5 ways how young people can save more money

Living in the current generation encompasses many temptations. The temptation to keep up with trends, the need for active social life and the ego and pride to not lose out. Some people describe the current generation Y and Z as 月光族. If we divide the words up, 月 means month. 光 indicates nothingness or emptiness. 族 means the generation. All together, the three words is used to describe people who are living paycheck to paycheck. Their expenses equal or exceed their monthly income. They have nothing left over at the end of the month.

Living as a young person in Singapore, i can understand the pressures to keep up with the standards of society. Young people like to dress nicely, own the latest gadgets, buy branded goods to impress friends and so on. It is no wonder most people can't save any money by the month end. I did had a discussion with my friends on how we can save more money. We joked about if we really want to save money, then we should just stay at home and maybe play computer games. Stay at home = no money spend. In this way, we can save a lot of money. Well, by now, most young people will start to think this is absolute no life. We call it the anti social life. No one wants to be labelled as anti social. End up will be without friends and feel lonely. This is not what we want.

So how can young people save money without compromising their social life? The truth is, there will be some sacrifices involved. But well, you can choose to enjoy now and suffer later or you can choose to sacrifice now and enjoy later. It's your choice. But i guarantee that you will not end up in the extreme of being anti social. There are 5 ways which i will share below:



1) Pay yourself first
This is what most financial planners and advisers will tell you. It is not new to many people. But how many people really understand the true meaning of this phrase? Paying yourself first means setting aside a fix amount of money even before you start spending. Will this compromise your social life? The answer is no. Let me explain.

Think about how much did you earn when you started working? Maybe just slightly above $1000 per month working part time. Think about how much did you have as allowance when you were a student? Maybe just a few hundred dollars per month. Did you still live through life and still have friends? Yes you did. When we start to grow up and earn more money, unknowingly we start to spend more also. We buy more things and dine at more expensive places. Our usual cheap hangout places become more and more high class as our income increases. When we're young, we hope to have more money thinking that we would be more happy being able to buy the things we like. But sadly, this is not true. We will come to realise that spending money will only make us happy for that instance. It doesn't last long. The new thing that we bought starts to lose it attraction very soon. We get into the cycle of always wanting to have new things to make us happy.

So, try paying yourself first. Set aside a fix amount to save once you get your paycheck. You can start by saving just 10% of your income. Watch your savings account grow every month. This could make you more happy than spending money.



2) Track your expenses
You need to know where you spend your money in order to find out why you can't afford to save every month. Record down your big and small expenses. This include how much you spend on food everyday, what are the things you buy and also how much you spend on transportation. You can track your expenses using a smart phone app. I personally use "expense manager" on my Samsung phone. The app icon is blue in colour. After one month of recording, you'll know what are your biggest expenses. You'll be shocked at where you spend your money. Start tracking now and be in awe of yourself! You can only resolve a problem if you see the problem. Tracking your expenses will open your eyes to the problem.

3) Have a budget plan
Have a plan. This is as simple as that. There is a famous quote that says: "If you fail to plan, you plan to fail". After tracking your expenses, you can work out how much you need for your expenses every month. Cut down unnecessary expenses and live below your means. You may start to think hey, that's not the life i want. Why do i have to restrict my enjoyment of life? But do hear me out. I believe firmly that if you want to have a more enjoyable life, then you have to to try to earn more money. Yes, increase your income so you can spend more but at the same time still be able to save money. You are still living below your means but having a much better life. Go get a degree if you haven't got one. In Singapore, certification is important and almost guarantees you a higher pay. Go learn new skills to create more income. Learn how to invest wisely and receive dividends from stocks. Learn how to start a part time business. Learn how to communicate more effectively and expand your network in your workplace so you can get promoted or get higher bonus.

Work out the amount you can save every month. Have a long term savings plan if you can. How much do you want to save in 2, 5, 10 and 20 years time? List it down and have savings goals. This is also part of planning for retirement. If you can't meet your target, you can review it and know the problem immediately. Remember, if you fail to plan, you plan to fail.

4) Know the reason and purpose for savings
By now, you would have felt that saving money is really hard. Why do i have to do this? Is it even worth the effort? This is what happens to most young people. They give up and end up not saving money because they are not able to persuade themselves into it. They will say: "Life is too short, why worry about not enough money when i'm older. I may just die any time so why not enjoy now?". Or they may also say:" I work so hard for my money. I should pamper myself for working so hard". Does it sound like you? If it does, then you need to change the way you think.

Have a reason for saving. Without a reason and a purpose, you will find it very hard to save money. This is the same as losing weight. Why would people want to lose weight? Because they want to regain confidence and look good and healthy. So why would you want to save? It may be for retirement or for your future house or family. One of the most important reasons is because you need that savings in case of emergency. If you lose your job, you definitely need that to tide you through that period. A guide is to have at least 6-9 months of your expenses set aside as emergency fund. So in essence, this is saving for rainy days which the older generation will tell us young people to do.



