Thursday, August 31, 2006

How to distribute your money?

Lesson 7: How to distribute your money?

It is shocking to find that 70-80% of working adults have credit card debts. Recently, we read from newspaper that more and more Malaysian youngsters are getting into a lot of financial problems due to credit card debts.

Bankers would tell you one thousand and one reasons for you to have what they call 'auto-debit' or 'standing instruction'. They advise you that for your convenience (or maybe their convenience) , they would debit your saving/current account to pay off your home mortgage, car loan every month. You should not get yourself trapped by signing the agreement, don't you find it is ridiculous for the bank to 'get a taste' of your hard earned money every month before you even have the opportunity to hold the money?

Therefore, always remember to 'pay your self first' every month after you get your pay check. I would always suggest to you distribute your salary every month by saving 10% of your salary as 'emergency fund' (you should have at least enough saving to cover your expenditure for 3-6 months should you lose your job), another 20% for investment and only 70% for your monthly expenditure (everything you spend a month- including your home mortgage, credit card debt and car loan!)

If you tell me you can't even save 10% of your saving because you have to pay your debt, then I must say that you are the type of person whom I call ' Generation X who is living in credits', cut down your debt and never try to buy things using your credit card anymore!

It is shocking to find that 90% of us like to buy things we actually do not need. If you are earning two thousand a month, do not live in a house that costs you one thousand a month to pay as home mortgage. Always take into consideration your income before spending a cent!

After you have saved enough for your emergency fund, then you can increase your investment to 30%. I would talk more about what types of investment you can put in your money in future posts.

A lot of people ask me should they pay their debt first or invest first if they have extra money. I always tell them, after having enough money in your 'emergency fund', then you should consider what is the interest rate and projected return of your investment before you decide to put your money in investment or settle your debts. For example, if you think you can get a return of more than 18% a year by putting your money in stock markets, then you can delay paying back your credit card debts since banks charge you 18% per annum for your credit card debts.

Therefore, I would advise you at least settle you credit cards loan first before you even think of investment. I do not think you can get 18% return in any investment in this world except you are investing with Warren Buffett!

Saturday, August 26, 2006


Lesson 6: Assets

I talked about liability in my last post, today I am going talk about assets. A lof of people have mis-understanding about assets. I have a simple definition about assets, I consider something as your assets if it can generate income for you or potentially help you to earn money in future.A lot of us always think that by buying houses, they are actually building their assets, I would like to warn you that if you are planning to buy house for yourself to live and you are paying instalmentevery month for your mortgage, then that house is considered as your liability. You only can consider that house as your assets once you settle your loan/mortgage. However, if you are buying a house in order that it can be rented out so that you can generate income by getting rental every month, then you may consider that house as your assets provided your rental income is enough for youto pay your mortage.

I think for you to get your first million as young as possible and retire early, you have to build your assets. It is not necessary for you to use your money to buy assests because some assets can be created without costing you a cent. Keeping your money in your bank account can be considered as your assets as well because these monies can generate income ( interest) for you. However, to build your assets portfolio, there are a few terms you need to know, I would like to divide assets to two major types, real estate and personal property. Real estate, or immovable property, is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. For personal property, it can be your cash, stocks, mutual funds etc.

You need to know your financial goal when you want to build your assets,if you think that you are not going to need cash out your assest in short term, then you should be buying houses or land. These are good investment vehicle in long run and would give your a very good return in 10 or even 20 years time. However, the liquidity of these assets are very limited, meaning that you can not change them into cash in a very short period. The reason is simple, you have to find buyers for these assets( lands and houses) and since they usually cost more, you need to spend time to find the buyers.

On the other hand, if you think you need to cash out your assets in near future, I would recommendyou to buy/invest in some assests that are more liquid, these include mutual funds, stock markets or even keep your money in bank accounts. These vehicles of investment are highly liquid because you can convert them into cash in days or even hours.

Therefore, it is important for you to know your short term and long term financial goals.

