Tuesday, December 25, 2007

Learn to Attract Money

You already know that the best way to learn about creating wealth is from people that have built their own fortunes. When you learn how they think, you will be able to create the fortune you desire.

To equip yourself, below is another resource that you may want to browse through to learn about some proven techniques that you can apply to your life.

Just click on it.

Holiday Money Package

Happy Reading!

Reading Material (not to be missed):
How to set Goals? Click Begin with an end in mind,
Importance of Saving: Click Power of Compounding, Power of Saving,
How to grow my wealth? Ways to Invest

Thursday, December 20, 2007

Wealth Creation Mindset

Do you know why you are not rich? Would you like to know what it takes to be wealthy?

Financial Abundance and Wealth Creation is a real and tangible idea but there is a critical condition to it. In order to grasp the idea of wealth creation, one must take the view of the rich and the wealthy. Want to know the mindset of a millionaire?

Here it is:
a) Find optimism. View each failed attempt as a learning experience. Take the feedback and change the strategy until results are achieved.

b) Find encouragement in defeats. Do not give up easily.

c) Find opportunities when it is most invisible. Everything happens for a reason and that adversity is often opportunity in disguise provided you learn from your experience and continue to take consistent action.

d) Exceed own expectations in whatever you do. Adopt an adaptive mindset that creates value wherever you go.

e) Be Proactive. Take initiative to make things happen. When problems get in the way, take action to solve it.

f) Do what you love. This is the only way you can become totally obsessed and committed towards something.

g) Delay gratification. Saving is involved in wealth creation, and that means forgoing what we can spend now for later. Spend Less and Invest More. Have patience to allow your money to grow and compound through investing.

h) Moving forward. Improving oneself in every aspect and knowing that there are different ways to be a better person is a mindset that can help you to improve in the long run.

Are you now ready to revamp your current lifestyle? Changing your mindset is the key towards the life you desire.

For more reading materials, click here.

Sunday, November 4, 2007

Easy, Effective Way of Holding Bonds

Newbie investors who have a sum of money and want to invest into bonds can consider this easy and effective method. It is called the Bond Ladder.

Click Here to find out more

Other Topics (not to be missed):
How to set Goals? Click Begin with an end in mind,
Importance of Saving: Click Power of Compounding, Power of Saving,
How to grow my wealth? Ways to Invest

Saturday, October 20, 2007

Risks in Bond Investment

Despites its conservative nature, Bond investment has risk too. As an investor. you should be aware of the degree of risks you carry in order to invest prudently.

Bonds can be subject to credit risk. This is the risk of default which means that the issuer is unable to pay the interest or the principal of the bonds to the investor. Hence it is important that you find out the credit rating of those corporations that you intend to invest in. You may refer to rating agencies like Moody's and Standard and Poor's to determine the credit worthiness of corporations and governments. Government Bonds are fully backed by the full faith and credit of the government. As such, the risk of default can be little or negligible

It is not necessary to hold bonds till maturity. There is a secondary market where bonds can be sold before it matures. However, you will be subject to interest rate risk if you do so. As you have learnt in the earlier post, bond price can fluctuate due to changes in interest rate. In fact, a bond price has an inverse relationship with interest rate. This means that if interest rate rises, bond price will decline and vice versa. If you were to sell a bond before it matures and the price has fallen, a part of the prinicpal investment would be lost together with any future income stream. Generally, bond investors are more concerned with receiving income instead of capital appreciation, and principal investment at maturity.

Due to its safe and stable nature, returns from bonds are generally lower than high risk investment like equity. In an inflationary environment, the total return may not keep pace with inflation. Hence you may be subject to inflation risk. This means that though the return is postive, you may actually see a decline in investment in real term.

Lesson to be learnt:

Never put all your eggs in one basket. No one investment is totally safe and that includes fixed deposit because you would not be able to hedge against inflation. Diversification is the way to go to grow your money.

Other Topics:

How to set Goals? Click Begin with an end in mind,

Importance of Saving: Click Power of Compounding, Power of Saving,

How to grow my wealth? Ways to Invest

Sunday, September 23, 2007

Uses Of Bonds

As you have already learned, bond investments are interest earning and its value can appreciate or depreciate in relation to interest rate changes.

Bond is generally a safe investment. However, except for bonds from the government, bonds do carry the potential risk of default, no matter how remote that risk might be.