5) Make savings a habit 
There are good and bad habits. Saving money is one of the good habits that young people can develop. A lot of people say saving money has to start from young. Once its a habit, then the child will not find it difficult when he or she grows up. So parents should teach their children on the importance of saving money.

But what if you've already grown up and your parents did not teach you how to save money when you are young? You spend a lot and find it very difficult to save. It has sort of become a bad habit to spend more than you earn. But here's the good news. Habits can be developed at whatever age you are. You just need to start somewhere and do it month after month. After awhile, you'll realise that the good habit of saving money has developed.

Start by paying yourself first. Open a separate savings account and transfer a fix amount of money into that account once you get your salary. You can do this automatically by setting up a standing instruction using internet banking. I use a POSB account for my daily expenses and i transfer a fix amount automatically to my other accounts every month on my pay day. This service is provided free of charge. I have an emergency fund account, an investment account and a separate spending account that i use for big expenses (this account i use a card to pay for my expenses which gives me cash rebates). I only keep a minimum amount in my POSB account which i can draw out from the ATM for daily expenses.



Start today!!
With technology and services by internet banking, saving money is not so much of a hassle any more. Just take the first step and the rest will be automatic. Track your expenses and have a budget plan to reinforce your savings habit. Ultimately, humans need to see in order to believe. Writing your plan down creates a vision for your future and whatever your brain can see, it will also try to achieve. I wish you all the best in your journey towards creating a better future.

"Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like." ~Will Smith 

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1. Managing my personal finances

2. How the rich manage their money that the poor and middle class do not - Part 2

The dangers of over leveraging on debt

This post is inspired by comments from my previous post on Recession Heroes Ep 5 - Resilience during tough times. Too many people have too much debts causing problems for them and their families when they lose their jobs. Housing debts are one of the major debts among young people in our current generation now. When buying a house, remember to plan ahead and do not over commit. A general guideline is not to use more than 30-35% of your monthly income to pay for housing loans. However, different people have different circumstances. You will know your situation yourself. Plan accordingly.

MAS has reported that statistics show rising household debts in Singapore is worrying. Measures have been put in place the past few months and is still ongoing currently.




National development minister Khaw Boon Wan has also spoke regarding the future spikes in interest rates.

Mr Khaw said: "They assume two things. Property prices will keep going (up). Two, interest rates will keep on remaining low. Both are wrong and therefore one day, both will collapse on them. So, if you are over-committed, let's say you can only afford a 3-room flat, (but) you decide to buy five room flat. Yes, based on today's interest rates you can afford a five-room flat. But, when interest rates go up as it will, you will no longer be able to afford a five-room flat and what will happen, your bank will start calling you up to please top up or sell your flat and that's when trouble starts."

In addition, Mr Khaw said the high property prices will not last in the long run.

At the same time, he acknowledged he cannot be certain when and how much prices will come down.

He added: "Only when you can get enough buyers who can afford, will prices stay up, if not they will come down. Today because of low interest rates, this bubble is being pushed up and sustained longer than it should have. So, it will collapse in a matter of time and therefore do not think that prices will keep on going up."

~ Quoted from Channel News Asia 

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Recession Heroes Ep 4 - Got retrenched at a young age of 23 but still full of passion in life

This episode really encourages and motivates me. The guy in this story is Ken Chee. I've saw his name somewhere before and i thought his face looks really familiar. The i realised he's the one who started a company called 8 investment. His company runs the millionaire investor program in Singapore and it teaches value investing. I've never attended the program so i'm in no way related to it and this is not an advertisement for the program.

Back to this person. I thought he looked and sounded really humble and i felt he's someone who's willing to help others. He grew up in a poor family as his father lost a lot of money in the stock market. His grandma had to come out from a semi retirement state and go back to work just to support the family. He started working at a very young age as his dad could not give him much allowance. When he graduated, he got a job in an IT company but during the Dot Com bubble crash, he was fired at a young age of 23. This woke him up to the reality of life. You can watch this episode here. The story is really heartening.

What caught me was this is another story of someone losing lots of money in the stock market. The financial loss not only impacted one person but the whole family. Its really saddening to hear that. People would say that stocks are dangerous and do not dabble in stocks because you can burn your fingers and lose a lot of money. This is true. I've heard many cases of it and even have friends who experienced it. They are as young as me. Many are much older than me with family to support.

On the other extreme, there are people who know that stocks are risky and never invest in stocks at all. The problem is they are also struggling in their finances. I realised many people have poor financial management and poor saving habits. Indeed, without knowledge and good habits, people struggle in life.

