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Posts Tagged ‘Savings’

In the movie Godzilla, the gigantic monster started off as a small harmless lizard on some island.  As it was left unchecked, it ate so much rubbish we dump on the island that it gradually grew into a humongous monster.  One day, while suffering from diarrhoea, rushed to the toilet and destroyed half the city along the way…

 

The moral of the story is that devastating effects come in small packages spread across a period of time.  I can think of several famous analogies such as “death by a thousand cuts” or “cooking a frog slowly“.  All describing a smiliar experience of suffering a slow agonising death without the victim realizing until it is too late.

 

So what do all these have to do with savings for investments?  The major problem with most of us is that we are oblivious about our normal spending patterns.  Small savings in our daily spending routines means more money saved for investments.  Take the following example:

 

Starbucks Latte versus Kopi

LatteA posh cafe latte costs about S$3.50 with tax.   Prepared by happy looking baristers (coffee makers), it makes you feel like the most important person in the world!  The courteous baristers smile and ask about your day.  They almost seem to actually care about your day.  This coffee boosts your ego as it tickles your taste buds.

 

KopiConsider the alternative – Kopi.  This coffee costs only S$0.70 without tax.  This raw unadulterated heartland coffee is brewed from the hot stuffy depths of any nearby coffeeshop.  The brewer is normally an old uncle who does not give a damn about you or your day.  There are only 2 versions available – with or without milk.  The coffee does nothing for your ego and often leaves you in perspiration.

 

Both types of coffee will satisfy the daily caffeine addiction of most folks. However, the Latte costs almost 700% more than a simple Kopi just to massage your ego at the expense of your wallet!  The cost of a Latte is able to fuel your caffeine needs for an entire week in the form of a Kopi.  On an annual scale, you will save approximately S$1,022 just by drinking Kopi instead of Latte.  Hence, a great way to savings is to start taking stock of your spending by cutting down on unnecessary costs. 

 

So should we ever pay for a more expensive Latte?  Does it mean that we should deprive ourselves from the luxurious coffee that life has to offer?  The best approach is enjoy luxury in moderation.  Spoil yourself occassionaly instead of making it a daily habit.  Always remember not to take cost cutting into the other extreme.  You would never get wealthy being stingy either!

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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.
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  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.
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There is true wisdom in uncommonly applied common sense…

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SnowballIt may surprise many, but even humongous things probably began as a small and insignificant item.  Imagine being smashed on the face by a snowball thrown by a snow monkey.  Not much damage given the size of the snowball.  However, do not attempt to annoy the same monkey when it is armed with the same snowball at the top of a snow covered mountain.   

 

AvalancheA small snowball, given sufficient time and momentum, is able to gather in force and size that it becomes a monstrous force of nature.  This frightening force of nature, also known as an avalanche, can be so immense that it is capable of destroying an entire town!  All the mayhem and destruction started life as an insignificant snowball!  So what does this have to do with investment, savings or even wealth? 

 

Most folks grumble and belittle the small amount of savings that they are able to put aside each month.  But little do they realise, that this “insignificant” savings can be accumulated into a significant sum money.  Coupled with compounded interests across a good period of time, with wise re-investments of dividends and interests, this gradually accumulates momentum into a rather significant wealth.

 

For example, at 12% compounded annual interest rates, doubles every 6 years of investment.  So with only just $10,000 savings, it becomes approximately $320,000 in just 30 years.  Did I mention only basic math and no physical labor required! 

 

No wonder the rich gets richer!  What are you waiting for?  Start your very own saving avalanche now!

ps.  No snow monkey was harmed during the writing of this article.

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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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This is not about an epic saga about to unfold, but rather a piece of basic investment advise for a friend.

There are three ground rules to investments and mangaging your money.  These are for your own protection as well as your sanity.

  1. Invest only your excess cash or other people’s money.  So that means if you have more than 6 months of salary sitting idle in your bank, invest the excess!  Similarly, if you managed to insure a million dollars on your pet, and it recently got rolled over by a truck (which incidentally made you filthy rich), invest it!  Anything beyond your 6 months of your needs should not be left idling in your bank drawing zero point something of a percentage in the bank.  Also, excess cash means money more than you need for necessities
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  3. If you are turly serious about investment, learn to think long term.  That means think in terms of years instead of days.  Stop looking at the stock market ticker!  Any serious investor should realise that good companies should not fluctuate in values of millions in the course of a single day.  For example, these value fluctuations in the stock markets are implying that the world woke up one day and significant percentage of the customers decided not to drink Coke for some apparent reason…yikes!  The good news is that everything stablises across a period of time.
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  5. Never tell your parents what you are doing with the money.  They can ask, but you need not answer.  Most well intentioned comments from parents are usually negative.  Dun ask me why.  If they had understood how to invest and taught you how to, you would not be reading this article.  You would have inherited a fortune and enjoying coconut juice on some tropical island that you own.
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So the list is not exhaustive, but it is a start for most folks.

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