Bonds would appeal to those who want to receive interest income or to preserve and to accumulate capital. If you want regular returns of a certain amount of money, a bond will fit the bill very well.

Bond is a better alternative to savings and fixed deposits. If you wish to invest your money safely for a longer period of time, bonds serve this purpose better than fixed deposits. You can beat inflation and enjoy higher returns than fixed deposit rates.

Due to the conservative nature of bonds, it is one of the investment tools that could be added in any phase of your retirement portfolio. Your holdings in bonds would vary depending on your risk tolerance and investment time horizon.

If you are young and have many years away from retirement, you are most likely to build your nest egg by taking a fairly aggressive stance. However, it would be unwise to put everything into equity as it is a very volatile instrument and are generally the most risky. You would probably have a diversified investment portfolio that consists of bonds, equities and cash in varying allocation. Diversification offers some protection for your portfolio as the rising value of certain assets could help to offset the assets that are facing a negative impact. By adding bonds in an equity portfolio, it would enhance stability and reduce risk exposure as your capital in bonds would likely to be protected from equity market fluctuations.

If you are a few years away from retirement or have retired, you need to protect yourself from possible steep equity declines. You can shift from an aggressive stance to a moderately aggressive one by adding more bonds. As you receive a fixed amount of income that is paid regularly over the lifetime of the bond, the predictable cash flow from bond investment adds a necessary element of stability to the retirement portfolio.

As lower risk often leads to lower returns, the emphasis of investing in bonds generally does not lay in capital appreciation, but in, income generation and capital preservation. If you invest in bonds of good credit ratings, you will most likely get back your principal upon maturity. As it is possible to incur a capital loss if you were to sell before the bond matures, you will need to consider when you want the principal to be repaid and the kind of returns you seek, and take into account your risk tolerance.

Saturday, September 1, 2007

Bonds - Fixed Income Instrument

Having talked about bank deposits and forced savings through insurance product the past few weeks, today I shall cover another investment instrument that one can consider and that is Bonds.

What is Bonds?
When investing in bonds or fixed income/debt securities, you are actually lending money to finance a corporation or the government's operation, becoming a creditor of the corporation or government.

Bond investments are interest earning. It has a coupon rate which is the interest earning element and a maturity date. During the initial issue, a bond is sold at par value, or 100% of its face value, and the return (yield) is the coupon rate. Once a bond is issued, the coupon rate or interest is fixed and will not change throughout the term of the bond. However the price of the bond will change. This is because bonds can be bought or sold on the secondary market before they reach maturity. There is hardly a time when a bond is sold at par value. When a bond sells below its par value, it is said to be selling at a discount. On the other hand, if it sells above par value, it is selling at a premium.

A change in the price of the bond is caused by changes in interest rate. When interest rate rises, bond prices will depreciate. This is because new bond issues will have higher coupon rates than existing bonds. Therefore, bond prices will fall to compensate for the difference between the existing yield and the current market yield. Hence, an investor considering the purchase of the existing bond can earn additional interest by paying less (< $1000) for each bond and getting the same coupon rate. The opposite is true when interest rate in the market falls and new bond issues offer a coupon rate that is lower than the existing coupon rates. Bond prices will increase because whoever buys the bond at par value would be earning a coupon rate that is higher than market rate. This will result in excessive bidding for the bond due to its attractive yield. The price of the bond will then be bid up to the level where the bond offers a comparable yield as the current market yield, usually higher than the par value.

In summary:
When bond is sold at par, return = coupon rate;

When bond is sold at discount, return > coupon rate;
When bond is sold at premium, return < coupon rate

Henceforth, when investing in bonds, not only will you earn interest but also get the opportunity to sell at a premium when bond price increases. You can also choose to hold it till maturity should bond price decreases.

Saturday, August 18, 2007

Retire? Not so soon, say many Singaporeans polled

Below is an excerpt from an article taken from the Straits Times dated August 11, 2007.

Retire? Not so soon, say many Singaporeans polled.
"Singaporeans are in no hurry to retire and most want to work beyond the official retirement age of 62, some even into their 70s. It is a case of "CPF not enough" for many of these workers.

Seven in 10 polled last month in a Straits Times Insight survey on CPF said they do not think their savings in the national pension fund will see them through old age.

The survey of 636 Singapore residents aged 30 and above found that apart from CPF, 77 per cent expect to be able to draw from other sources of retirement income, mainly savings, investments and insurance. But a significant minority of 23 per cent had nothing else set aside.