The purpose of setting up my blog is to educate readers on how to properly manage their money and also learn the proper way to invest. I hope i can do my part in this society and make it a better place. It is saddening to keep hearing stories of how people suffer in life just because they were taught the wrong financial habits or because of the lack of knowledge in investment. Many times its due to greed where people wants to get rich quick. Getting rich quick has nothing to do with financial freedom. Financial freedom is not about money. It is about the ability to choose what we want to do in life without having to worry about money.

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Preparing and experiencing a disaster. How we can prepare ourselves for a financial crisis?

I've not been posting in my blog for the past few days. I'm actually in Taiwan currently. If you've watched the news, Taiwan is preparing for a typhoon that is forecasted to come in today. The name of the typhoon is typhoon trami. I'm preparing for this disaster and experiencing it for the first time. I'll share with you on how we can prepare for a financial crisis too in this post. So read on to find out more.

As a Singaporean, we do not have any disasters in our home country. In a sense, we're really fortunate to live in a safe environment. Let me share with you how Taiwan is preparing for this typhoon.

The news channel here is reporting on the typhoon and keeping residents updated on the crisis. Many shops are pilling up sand bags. Fishermen are securing their boats to prevent their boats from being blown away by the typhoon. Currently, many states in Taiwan has declared the sea and land typhoon alert. Schools and offices are closed and declared typhoon holiday. Domestic and some international flights are canceled.

I'm at central Taiwan now. The strength of the typhoon is strongest at the north of taiwan at taipei. From where I am currently, it has been raining very heavily since morning and winds are very strong.

The bad thing for me is i'll be stuck in my hotel for the whole day today. Hopefully tomorrow when the typhoon passes, I can continue travelling.

Preparation for any crisis is very important. It is the same with our finances. During a financial crisis, we may lose our jobs, our investment portfolio will suffer loses and those with high debts will be affected the most.

How do we prepare ourselves for a financial crisis?

1) Set aside at least 6-9months of your monthly expenses as emergency fund

Having an emergency fund will prepare you in case you lose your job during a crisis. It helps you to have a piece of mind to continue living your life and provide for your family while you find another job.

2) Do not be overleveraged on debt

How much debt is a healthy level? Many financial advisors will recommend you borrow not more than 60% of your monthly income. This includes your housing loan. Debts require you to pay interest also. Generally, debts with high interest rates will increase the impact caused to you.

3) Have a compresensive insurance and hospitalisation plan

Having insurance will ensure your family have a sum of money in case something happens to you and hospitalisation plans will cover you for your medical bills. We should have ourselves covered by insurance and hospitalisation plans regardless of a financial crisis or not. Seek a professional financial advisor on what you need. A point to note is do not buy too many insurance plans. Some are not really needed. So do research throughly before buying one.

4) Do not invest money you cannot afford to lose

During a crisis, stock market will crash and most of your investments will be negatively impacted. If you invest money you cannot afford to lose, you'll be emotionally unstable during a crisis and will not be able to make sound decisions. That is what happen to many people who over invest. They got their fingers burnt because they were forced to sell their investment during a crisis. Those who have capital to invest more during a crisis will emerge out better off. Learn how to invest wisely before you even start investing.

5) Upgrade your skills and seek to have more than one source of income

Upgrading our skills or learning more skills will enhance our competitiveness. In case we lose our jobs, we can find another one more easily if we have more skills. Investing in yourself and getting more certifications will definitely help you. Having more than one source of income is definitely even better. We can learn to create passive income. Other sources of income can come from rental from properties, dividends from stocks, part time business, royalties from intellectual properties like books and music albums etc. Learning to create multiple sources of income can increase our income greatly and let us reach financial freedom faster also. During a crisis when you lose your job, you do not have to worry too much too.

These are some of the points that can help us in preparing for a financial crisis. I can write so much today because I'm really stuck at the hotel as the winds and rain gets heavier and heavier. I can see the trees swaying agressively and the winds howling strongly even though the windows are tightly closed. I'm experiencing a nationwide crisis.

Start preparing today. Preparation starts before a crisis happens.

I'll end of with a famous quote:  "If you fail to plan, you plan to fail."

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An interview with a Singaporean couple - How they manage finances with a family of 5 children

Many couples cite the rising cost of raising a child as a deterrent from having more children. A family with 5 children tells us how they manage their finances.

One thing i'm impressed with is that the husband is the sole breadwinner in the family. He earns 8-9k a month and still manage to save 20% of his income. Watch the interview below to know more:

 

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How 27-year-ol​d S'pore woman lands herself in $100k debt

I chanced upon this article when one of my friend shared it on Facebook. The title caught my attention. I guess if you're reading now, you were also attracted by the title itself.

