite prohibitive for me.  Only recommended for home owners with huge properties or numerous properties.

The above is listed in the order of preference with the following criterias:

  1. Low interest rates – the lower the better
  2. Low consequences in the case of default
  3. Long repayment period
  4. Ease of approval

While the list I mentioned is not exhaustive, it should get most people started.

My friend then proceeded to look amazed and asked why would she get herself in debt to invest?  I then explained the reality.  There is good debt and bad bebt.

BAD DEBT

Most folks can easily find money to buy cars that depreciate 30% in value the moment you drive out of the showroom, or fund holiday trips to exotic destinations only to be miserable for months to pay off the hotel bills.  So anything debt that does not generate a positive return of cash to you can be considered bad debt.

GOOD DEBT

Taking a small loan/debt as a form of raising capital for good investments can be considered good debt.  This is because a wise investment can bring additional cash into your pockets and increase your individual net worth.  Hence a prudent investment can generate yearly returns from 10% to 20% from buying these investments!  This is a trick used by the rich.  Borrowing money to make even more money…

The assumption here is that she has the capacity (like a day job) to pay off the loan via installments over a 6 to 24 months period.  Thus she would be taking a loan to invest.  While she is paying off the loan, the investment would immediately start making money for her.  So in a scenario where she makes 12% returns on the investment and she had to pay an average of 6% on interest due to the loan, she would have a nett a respectable income of 6% on her investment.  This is in addition to the fact that she now owns a financial vehicle that will generate more returns in the years to come without having to lift another tiny finger.

Even in the event of the possible loss of value of the initial capital invested in a well chosen stock, the dividend should buffer the fluctuations, and also since you own the stock after 6 to 24 months, you do have long term holding power to wait for the value to rise to acceptable range again.

Stay tuned on what can potentially be a wise and prudent investment…

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10% Please!In a not so known earlier adventures of Indiana Jones, he once sought and found the lost book of richest ancient empire of Babylon. The secret of its wealth resided in “The Book of Wealth“. After braving many dangers, booby traps, Nazis and all the special effects the movie director can throw at him, he finally found the much sought after treasure.

As he traveled in the safety of his truck sending him home, he opened and read the ancient book in 4 seconds. Subsequently, he tossed the book out of the truck thinking that even if the Nazis were to find this book, they would do the same.

As we now know, Indiana Jones did not take the advise in the book as he had to subsequently come out of retirement just to make more movies to earn more money to sustain his lavish lifestyle. Poor guy…

Was he really loosing his nuts to have tossed that valuable ancient book? We can decide for ourselves. Shortly after, this book was discovered and found to contain only 4 pages. It was publicly examined, but “experts” found so much common sense in them (though uncommonly applied) that it was not deemed worthy of a place in any museum!

Here are the FULL contents of the 4 pages in big bold letters:

  1. Earn More
  2. Spend Less
  3. Grow Savings
  4. Protect Savings

Would you have done the same as Indiana Jones and suffer the same fate?

Let us examine each point accordingly:

  1. Earn More – Every rich person has good earning capacity. They earn the money and riches they have. So if you are lazy, and not even bothering to earn your riches, you can never be rich or wealthy. You would be very lucky not to be poor at all! What about those who inherited their fortunes? Well, unless they learn their earning skills from their parents of benefactors fast, they too will loose their wealth just as fast!
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  3. Spend Less – Accumulation of wealth simply means earning more than you spend. Notice that it refers to everyone, and not just to the rich. So that means that even when you are earning a modest salary, you too can begin accumulating wealth just be spending less than you earn! The general rule of thumb is to have the discipline to save 10% of your earnings every time. nothing more, nothing less. This applies even in debt, which I will talk about in another time.
  4.  

  5. Grow Savings – When you have saved enough money, it would mean that you should use this sum of money to grow it rather than letting it stay dormant. So use money to earn more money! So the rich do get richer!
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  7. Protect Savings – Set aside 6 months of your salary savings in cash. This is an emergency fund that should always be protected and never touched. All excess cash should be invested wisely to bring about accelerated returns. The key word is “wisely” so as to never lose money in all investments. Hence we need to always be cautious and careful. More of that topic later.
  8.  

There is true wisdom in uncommonly applied common sense…

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Sounds like I have just gone bonkers!  However, the concept is very simple.  Start with an end goal in mind.  Can you know how to begin if you don’t where you are going?  You might end up like a dog chasing its own tail.  Going around in circles.  Lots of sweat and work involved, but leading to precisely NOWHERE.

So when you retire at 60, do you want to:

  1. Be bankrupt and full of debt – leaving your next few generations of descendants to work as slaves to pay your debt.
  2. Be worth millions in value – asset rich but cash poor. You may have to start eating your valuable house at some point when you grow hungry as you have no money left to buy food.
  3. Be worth millions in cash and have a valuable home – live off your money in style! You will definitely be the favourite dad/mom where all your kids are dying to win your favor for obvious reasons.

Assuming your choice is option 3, then calculate how much income you need at 60 years to live comfortably in a preferred lifestyle. For example:

  1. I have 30 years to retirement
  2. Assuming that my current lifestyle costs me S$10,000 per month to be comfortable
  3. We need to factor inflation at say 3% per year for the next 30 years
  4. Using an calculator, S$10k multiplied by 103% by the power of 30 years, we need approximately S$25,000 per month (or S$300,000 per year) to have that lifestyle 30 years later

So if an investment pays 10% annual interests or dividend rates, we need to have at least S$3 million in investments just to have the lifestyle we want.  So how far are you from that retirement dream?

The thing is, most folks leave these important life calculations and decisions to either the government, or some proclaimed investment banker/adviser. Take charge of your life NOW!

Later in my articles, I will explore how to live comfortably of your annual interests or dividends and still die a millionaire (and not exhausting your savings)!

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