One cause for concern is that only one in two Singaporeans has done any financial planning for retirement.

Even fewer, three in 10, have done their sums on how much they need to squirrel away.

What may mitigate against any resulting savings shortfall is their willingness to work beyond the retirement age of 62."

Hi Friends,
Where do you think you stand in this area? Do you have a sense of security over your retirement finances? Would you be happy with just a lifestyle of S$789 per month when you retire? If not, are you willing to work beyond your retirement age of 62?

These are real issues that one cannot ignore. At the national level, our government is studying ways to tackle the ageing population and one of the ways is to help Singaporeans work longer.

Which do you prefer?
a) I need to carry on working because of worries over insufficient savings; or
b) I like to carry on working because it adds meaning to my life.

I believe everyone wants to be given a choice. And who can give you this choice? It is yourself. So start planning early for your retirement. Grab a copy of the financial plan template to get an insight on how to do your financial planning for retirement.

Sunday, August 12, 2007

Insurance Policy as a Savings Vehicle - cont'd

Essentially, there are two types of non-participating and participating policies for your saving needs. They are:
a) whole life insurance;
b) endowment insurance;

Whole life insurance is a permanent insurance policy. It provides insurance coverage for the entire life of the insured. This means to say that as long as premiums are paid, the coverage continues until the insured dies or reaches some predetermined advanced age (usually 100 years old).

Whole life insurance policy has the following common features:
a) It covers the insured against death; Duration of cover is for life;
b) It also has some form of saving element known as "cash value". This means that the insured can encash the policy by surrendering it after a specified period of time (usually three years);
c) policy lapses if premium is not paid witin the 30 days grace period. However that can be avoided, if policy has acquired a cash value, by activating the non-forfeiture options like surrendering the policy for its cash value or converting it into a reduced paid up policy or extended term insurance policy;
d) policy loans are allowed once the policy acquires a cash value. It is borrowing against the policy's cash value and interest is chargeable;
e) premium is usually a fixed amount payable on a regular basis; It is higher than term insurance.
f) death benefit is payable in one lump sum upon death;
g) total and permanent disability benefit is usually attached and is paid either in a lump sum or in instalments upon total and permanent disability;

Endowment insurance is also a permanent insurance. It has a fixed maturity date which is typically ten, fifteen, twenty years up to a certain age limit( e.g.65).

Common features of such insurance policy are:
a) Duration of cover is for a period specified at the inception of the policy. When this period ends, the cover stops and if the insured is alive, the maturity value ( the basic sum assured + bonus, if any) will be paid to the insured;
b) cash value builds up quickly;
c) non-forfeiture option is available once policy acquires a cash value. Hence insured can avoid having the policy lapses which is possible if premium is not paid within the 30days grace period; d) policy loans are allowed once the policy acquires a cash value;
e) sum assured, plus bonus if any, is paid in one lump sum upon death;
f) a total and permanent disability benefit is usually attached and the sum assured, plus bonus if any, is paid in instalments upon total and permanent disability.
g) premium is a fixed amount payable on a regular basis. It is higher than Term and Whole Life Insurance policies.

I hope you have obtained some good understanding of the above policies by now. These are useful saving vehicles that you can consider. Building a retirement fund is a long haul process. You have to start saving early and investing it over a long period of time.

Saturday, August 11, 2007

Insurance Policiy as a Savings Vehicle

Do you have problem saving up? Read this if you are one of those who have no discipline to save.

The saving tips that I am about to share with you is a Forced Saving Program through the use of insurance policy.

Life insurance as a useful savings vehicle can come in two form:
a) non-participating policy with cash value
b) participating policy

A non-participating policy refers to a life insurance policy that does not share in the profits of the insurer i.e. the policy-owners of such products are not entitled to any bonus payment by the insurer. Such products are also known as without profits policies. Only non-participating policies that acquire cash value has a savings element. Term insurance is also a non-participating policy but it is purely for death protection purpose and does not have savings element because it does not acquire cash value.

Participating policies, on the other hand, refer to life insurance products that share in the profits or surplus of the insurer. Such products are also known as with profits policies and the policy owners receive bonuses from the insurer. The bonuses are declared on an annual basis and are guaranteed once they have been declared. Participating policies acquire cash value too.