It goes to show that there are people who do not know how to manage their finances and regret it later in life. This woman was a real estate agent and i guess her income was really high from selling properties during the property boom.

Some points to summarise:

She was $100k in debt at just 27 years old.

Spent $10,000 a month just on entertainment.
I wondered how she manage to spend so much? $10k/mth is a big amount to just be entertained.

Bought a car for $70,000

Splurges on designer clothes and bags, and dining at exclusive restaurants.

Invested $30,000 in a dubious scheme which her friend promised a 20% return. Was conned and the friend ran away with the money.
Never invest in something you're not familiar with

Max out 4 credit cards with debts mounting

Place bets on illegal online football websites, thinking that gambling was the only way to recover her money.

Read the full story here: How 27-year-ol​d S'pore woman lands herself in $100k debt


The fact is it doesn't matter how much you earn but its how much you manage to save that matters. Most people spend money to impress people. It is always the pride and ego which destroys a person's life.

I'll end off with this quote:

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”

― Will Rogers

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2. Channel 5 new TV series - Recession Heroes
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Managing my personal finances

Over the years, as i learn more on how to manage my personal finances, it became more fun to me. Regular savings have become a habit and i have opened several bank accounts to allocate my money respectively. I have a spending account, an investment account, an emergency fund account and a monthly savings account.

This is how i allocate my money:

1) Allocate around 6-9 months of my expenses into an emergency fund account.
An emergency fund is important in case i need the money urgently. This is strictly for use during emergency time when i have not enough cash.

2) 60% of my monthly salary to my investment account
This account is used to buy stocks of companies or invest in funds

3) 15% of my monthly salary to a savings account for higher interest.
This account is to earn higher interest rates than a normal savings account. There is no lock in period and i can take out my money anytime. This also serves as an opportunity fund where if a stock market crashes, i have extra money to buy undervalued stocks. I use this fund to donate to charity also.

4) The rest of 25% for spending account
If there are leftovers in my spending account, i can accumulate to a certain amount and spend on luxuries.

As i have more money over the years while working, it gets more and more exciting to see my account balances grow. Saving money is part of my life now and i do not find it hard anymore. When i first started out, saving money was hard as we're more prone to spend more money. I learnt that in order to have a financially free life, one thing we must learn is to have delayed gratification. This means paying myself first by saving and then spend the rest. Living a simple life helps a lot too. I prefer life to be simple although i do spend on luxuries like eating out at restaurants or travelling. But still those luxuries can be done at low cost if planned properly.

Many people spend money first and then save. This is why most people find it hard to save money as most of the time they do not have much left over after spending. It takes discipline to put aside a fixed percentage of your income for savings before you even start spending. I use a free service provided by DBS bank to auto transfer money out to my various investment and savings account once my income goes in. This saves me the hassle of transferring manually every month. I do not even have to monitor where my money goes. Everything is automatic.

As my investment account grows, i can invest more easily. Investments make my account grow and there are dividends from stocks also. Money is constantly flowing into this account. I will let money in this account to compound over time and this will help me achieve financial freedom in the near future. You may be wondering why not spend some of the investment gains and dividends from stocks? I do not think i should do that as the purpose of investment is to grow the money. If i do want to spend more, then i should try and increase my income so that i have more money to spend in my spending account. If i am able to increase my income, then i don't even have to save that much anymore.

Managing our personal finances is important. I set financial targets for myself to make sure i'm on track. You can read it in my goals tab. The journey towards financial freedom is a journey in itself. You have to plan the road or else you'll get lost or get off track. This road is an exciting one and i hope to update you of my progress in years to come. I have been inspired by many people who have walked this road and accomplished what they set out for. They have shown that it is possible. If more people know how to manage their personal finances, more people can benefit from a lifestyle of financial freedom. We can get out of the rat race and truly enjoy life, not just working for money for the rest of our lives.

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Explaining Personal Loans in Singapore [Guest Post]

The following post is contributed by imoney.sg. I'm glad to be able to work with them to reach out to more readers on subjects related to financial planning and investments. You may have seen previous posts on housing loans which was also contributed by them. Some of my blog posts on SG young investment has also been featured on imoney site.

imoney started out in Malaysia and is now branching out to Singapore also. Their malaysia website has seen over 24k likes on their facebook page and the Singapore site which just started has already got 304 facebook page likes. Click here to access imoney site

Here is the post on personal loans:

Personal loans have become very popular and common in Singapore in the last decade. But what exactly is a personal loan and how does it work? A personal loan is an unsecured loan that is meant for personal usage – this means the bank won’t ask any explanation on what you are using the money for. As these loans are unsecured (meaning the bank does not ask for collateral) the interest rates will usually be higher than those on secured loans (car loans, mortgages, etc.). Another characteristic of personal loans is that they are short term, usually somewhere between 1 and 5 years, which means they are repaid much quicker than a mortgage, for example.