Monday, August 07, 2006


Lesson 5: Liabilities ( Good and bad debts)

A lot of people believe in "UOM", it means " Use other people money". They would tell you that even big corporations in the world have to survive on liabilities, everyone needs to borrow money.If you do not borrow, you can not suceed in your business! I certainly agree that liabilities are necessary for you to build wealth fast, if you want to depend on your salary to get your first million, you may need to wait for at least 40 years. There are a few fast ways for you to get rich,

a) Your parents are rich and you inherit the wealth
b) Your spouse is rich and you share the wealth with him/her.
c) You are lucky and win the lottery. Congratulations
!d) You are poor as well as your spouse and both your parents, therefore you have to make it! ( the process can be made faster if you know how to do it!)

For you to own your first million,you have to build your wealth slowly, sometime this process can be made faster by borrowing money, however, it may also lead you to end up with a lot of problems if you borrow the wrong debts!

I am going to tell what is a good and a bad debt. If you are borrowing money to buy/ own some thing that would increase in value in long run, congratulations, you are doing the right thing! Things that I consider would increase in value in long run include houses, land, business empire, intelectual property etc. On the other hand, if you are borrowing money to buy some thing that would depreciate in value, sorry, sir , you are actually getting yourself into problems.

You are not encouraged to borrow money to buy things that would depreciate in value such as car, your home electrical appliances etc. You may be suprised " What ? You are asking me to buy car with CASH!" Yes, yes, yes, if possible, you are encouraged to buy car with CASH,CASH, CASH!!"

You would be suprised to find out that more than 90% of cars on road in any country in this world are actually owned by banks and not their owners. Young graduates prefer to buy cars than anything else once they get their first salary. Their debts would esclate further if you know the facts that majority of US graduates have an average US 20,000 debts once they leave the college.

So, I am suggesting to you , if possible, do the following after you graduate from college,

a) settle your study loans as soon as possible ( or settle loans that have highest interest rate! It is your credit card loans that has highest interest rate )
b) save some money and if possible pay more than half the price if you want to buy a car, your loan period should not more than 2 years,
c) keep some money for emergency fund
d) pay yourself first every month and use that money to invest in something that would increase in value in long run.

Friday, August 04, 2006

How to start investing?

Lesson 4: How to start investing? Pay yourself first!

Now we come to the first crucial topic in our discussion. A lot of people want to know how they can start investing while they are still having problems paying back their debt every month. " I do not even have an extra one cent to spare after paying back my mortage, credit cards, insurance etc, so how possibly for me to have money to start my first investment!"

Therefore, I think the first problem a lot of people are facing right now is they are actually work hard for the bank and not themselves. They have a lot of downpayment to make every month and eventually they become slaves to their loans. Don't you think it is funny for you pay the bank first when you get your salary every month instead of paying yourself first. You are the one who works hard to get the money but the funny part is you are paying the bank first when you are being paid every month.Some may argue that, they have no choice because they have to pay their loans or else they would have to pay extra next month due to late payment. If you can't spare 10% every month for any investment, there must be something wrong with your money management every month. There are two possibilities, either you are living on liabilities ( you use credits to buy almost everything and you are now paying back your bad debts every month) or you are just spending too much ( the only way you can spare 10% is to cut down your expenditure).

If you are case number one, it is a bit difficult but I think the first step to do from today is to cancel your extra credit cards. A lot of people ask me, actually what is the appropriate number of credit card a person needs, I said it is "ZERO", get me right, not "ONE", not "TWO", it is "ZERO", you shouldn't live on liabilities. I would talk to you about what liabilities you may take in next lesson.Credit card is the monster that seduces you to spend extra money, some time even more than you actually can afford. No matter what, you should put aside 10% of your salary this month. If you are case number two,meaning that you just spend too much, the best way for you to avoid spending too much is pay with cash every time you buy some thing, so you would notice now that a lot of your problems will be solved if you try to avoid using your credit cards!