What is Cash Value? Cash value (also known as "Cash Surrender Value" or reserve) is the amount of money, before certain adjustments, that the policy owner will get in the event that he surrenders his policy to the insurer for cancellation. Cash value arises as a result of the level premium system adopted by insurers. During the early years of the policy, the premium paid covers more than the cost of insurance protection provided by the company because the risk that the insured will die is lower. In the later years of the policy, the same premium covers less than the cost for the insurance protection by the policy as the insured grows old and is more likely to die. The extra premium collected in the early years by the insurer is set aside partly to form the policy's cash value. As time goes on and premiums continue to be paid, the cash value grows.

A word of caution: Most of these policies don't start to build decent cash value until their 12th or 15th year. Usually, it will breakeven on the 10th year i.e. total premium paid = cash value accumulated. So if you surrender in the first five years or so, practically most of the money you put in will be down the drain. Hence, if you buy one, be prepared to pay into it for a very long haul to yield a reasonable return for your retirement. Otherwise, I think you should just forget about it.

Surplus from the participating policies is the amount by which the insurer's assets exceed its liabilities. Surplus usually arises from:
a) bonus loading on participating policies;
b) the profits made by the insurer from all classes of business

Returns from these policies are usually in the range of 3 to 5%.

Sunday, August 5, 2007

Forced Saving Program

Do you have the financial discipline to save? If you don't and if you always find that money is not enough, you may want to consider taking a forced saving program to ensure that your retirement funds are well provided for in your golden years.

The forced saving program that I would like to introduce here is an insurance product with savings element.

Life insurance, namely, Whole Life and Endowment Insurance are useful savings vehicles. These policies acquire cash value over the years which the policy owner can tap for various purposes such as taking a policy loan or surrendering the bonus to meet some urgent needs. In addition, if it is a participating policy, it pays annual compound bonuses on the policy which are tax free. Such policies enable the policy owner to enjoy capital growth on their investments.

As the name implies, Whole life product is designed for a longer term and perhaps for your entire life. Premium payments purchase protection against the risk of premature death and also allow you to build a cash reserve -- the savings element.

Generally, the face amount of the policy and the annual premium are fixed and the cash value of your policy increases, so the amount of pure risk protection decreases over time. You could look at a whole life policy as a combination of decreasing term life insurance and an increasing savings fund. Part of your premium goes for the death benefit and the rest is like an addition to an investment account.

Also be fully aware that, unlike a savings account, the savings element of a life insurance policy is usually not immediately available to you. You may have to pay surrender charges if you withdraw funds early in the life of the policy. You should carefully consider how much you are paying for the "savings" part of the policy and how soon you might need these funds.

I will elaborate more about the products in the next post.

Sunday, July 22, 2007

Fixed Income Products - Bank Deposit

What is your risk appetite towards investment? Are you so afraid to invest or are you willing to take some risk to improve your return on investment? Whether you are risk averse or a risk taker, there are products available in the market to suit your individual risk profile.

Today, I shall cover the safest investment options that you can go into to start growing your money and that is none other than bank deposits. Bank deposits are excellent investment options for emergency funds, capital preservation, and short term financial goals. These are practically risk free investments, that is you won't lose any money. However there is a trade off for that lack of risk and that is you don't get much return.

What is meant by "practically" risk free? It is risk free in the sense that you do not lose it in monetary term, but in term of its purchasing power, you will find that it declines over time. Why is that so? It is because of inflation. Inflation is associated with rising prices of goods and services. It is a condition in which too much money is chasing after too few goods. Hence if the interest you earn from the deposit barely covers the prevailing inflation rate, you would actually be losing buying power. So bear in mind that there is still a risk if you just leave your money idle in the bank.

Examples of bank deposits are saving deposit and time deposit.

Saving deposit is more liquid but has relatively lower interest rate than time deposit. It is liquid because you can draw it anytime you like. It is an excellent place to put your emergency fund.

Time deposit or certificate of deposit is not liquid compared to saving deposit because you are expected to let the bank locks up your saving for a period of time. Typically, you invest a fixed amount of money for a predetermined amount of time called the term, and you are guaranteed your principal plus a fixed amount of interest, which you receive either upfront, periodically, or at the end of the term. When the term expires, you can cash out the principal and interest, or roll over the deposit for another term. You can opt to withdraw the interest as they are received.

Time deposit or certificate of deposit can be purchased for terms ranging from three months to five years or more. Although interest rate is higher the longer you allow the bank to use your money, it is not a good idea to buy with term of more than five years. The interest rate situation could change dramatically during that time and you could get stuck with a long term, low interest rate deposit. As there is a defined date of maturity, cashing it in before that time will incur penalties.