The question that naturally comes next is: if there is no collateral, what are the other criteria that banks look at to determine the loan amount? In Singapore, the banks look at your monthly income and usually determine the amount you can borrow as a multiple of that number. For example, if you earn S$5,000 per month and the bank offers up to 5x you income, you are eligible to borrow up to S$25,000. What about the costs associated with the loan? In addition to the interest rate, the banks usually charge an annual fee, somewhere between S$50 and S$90. Adding the two costs together will show what the total expense associated with a particular loan package is.

When Should You Consider Taking a Personal Loan?

While it might be tempting to take a personal loan to buy a new TV or take a nice holiday, for example, you should really consider whether it is worth doing so. The interest rates on personal loans in Singapore are high (between 9% and 18%) so you will most probably end up greatly overpaying that TV or holiday and regretting it later on. Personal loans are thus not the best way to finance such “entertainment” expenditures.

So when is taking a personal loan a good idea? There are a few occasions where a personal loan can actually help you reduce costs. One of those occasions is called debt consolidation. Debt consolidation simply means taking a personal loan in order to merge more of your outstanding loans into one, usually at a lowest interest rate. Another occasion where you might want to consider a personal loan is to cover a large credit card debt. As credit cards have incredibly high interest rates it makes sense to repay that debt with a loan that provides lower ones in order to save money.

Ultimately it makes sense to take a personal loan for things that will help you generate more income or create savings in the future. In addition to the two reasons mentioned above, other appropriate situations might be acquiring a professional education or investing in an asset that is quickly appreciating in value. If you think you are in need of a personal loan, be sure to compare the personal loans that are on offer by banks in Singapore!

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Married with kids still can be rich?

There has been quite a number of discussion on the question whether is it possible to be rich in Singapore if you're married? Many people say that housing prices in Singapore is very high, a wedding is very costly and the cost of living in Singapore is constantly rising.

So is it possible to be rich and retire a millionaire even when you're married with let's say 2 kids?

In 2007/08, the Singapore department of statistics conducted a household expenditure survey to gauge on the average expenses per household.

Here are some of the results:

Average monthly expenses

A household living in a 4 room hdb: $3057/mth
A household with 4 members: $4217/mth

I took 4 room HDB and household with 4 members because this is where most people are. Married with a 4 room flat and 2 kids.

Of course this data is taken from 2007/08 which is some time ago. The department of statistics is doing another round of survey this year and is still ongoing currently. I expect the average monthly expenses to go up.

Most of the household expenses are spent on paying the housing loan. For a couple who bought a 350k BTO 4 room flat, the loan that they take up would be 315k after paying the 10% down payment. If they take a 30 year loan with HDB at the current interest rates, the monthly repayment is $1262.

If both the husband and wife earn a combined income of $6000, after deducting the expenses of $3057 (for household living in 4 room HDB), they will be left with around $2943. This adds up to an annual savings of $35316.

Is this savings a lot and can the couple accumulate a million dollars. I do not think the couple in the above scenario will be able to. This means a family income of $6000 is just enough to live by. The practical aspects of starting a family begins with prudent financial planning. If not, many people will be stuck in the rat race and live day to day till their old age. Already older Singaporeans are finding it hard to retire and most still have to work. With rising cost of living and higher inflation rate, the need for investment becomes even more important. Savings alone will not bring us anywhere in times like this when interest rates in banks are minimal. We need to know how to maximize the value of our savings.

It is possible to be rich even if you're married with kids. There are people who have done it. We should learn from people who have been through that journey.

How rising interest rate affects the housing loan you pay? [Guest Contribution]

Interest rates are starting to rise and it affects the amount of loan that you pay for your housing mortgages. But how much will it affect you?

Look at the simple illustration below:

A Singaporean Guide to home buying fees and charges

Click Here for PDF

Inforgraphics provided by imoney.sg , a price comparison website dedicated to helping Singaporeans make the best use of your money.

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The curious case of GOLD - A Gold bubble?

Gold price has dropped significantly the past few months hitting a low of $1180 before recovering back to $1235. Gold price was at a high of $1837 in 2011. That is a 33% drop till now.

The above shows a 20yr chart of Gold. The recent drop is the worst in 20 years. Back home in Singapore, if you notice, there were already signs that Gold had formed a bubble and a crash is coming. How do i know?

The answer lies with more and more people without financial knowledge are investing in Gold. In Singapore, we saw an increase in the number of  firms who promise a guaranteed return if you invest with them. These firms typically use Gold as a luring point and attract people to put their money with them. As Gold is a rather safe asset and a hedge for inflation, nobody thought that Gold price will go down. The marketing point was that as long as there is inflation and prices are going up every where, then Gold price would go up also.