" What to do with the 10% that I save every month?" I think the first pricinple to apply in every money management is protection first! Therefore you should put aside some money in your emergency fund so that you still can survive for at least 3 months if you suddenly lose your job tomorrow.Save your 10% of money in a separate account in your bank and never touch it until it is really emergency.Emergency does not mean that you have to buy presents for your children this coming Christmas or you want to renovate your house before New Year. What I mean emergency is really emergency, you fall sick next month, you need money to repair your house after fire etc.

If you have saving ( emergency fund) enough to support you and your liabilities for at least 3 months,then welcome to te world of investment, we are going to talk every thing about liabilities and assets in upcoming lesson soon.

Tuesday, August 01, 2006

Vehicles for Investment

Lesson 3: Vehicles for Investment

As I mentioned in my previous posts, there are a lot of ways for you to invest your money. I would discuss further today about each of them and give you a brief idea what may be the suitable way for you to invest your money.I would start off by talking about bank deposit. Certainly a lot of people think that their capitals would be forever safe if they keep the money in bank. People always think that they would not lose thier money if they deposit their money in bank as fixed deposit or saving. Unfortunately, although banks provide you rather low return for your investment, you still have to bear some risks of losing your money when there is economic crisis. This has had happened before when Asia was hit by econonic crisis in 1997-1998. The worst part about saving your money in bank is you are helping the bank to make more profits from your money while they are just giving you a tiny portion of thier profits. The fact is the money you keep in bank is your hard earned money and the banks have never helped you in any other way to earn these monies!

The second way to invest your money is through stock market. You must learn more about stock market and do your homeworks before putting your money into this vehicle of investment. A lot of people like rumours, and majority of self-claimed 'investors' actually do not bother to read company annual reports and some of them do not even know what the company's core business . Never become speculators, speculators trade stock instead of investing in stocks. You must always prepare to keep your stocks for at least three to five years and see them grow in value. If you are expecting fast cash, never use stock market as your vehicle of investment!

The third way to invest your money is through mutual funds/ unit trusts. How mutual funds and unit trusts work is simple, you give your money to someone ( known as fund manager) who is supposed to be an expert in stock and money market. They would help you to invest your money and in return, they get some commissions ( sometime known as managers' fees) from this. Good thing for the manager is no matter they are helping you to earn or lose money, they are regularly being paid for their services! Besides that, they are charging you transaction fees as well. Sometime, I am wondering whether these mutual funds are created to help us or to help the fund manager to get rich!

You may find disappointing so far after listening to what I said. It seems that there is nothing in this world that worth investing! However, as I always told my friends, for you to rely on people to manage your money, it is better for you to learn yourself how to manage your own money. There are not so many people in the world like Warren Buffet who is consistently helping others to build wealth. You may have to depend on other people for something, but in term of money, it is better for you to manage your own money.

The fourth way to invest your money is through property investment. There are a lot of good property out there for you to invest- houses, land or even intelectual property. I always think that the best property you can have is intelectual property because you may not even have to spend a cent to own it.Just imagine you can write an interesting book like J.K Rowling or create a powerful programme like Bill Gates, you basically do not need to spend money to do this, you only need ideas. It is a very powerful if you can create new thing- books, inventions, computer programme, new ideas etc. However, not many people can do this in real life, therefore we still need to depend on real estate investment. Although one of the drawback for you to invest in property is you need large sum of money and the return is slow, history has told us that it is the best investment in your life.

The fifth way for you to invest is to keep some valuables- gold, expensive watches etc. Howver, I think it is rather difficult for layman like you and me to understand which watch to buy or when is the best timing to buy gold. I would skip this because I myself have no experience to buy these.

The sixth way for you to invest is to invest in your knowledge. Take up a course or learn some thing new in life. You maybe able to get a higher pay job so that you have extra money to invest in other things. I always think that this should be the first investment in your life to make. Only equiped with knowledge and will power, only then you can go further in your journey to become a young and financially free investor.

Good Luck and hope we all can make it to be able retire young and rich!