In case you are not aware, saving and time/certificate of deposit are covered under the deposit insurance scheme in some countries.

For the risk averse, this is a good place to grow your money. For the risk taker, it has a place in your investment portfolio too as it helps to spread your risk. Very important though, you must make sure that the deposit interest rate is higher than the inflation rate. Also, bank competes for deposits by offering better than average rates. It is advisable that you shop around to find banks that offer the highest yield possible on your deposit.

Remember, there is still risk if you just keep your money idle in the bank. Give your money the opportunity to grow for you.

Sunday, July 8, 2007

Ways to Invest

Have you started saving for your emergency fund? I encourage you to do so if you have not. For those who have already reached the targeted emergency fund, I congratulate you. This means you are ready to invest.

There are a number of ways that you can invest in the financial markets. As an investor, you would want to make the right investment choice that best suits your financial needs. Hence, you must take charge of your own investment.

As a start, you should get yourself familiar with the different types of investment instrument available in the financial market. The common ones are:

a) Bank Deposit
Bank deposits like fixed deposit accounts are usually short term investments to hold money for use in the near future. It is easily convertible to cash. Such deposit has low risk of losing value but offer low potential returns.

b) Insurance Products with savings or investment element
These are product that provide not only protection but also a saving or investment plans. Examples of these are whole life polices, endowment polices, annuities, and investment linked insurance policies.

c) Bonds
When investing in bonds or fixed income/debt securities, you are actually lending money to finance a corporation or the government's operation, becoming a creditor of the corporation or government. Bond investments are interest earning and the bonds value appreciate or depreciate in relation to interest rate changes. This is generally a safe investment. However, except for bonds from the government, bonds carry the potential risk of default, no matter how remote that risk might be.

d) Structured Deposits
A structured deposit is essentially a combination of a deposit and an investment product where the return is dependent on the performance of some underlying financial instrument. Typical financial instruments linked to such deposits include market indices, equities, interest rates, fixed income instruments, foreign exchange or a combination of these.

e) Mutual Funds / Managed Funds /Unit Trust
A mutual fund is an investment company that takes cash from investors and invest it into diversified securities, providing investors with both diversification and professional management of their funds. A mutual funds invest in stocks, property, bonds, options, money market securities, and commodities to name a few, depending on the fund's investment objectives.

f) Shares and Equity
Stock investment is equivalent to holding an ownership in a corporation, and your investment value appreciates as the price of the shares or equity goes up and vice versa. This is considered a high risk investment, unless you managed it well with great discipline.

g) Option Trading
An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date. To acquire this right, the taker pays a premium to the writer (seller) of the contract. There are two types of options available: call options and put options. Call options give the taker the right, but not the obligation, to buy a security at a predetermined price on or before a predetermined date. Put options give the taker the right, but on the obligation, to sell a security at a predetermined price on or before a predetermined date. The taker of the put is only required to deliver the underlying shares if they exercise the option.

Above are just a brief account of what they are. You will get more details in due course. So stay tuned.

Sunday, June 24, 2007

Building an Emergency Fund

How much should I save? As a rule of thumb, a saving ratio of 20% is considered healthy. Saving ratio is defined as total annual saving divide by total annual income.

As you start saving, your first priority is to build up your emergency fund. Establishing an emergency saving account is vital in both good and bad times. It is an absolute necessity for financial security because it gives you funds to fall back on if you or your spouse lose your job, incur large medical bills, unable to work for certain reasons, and so on. Without an emergency fund, you may be forced into incurring credit card debts that could take you many years to pay off. You don't want to be living on the edge, do you?

To build up your emergency fund, you have to put away the money consistently on a regular basis. As it grows, be sure not to dig into it for non-emergencies purpose. Remember, this fund can only be tapped for true emergencies.

How much do you need in this emergency fund? The minimum amount to have should be at least 3 to 6 months of your basic living expense. It has to be sufficient to tie you over during the period when your income stream is suddenly cut off. So examine carefully your income and needs to decide how much you actually should save. The level has to be comfortable to you.

Where should you be keeping your emergency fund? Emergency fund must be easily and quickly available and accessible when needed. It is best kept in liquid assets. Liquid assets refer to assets that can be converted into cash quickly. Example of such assets include saving account, time deposit, money market funds, and short term bonds. Do not put your emergency fund in property and stocks/shares. Property is not a liquid asset because it takes months to sell it. Stocks/shares are somewhat more liquid than real estate, however you can lose money if you are forced to sell it at the time when the market for your stock/share is less favorable.