Before the recent huge fall in Gold prices, some of these firms promising a guaranteed return on Gold investment shut down and the owner disappeared. This left investors stranded and they lost all their money. Examples of 2 such companies in Singapore are Genneva Gold and The Gold Guarantee. With cases like this happening, it gives us a strong hint that Gold prices are at unsustainable levels  and the bubble might burst soon.

Watch this video to find out more on the recent Gold scam in Singapore by The Gold Guarantee:

Family losing close to a million in the Gold scam? It is really happening. 

You'll realise some investors are old people and most likely they do not know anything about Gold. Its quite saddening to see how people lost all their savings and money to firms like this. It is important to have knowledge and educate yourself on the financial instruments before investing. You'll save yourself from all these scams. 

Then the question is why would people invest their hard earned money with these institutions? Most likely is due to greed of having higher returns. These institutions can promise a guaranteed return of more then 10%p.a. In the first year you may get your returns as promised but the next following year, they may disappear along with all your money. 

The next bubble? Maybe housing bubble in Singapore and some parts of Asia. No one knows for sure but i do know that more and more firms are into property investments similar to the Gold case. This is something to be aware of. These firms are promising 12% return PA investing in properties. Watch out for similar scams like this. 

How the rich manage their money that the poor and middle class do not - Part 2

In Part 2, i will show you various scenarios of how a person wealth can increase over time if he invest and also how a person's wealth can decrease if he doesn't invest.

The first scenario: Two person starting with $10000 capital and no extra savings for the rest of 20 years

This comparison shows two person, one who doesn't invest and the other one invests. First person as seen in calculation one has their money eaten up by inflation (3% average inflation rate for Singapore). By the end of 20 years, his money is almost halved. It takes approximately 23 years for your money to shrink by half if inflation rate is 3% on average. Person 2 invests his 10k at a annual return of 10%. By the end of 20 years, his 10k has increased to $73281. That is 7X in 20 years.


2nd scenario: Two 25 year old starting out with a capital of $10000 each and saves $500 monthly.

Person A who does not invest will end up with $95578 when he is 45 years old and person B who invest at 10%p.a ends up with $456,129 at age 45. That is 4 times more as compared to a person who doesn't invest.

3rd scenario: If person A saves double at $1000 but still doesn't invest

Even though person A saves $1000 which is double of person B, he still has lesser money than person B who invest. This shows that even if you save more but don't invest, you will still be worse off. That is the reason why some people who save and spend little are still poor when they are older.

How do you become a millionaire in 15 years?

If you start at 25 years old with 10k, you can be a millionaire by age 40. Just save $2500 every month and invest at a return of 10%p.a. Is it possible to save $2500 every month? I would say its quite hard unless your income is very high which is unlikely if you're in your 20s. The solution? Increase your investment rate of return to more than 20% p.a and you just need to save roughly below $1000 and invest it. 

Conclusion

To be rich, learn to increase your investment rate of return and save more. If you can achieve both at the same time, then you'll shorten the time to be a millionaire. If you do not invest above the rate of inflation which is 3%, then your savings will shrink due to inflation. 

To find out how long it takes your money to double, use 72 divide by the rate of return. For eg, 72/24=3

This means if your investment return is 24%p.a, your money will double in just 3 years compounded.

To find out how long it takes your money to halved due to inflation, use 70 divide by the rate of inflation. For eg, 70/4=17.5. This means your money will devalue by half in 17.5 years if inflation rate is 4% on average.

To read part one of this series, click here: 

How the rich manage their money that the poor and middle class do not - Part 1

All the above calculations are calculated using a compound interest calculator provided by the CPF board of Singapore. You can access it here: http://www.cpf.gov.sg/cpf_info/calculator/Compound_Calc/comp_calc.asp 

How the rich manage their money that the poor and middle class do not - Part 1

After many years of reading books on successful people, I've more or less discovered the difference between how the rich, the middle class and the poor manage their money. A big portion of this analysis comes from the book rich dad poor dad. I will add in examples in context with the life in singapore.

The poor

Income --> Expenses   --> Cashflow
$2000           $2000                $0

Most of the poor spend all their money and they don't even have enough to live by. A small portion of them will have some left over to save. However, the money they save are mostly in a bank account which gives a tiny interest rate of 0.05% pa. If you live your life in this manner, it is impossible to be rich.

Some people can earn $10000 and spend $10000 also. These people with high income we call them the middle class

The middle class

Income
Salary: $10000
      ↓
Expenses
Daily expenses: $3000
Car loan payment: $500
Housing loan payment: $2563
(30yr loan period with 2.6% interest)
Credit card payment: $800
Interest on car loan: $80
Interest on credit card: $200
Child 1 expenses: $1000 
Child 2 expenses: $1000  
Total expenses: $9143

Assets
Property: $800000
Cash in bank: $50000

Liabilities
Car loan  $50000
Credit card debt $10000
Housing loan: $640000

As you can see, the middle class are generally highly educated and they can earn a high income. However, without proper financial management, they take on debts and never pay their credit card debt on time. Interest on credit card debt can become uncontrollable if compounded over time. Most credit card interest rates are at 24% pa. That means your debt amount will double in just 3 years.

Again, some middle class people will have savings. But they just put in a bank or some fixed deposit which only yield a tiny 0.05% pa for deposit accounts in Singapore.

For this example, this person saves $857 per month. Yearly savings is $10284

Interest earned on savings put in the bank: $10284*0.05%=$5.142

The rich

Income
Salary: $10000
Dividends from stocks: $1500
Rental from property: $500
        ↓
Expenses
Daily expenses: $2000
Housing loan payment: $2563
Child 1: $1000
Child 2: $1000
Child 3: $1000
Total expenses: $7563

Assets
Stocks: $200000
Property 1: $800000
Property 2: $1 million
Cash in bank $10000
Car (paid fully)

Liabilities
Housing loan: $640000
Housing loan: $800000

First, the rich will strive to increase their income. They will seek multiple sources of income instead of relying on a single source. They will create passive income for themselves through investing in stocks and property.

Second, they will not take up unnecessary debt so that their expenses can be kept to a minimum. In this example, this person saves $4437 per month. He saves $53244 a year. Let's say he invest this amount and has a return on investment of 18%. His money compounded over 4 years will become double to $106488.

Thirdly, the rich invest their money. That's a common link I found between all the rich people.

This is how the rich grow their money.

In conclusion
If you want to be rich, follow the strategy below:

1) increase income and learn to create passive income
2) reduce expenses
3) invest your money and learn to invest wisely. (Note: It's true that many people burnt their fingers in the stock market. Most of the time these are individuals who have no knowledge on investing. You do not want to be one of them)
4) Do not take on bad debts especially credit card debts. If you have a credit card, do not over spend and always pay on time.

In part 2 of this series, I'll write on how you can become a millionaire by investing and the power of compounding. Also on the reverse, how you will become poorer by not investing and how inflation erodes your savings.

To read part 2, click here: 

How the rich manage their money that the poor and middle class do not - Part 2

Investment and risk management. The current economic condition

This year, i'm going to start a share builder plan with Phillip securities, a brokerage in Singapore. They have this plan where you can invest a minimum of $200 per month to buy into the STI ETF. This method of investing every month is a tested proven strategy where the average returns is about 7-8% annually. By using this method, one doesn't need to time the market and the plan can be on auto pilot where money is deducted from your bank account automatically every month.

For the past 10 years from 2002 to 2012, the STI ETF has achieved an annunalised return of 9%. This is higher than most unit trust or funds out there in the market. My opinion is this, if you can't acheieve more than 9% in your investment consistently every year than why not invest in the STI ETF instead?

A point to note when investing is to have proper risk management. By that, you have to know how to allocate your money to different asset classes at different times. Do not put all your money in stocks as that would mean you're taking too much risk. Even before investing, set aside an emergency fund of up to 6 months your expenses. Then using the rest of your money, invest into safe, medium risk and high risk assets. That means you'll need to have a portfolio of index funds, bonds, stocks, commodities to balance your portfolio. The above assets do not move in the same direction. So when stocks go down, bonds will go up as people move money into safer assets. By having a mixture of all, you reduce your risk exposure. How many percentage of each asset should you invest into? That will have to depend on the current economic conditions and how money is flowing in the economy.

Now, some economics of the current situation. As we know, bond price are currently at high prices and yields are very low. If you study economics you will know that as interest rates rises, bond price will start to drop. Right now, interest rates in the US are at a low of 0.25%. That would mean that the potential for interest rates to go down are limited and the possibility of interest rates going up are more likely. Economic conditions in the US and China are improving with their manufacturing index climbing up and above 50 showing signs of expansion. Although US fourth quarter GDP showed contraction, i believe the next result would be better as manufacturing activity starts picking up. Bond prices are starting to drop and 10 year treasury yields are above 2% currently. Historically, a yield of above 2% indicated the economy is about to recover in 6-9 months. By the end of 2013 and early 2014, we should see a recovery economy around the world.

If you want to be rich, learn this principle

Watch this video by T harv Eker, author of secrets of the millionaire mind.