Sunday, June 17, 2007

The Power of Compounding

I cannot stress much more the importance of saving if you want to create wealth for yourself. Save and Invest is one good wealth creation strategy that you can easily adopt. The reason you save is so that you can let the money work harder for you. As a start, you work hard for money. But up to a stage when you have accumulated some saving, you have to let the money work for you.

Allow me to show you how saving can work wonders for you. Let me introduce to you the concept called the "Power of Compounding Interest". This comes about because over a long period of time, you will actually experience your money feeding on itself, earning you additional dollar that will accumulate into sizable amount.

Through investing, you can actually double your money over a period of time. How long that is will depend on your rate of return.

If your rate of return is 2%, then it takes 36 years to double your money. Whereas if your rate of return is 7%, it doubles every 10 years.

To illustrate, let's say you have an initial investment of $100k.
If this is invested at a return rate of 2%, in 36 years, your money would have reached $204k.
If this is invested at a return rate of 7%, it will double every 10 years and in 36 years time, your money would have reached $1.1 million.
Which one do you prefer?

So the lesson learnt today is: Do not just leave your money in the bank. You will be missing a lot if you do. Let your money work harder for you.

For those interested to know When? you will double your money with a given rate of return, use this formula. Take 72 and divide it by rate of return (without the %). For example, if I divide 72 by 2, I get 36. This means when you invest your money at a return rate of 2%, it takes 36 years to double your money. Similarly, if your rate of return is 5%, then it takes (72/5) 14.4 years to double your money.

In addition, if you want to prove that it really takes 36 years to double your money for a given rate of 2%, use the future value (FV) formula in Microsoft Excel.

I hope you have learnt something today.

Sunday, June 3, 2007

Why is it Important to Start Saving Early?

A fews days ago , I mentioned that it is important to start saving as early as possible. I would now like to illustrate this in terms of the table given below.

Assume that a person saves $500 per month and assume that his desired age of financial independence is 55. How much funds do you think this person would have accumulated when he reaches 55.

See this:

Starting ------------------------ return per year ----------------------
Age 2% 5% 7% 10% 15%

30 $196,025 $300,681 $406,059 $649,091 $1,468,272
35 $148,700 $208,316 $263,191 $378,015 $ 706,861
40 $105,836 $135,945 $161,328 $209,698 $ 328,305
45 $ 67,012 $ 79,241 $ 88,702 $105,187 $ 140,096
50 $ 31,849 $ 34,811 $ 36,920 $ 40,294 $ 46,522
55 $ 0 $ 0 $ 0 $ 0 $ 0

What does the above table tell us?
  1. There is cost for waiting. A person aged 30 who save $500 and invest at a rate of 7% will reap $406,059 when he reaches 55 whereas a person aged 40 will reap only $161,328. That is 3 times less than the person who starts early.
  2. The longer you delay, the more pain you give yourself. In order for the person aged 40 to achieve the same amount of funds, as the person aged 30, when he reaches age 55, he will have to save much more every month. How much? $1,274 every month (assuming a return of 7%).
  3. How much funds you are able to accumulate shall depend on WHEN you start and the investment returns you get. If you just leave your saving money earning 2% and do not make your money work harder for you, you are not going to get far in reaching your retirement funds either.
  4. It is possible for a person to achieve financial independence just by saving and investing over a sufficient period of time.
For those who are already late in adopting this strategy, do not worry. It is still not too late to start saving now. However in order to achieve your financial independence, you will need to look at other wealth creation strategies as well.

Thursday, May 31, 2007

The Power of Saving

Let's recap before I begin with today's topic.

To start your wealth creation journey, it is important that you begin it with an end in mind. With your dream or desire translated into financial goals, your direction becomes clear and your actions become obvious. Click on "begin with an end in mind" if you need help in formulating your financial goal.

Once your goal is set, the next step would be to manage your spending. It is obvious that income you earn either goes to spending or saving. In your wealth creation journey, it is critical that most of your income goes into the saving bucket. Click on spend below your means and more managing spending tips to read more about how to manage your spending..

Believe it or not, Saving can do wonders to your wealth creation journey. Why? This is because it is a cash generating asset and its potential can be huge if you make it work for you.

At this point, I would like to introduce to you two concepts - the power of time and the power of compounding.