Rich people are frugal

A Blog Post by Singapore's Youngest Millionaire Adam Khoo

Some of you may already know that I travel around the region pretty frequently, having to visit and conduct seminars at my offices in Malaysia, Indonesia, Thailand and Su Zhou(China).

I am in the airport almost every other week, so I get to bump into many people who have attended my seminars or have read my books.

Recently, someone came upto me on a plane to KL and looked rather shocked. He asked, 'How come a millionaire like you is travelling economy?' My reply was, 'That's why I am a millionaire.' He still looked pretty confused. This, again confirms that greatest lie ever told about wealth(which I wrote about in my latest book 'Secrets of Self Made Millionaires'). Many people have been brainwashed to think that millionaires have to wear Gucci, Hugo Boss, Rolex etc. (I shop at G2000 by the way) and sit on first class in air travel. This is why so many people never become rich because the moment they earn more money, they think that it is only natural that they spend more, putting them back to square one.

The truth is that most self-made millionaires(not those lucky who inherited money) are frugal and only spend on what is necessaryand of value. That is why they are able to accumulate and multiply their wealth so much faster. Over the last 7 years, I have saved about 80% of my income while today I save only about 60% (because I have my wife, motherin law, 2 maids, 2 kids, etc. to support). Still, it is way above most people who save 10% of their income (if they are lucky). I refuse to buy a first class ticket or to buy a $300 shirt because I think that it is a complete waste of money. However, I happily pay $1,300 to send my 2-year old daughter to Julia Gabriel Speech and Drama without thinking twice.

When I joined the YEO(Young Entrepreneur's Organization) a few years back (YEO is an exclusive club open to those who are under 40 and make over $1m a year in their own business) I discovered that those who were self-made, thought like me. Many of them with net worths well over $5m, travelled ecomony class and some even drove Toyota 's and Nissans. I noticed that it was only those who never had to work hard to build their own wealth (there were also a few ministers' and tycoons' sons in the club) who spent like there was no tomorrow. Somehow, when you did not have to build everything from scratch, you do not really value money. This is precisely the reason why a family's wealth (no matter how much) rarely lasts past the third generation. Thank god, my rich dad(oh no, I sound like Kiyosaki) foresaw this terrible possibility and refused to give me a cent to start my business.

Then some people ask me, 'What is the point in making so much money if you don't enjoy it?' The thing is that I don't really find happiness in buying branded clothes, jewelry or sitting first class. Even if buying something makes me happy, it is only for a while. It does not last. Material happiness never lasts, it just give you a quick fix. After a while you feel lousy again and have to buy the next thing which you think will make you happy. I always think that if you need material things to make you happy, then you live a pretty sad and unfulfilled life.
Instead, what makes ME happy is when I see my children laughing and playing and learning so fast. What makes me happy is when I see my companies and trainers reaching more and more people every year in so many more countries. What makes me really happy is when I read all the emails about how my books and seminars have touched and inspired someone's life. What makes me really happy is reading all your wonderful posts about how this BLOG is inspiring you. This happiness makes me feel really good for a long time, much much more than what a Rolex would do for me.

I think the point I want to put across is that happiness must come from doing your life's work(be in teaching, building homes, designing, trading, winning tournaments, etc.) and the money that comes is only a by-product.If you hate what you are doing and rely on the money you earn to make you happy by buying stuff, then I think that you are living a life no better than a prostitute.

The Cashflow Quadrant

This is the cashflow quadrant that Robert Kiyosaki, author of best selling book rich dad poor dad talks about.

E – Employee

This is where most people are. They are employed by an organization or company and you are trading your time for money. If you want to make more money you have to spend more time working. Sure you can get a higher salary or find a better job, but the money does not scale. You only earn money when you work, if you get sick, go on a vacation or go into retirement your cashflow typically stop.

S – Self employed

This is where a lot of people start out. You work by yourself but also for yourself. Freelancers typically belong to this category. While you have more freedom and can typically charge more, there is still the issue that if you don’t work you don’t earn any money. It is typically the first step for people because you can continue to do what you did as as employee but at a higher salary and with a better boss

B – Business owner

Business owners own a system and typically have people working for him/her. It is no longer your hours that bring you income, but a system that you have setup. This could be selling other’s hours or selling a product. If you have built a good system, then it will run even if you get sick or decide to take a mini-retirement for six months.

I – Investor

This is where investors are. Just like the Business owner they do not get paid by the hour, but have money working for them. This can be investment in any kind of assets like real estate, stocks, businesses etc. Often you see people move to this category when they have made money as business owner.



On the E and S quadrant side, people work for money. While on the B and I side, people have their money work for them. Always remember, the rich don't work for money, they let money work hard for them. Choose your road wisely and find your passion. Only by doing what you love will you be able to succeed.