Here is one thought from the Richest Man in Babylon

Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed, the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.

Basically, he is talking about the power of time. If you save a little for a long period of time, it will grow and grow and grow and you will be able to grow your wealth tremendously.

He also talked about the power of compounding, where over a long period of time your money will actually feed on itself, earning you additional dollars which ultimately grow into a sizable amount.

So what is the lesson learned? Start early, start now. Save/invest as much as you can and keep doing this over a long period of time and you will accumulate a substantial retirement fund in no time.

Stay tuned. I will illustrate the two concepts with figures when I come back. I am sure it will be an eye opener to you. But do not be shocked, ok?

See you!. Visit my website too if you have some time. http://www.wealthcumhealth.com/

Sunday, May 27, 2007

More Managing Spending Tips

Welcome back! Today I would like to continue where I left off last week. See below post if you have missed it.

Last week, I mentioned that the first step to creating your wealth is to manage your spending. Mortgage debt is one area that we must carefully handle to ensure that we do not commit too much and for too long a period. Why? and How? See post below.

I am sure you know as well as I do that if your income is not spent away, it would be saved. Which one of the following is your habit of managing your income?

  1. Earn and spend all that you have earned;
  2. Earn, spend and then save the balance, but subsequently spent it away on big ticket items or doing nothing to grow the money;
  3. Earn, save and invest on cash generating asset, and then spend.
Which habit do you think will generate you more wealth over time? The answer is obvious, isn't it?

Hence, another way to manage your spending is to PAY YOURSELF FIRST. And you pay yourself first because you have a reason for doing that. How much you need to set aside will of course depend on your financial goals. Refer to below post on "begin with your end in mind" to identify your goals and determine how much saving you would require to achieve your financial independence.

Now, let's ponder for a while about your buying habits. Has it happen to you before that you bought something and later realized that you actually do not require them? Very often, isn't it? Yes, and this is called impulse buying. To manage your spending, this habit has to change. You need to ask yourself whether do you really need this. You have to differentiate between needs and wants. Spending on the latter is not a necessity and should be avoided or postponed till you truly have excess cash at your disposal

Good, I hope you have learned some useful tips on managing your spending. Remember that each dollar spent will cost you in terms of opportunity cost in the future. Stay tuned to find out more!

Sunday, May 20, 2007

Spend Below Your Means

Have you got your financial plan? If no, you may want to refer to earlier post to read about it. If yes, you are now ready to take action.

What do you think is the first step? Many people would think that by increasing their income, their wealth will automatically increase. Unfortunately, increasing income is only one side of the wealth equation. There are people who earn $2,000 a month and are broke and there are those who earn $20,000 and are still broke. The reason is simple. When we don't manage the money we earn, our expenses will always rise to our level of income, wiping out any surplus we have. Or worse, we start to spend on credit lured by easy repayment schemes.

Henceforth, managing your spending is one contributing factor to increasing your wealth. The number one trait that you must possess is to be FRUGAL and live well BELOW your means. Once spending is reduced, your saving will increase and correspondingly your wealth will increase too.

In that case, how am I going to own a house and buy a car? Well, taking a consumer debt would be unavoidable. However, you must avoid taking on too much for too long a period.

Use the following ratios to measure if you have taken too much debt.
  • Total Debt / Total Asset Ratio. This measures one's ability to pay one's debt. It should not be more than 50%
  • Mortgage Debt / Total Annual Income Ratio. This measures one's solvency and ability to pay one's debt. Advisable limit is 5 times for those below age 30; 3 to 4 times for those age 30 to 40; 2 to 3 times for those age 40 to 50; 1 time for those age above 50.
  • Debt Service Ratio. i.e. total debt repayment / total annual take home income. This measures how much income is needed to repay your debt. A ratio of > 50% is considered excessive. A ratio of <>
In addition, you must avoid taking on a debt for too long a period. In other words, you must reduce your debt as soon as possible. Why? This is because a 5% -6% interest rate, which may seem small, can compound to a huge amount of money over an extended period of time. You will find yourself paying thousands of dollars in instalment payments every month just to see that the principal sum you owe go down by only a couple of hundred dollars.

For example, let's say you bought a $500k Apartment and took a $400k mortgage at 6% stretched over 30 years. If you just pay the minimum instalment payment (using PMT formula in Excel, it is $2,386.27) every month, how much do you think you would pay for in interest eventually? The answer is $459k ($2,386.27*360 - $400k) in interest to the bank. That is like buying two apartments and giving one to the bank!.

That is all for now!. Be sure to look out for more tips.

Saturday, May 12, 2007

Begin with an End in Mind

Are you living on a paycheck to paycheck every month? Ever wonder what will happen if the next paycheck doesn't arrive the next month? Well, I leave that to your imagination. I think you know it better yourself the kind of situation you will be putting yourself in.

All of us are busy everyday working hard to earn a living. The question is: Do you want to do that every single day of your life? Seriously, do you want to? Even if you don't mind, do you think you can work till the last day of your life? I guess that would not be possible either.

For many, even if you are not living on a paycheck to paycheck, I am sure, if given a choice, you do not want to just earn a living, you want to live a LIFE. And I am telling you that this is possible if you set your mind to it.

Whether it is for retirement or to improve our life, I think it is important that we seriously look into our personal finances. Today, I would like to talk about Financial Plan.

To be successful, a corporation has a business plan. Similarly, a person ought to have a financial plan in order to be successful in life, isn't it? With a plan, your direction is clearly set out and the actions you need is clearly spelt out.

How do I develop my financial plan? Just follow these simple steps:
  1. Determine the amt you need annually to enable you to live the lifestyle you desire without having to work. Please be realistic with yourself when you do this. Otherwise you will fall off the chair later when you see the derived financial goals.
  2. Divide (1) above by the rate of return. The rate of return shall be the return you expect to earn from any investment. Usually a very conservative rate is used as you would not want to put the funds in high risk investment.
  3. The resulting amt shall be your financial goal.
  4. Next, tabulate out how much assets you have right now. By assets, I mean bank deposits, CPF money, Life insurance/Annuity, unit trust investment, stock investment, investment property, etc. i.e. cash or in kind that generates cashflow for you. At the same time, assign an assumed ROI (return on investment) for each class of assets tabulated. Thereafter, work out the weighted ROI for these total asset currently held by you.
  5. Prepare your income and expenditure statement to determine your annual saving. In the same manner as mentioned in 4) above, tabulate out to which assets the annual saving is channeled and then work out the weighted ROI.
  6. With the given weighted ROI from 4) and 5) above and assuming that your annual saving continues to accumulate and your total assets continues to grow at the given ROI, determine how much your wealth would have grown by the time you retire. Use the future value formula in excel file to get this number.
  7. Compare the total wealth that would be accumulated in 6) above to the financial goals derived in 3) above. Do you have a financial gap?
  8. If there is no gap, good for you. It just means that you do not have to do anything differently from now and if things go smoothly, you will reach your goals by the time you stop work. If there is a gap, you have to review your investment portfolio and/or the amount of the annual saving. This can be done by first determining the ROI you need to have to close the gap. Using the future value formula, make a few reiteration by changing the ROI until the gap is closed. You may have to adjust your annual saving too to finally come to a comfortable ROI and annual saving that will help you achieve your financial goals. (Caution: for some, you may have to also look at multiple source of income to boost your wealth creation)
  9. Once the desired ROI and annual saving are defined, you are ready to take action.

Isn't that simple? Don't you find that you have a clearer picture in your mind now where you need to go and what actions you need to take?

If you think you need more help in this area, feel free to get hold of a copy of the free financial plan template that is available to you at the top right hand corner of the blog.

Wishing your success!

Saturday, May 5, 2007


Hi, a very good day to you. Welcome to wealthcumhealth.com.

As the name implies, this site basically addresses two main topics that are close to everyone's heart and that is wealth and health.

It is without doubt that everyone wants a good life, including myself. We want to be able to live the lifestyle we desire and be in a pink of health. Chinese has a saying that Health equates to Wealth and isn't this perfectly true because poor health certainly can erode your wealth.

Are your living in the lifestyle you desire today? If not, how is your wealth creation journey so far? Are you still struggling? Come and visit this site!

I can assure you that it shall be a discovery journey for you. You will get to learn that:
  1. Goal Setting is very important. Once you begin with an end in mind, it helps to set the direction right for you.
  2. Success hinges on the right frame of mind.
  3. Many tools and strategies are available to create your wealth.
  4. Health is just as important as wealth
  5. Continuous learning is one of the keys to success.
  6. "How to get started" is actually easy.
What are you waiting for? See you at http://www.wealthcumhealth.com.

Hurry! Success will come running after you in no time.