Financial Literacy – your insurance to living

Today is Sunday, I woke up ready to have a lazy day but when scanning news online, I had headline like this “1,600 turn to Bank Negara’s AKPK unit every month” screaming at me. This is alarming for a small country like Malaysia.

These 1,600 individuals turn to the Credit Counselling and Debt Management Agency (AKPK) for help to manage their debts. What about those who are also in debts but are not aware yet and also there are those already in debts and trying to clear them on their own to save their pride. I am appalled by just thinking about it.

As reported by Rashvinjeet S Bedi, the number seeking help monthly has tripled since the agency was set up 18 months ago. And I am sure it will continue to rise if nothing is done to educate these people about how to handle their personal finances.

When I started this blog, my main objective is to bring awareness about how to value money to the younger generations; Generation X and Generation Y who should now be in the thirties and twenties and have just started to earn their own money and be out there to swim with the sharks.

I wanted so much to warn these young kids about “money danger” that some of my postings had become so dull, so boring, so not exciting and so annoying as a “nagging mum”. Yes, who wants to live frugally or live a simple life just to ensure there is enough money to keep us going when we are old. How uninteresting can that be? There are so many “happenings” out there that you would want to get your hands into.

To emphasise on why you should, here are the 2 real life examples quoted by reporter Rashvinjeet:-

“DR AZAM, 28, had it all: two flashy cars, a beautiful home and a flourishing career. He wore expensive clothes and lived extravagantly on credit.

He renovated his mother’s home and decorated it with expensive Italian furniture. He took a loan for the renovation and bought another house.

Without realising it, Dr Azam owed creditors RM400,000 in housing loans, hire-purchase loans and credit card debts.

Stuck, he approached the AKPK for help. Being single and with his mother being the only dependant, Dr Azam was advised to sell his house. He moved in with his mother and sold one of his cars.

In the end, Dr Azam was able to save 45% of his monthly loan payment.”

This is a typical example of living beyond your means and spending your money before you even earned it. At least Dr Azam can still be rescued and live a comfortable life. Lets look at the next example:-

“BEFORE the economic crisis of 1997, Allen was a sales manager earning a five-figure monthly salary, living a comfortable life. However, the economic downturn forced his employers to shut down operations in Malaysia.

At 43, it was hard for him to find a new job. To complicate matters, his wife has a medical condition.

Allen turned to loans and credit cards to fund his lifestyle. Soon enough, creditors began hunting him and threatening bankruptcy.

Suicidal, Allen turned to odd jobs, making less than RM1,000 a month. He skipped meals to ensure his wife had something to eat.

His wife changed his mind about suicide and suggested that he seek the help of AKPK.

Allen had RM200,000 in his EPF, although he could only withdraw the money at 55.

With a debt of RM130,000, AKPK advised him to consider bankruptcy as an option, so that he would be able to settle all his debts when he turns 55.”

I truly empathised with Allen. Earning a five-figure income in the 90s is a lot of money but obviously he did not foresee the economic crisis. What we can do now is to learn from this very painful lesson.

A good friend of mine thought me to use the “Worst Case Scenario” method of looking at every situation. Do a “worst case scenario” of your financial situation. How much mortgages, loans, debts do you have and if you were to lose your job today, how are you going to survive. Do you have “Plan B”? Really look at it, it is scary but it is necessary.

Change your ways. Do not spend indiscriminately or at your wimp and fancy. Think before you spend.

CHANGE

Time and again, we need to change but change is hard.

Sometimes we change due to living changes

or we will wait for “hurt to change”

but never wait till you have to “despair to change”.

It may be too late or too drastic, like in Allen’s case.

8 Secrets of WEALTH CREATION

1 ADD VALUE

If you have invested in a business and in order for you to make your products or services more valuable, you have to work harder, work smarter, work longer. This is to ensure that your business will start creating wealth for you faster.

2 CONTRARIAN THINKING

A contrarian trading strategy is based on the assumption of negative serial correlation of prices: a predictable pattern such that if prices have gone up, they must come down eventually, and vice versa. This view of contrarians focuses on the important role of fads: rather than acting independently, investors exhibit herd-like behavior, following waves of mass optimism and pessimism, whereas a contrarian thinker /investor goes against the masses.

3 LET YOUR MONEY WORK FOR YOU

Buy things that CAN make money like mutual funds, stocks, bonds, properties and businesses. Buy them at the right time. You would want to buy into investments after the masses have sold, then sell when the bubble develops and before the bubble burst. You can buy the shares of excellent companies with good fundamentals during a recession or a meltdown. Or if you think that recent change of top management will turn around a troubled company.

4 LIFE LONG LEARNING

Take advantage of the traffic jam, put your travelling time into good use, listen to all the motivating audio programmes like the “Rich Dad Poor Dad” series. Fill your mind with “can do” daily. Read books that will put you in a positive mood. Just think, a simple idea from all these positive “vehicles” might just make you a millionaire.

5 LOVE YOUR JOB

If you have to work to earn a living, find a job that you love and enjoy. “When you start doing what you really love to do, you’ll never work another day in your life”

said BRIAN TRACY, author of the book called “The 21 Success Secrets of Self-Made Millionaire”. Here while you are doing what you love and earning your salary, put a portion of which into your investment portfolio to create wealth.

6. IDENTIFY WITH SUCCESSFUL PEOPLE

“Birds of a feather flock together”, this is a saying to determine what type of person you are in relations to the type of people you mix around with. About 90% of your success will be determined by the people with whom you habitually identify and pass the time. Your success and happiness in life is going to be determined by the quality of the relationships that you develop in your personal and your business activities. Find a few people who can mentor you, who can keep you focused and motivated.

7 ACTIVATE THE LAW OF ATTRACTION

Thinking positive is the key… Feed your mind with what you want, not what you do not want. Magnetise you mind to attract on what you want to do. Positive mind enhances the effect of belief and once you believe, you will be successful in all your endeavours.

8 SET YOUR LONG TERM GOAL

Write down your goal, what do you want to achieve says in 10, 20 or 30 years then work towards achieving it. Long term goals should be permanent and specific. It has to be realistic to avoid changes, remember it is harder to hit a moving target. Then work towards you goal every day with persistency. Daily, weekly, monthly, set your short term goals to help you achieve what you want in life.

How to create wealth?

Wealth Creation...........its the most talked about topic in the financial arena. Is it only for the Warren Buffets or the Bill Gates of the world? Or is it for ordinary working people like us? Are we ready to invest, to create wealth?

The questions that comes to mind are:

• "What shall I invest in?"
• "When shall I start to invest and create wealth?"
• "Where shall I invest?
• "Who do I invest with?
  
• "How do I know to invest in the right business?"

It all depends!.............first....... are you ready to invest???

Ask yourself the following questions:

• "Are you out of debts?"
• "Have you checked your risk level?"
• "Have you put aside available cash for the "rainy days"?"
• "Have you started to learn the basics?"
• "Are you willing to take advice?"

If your answer is "yes" to these 5 questions, you are more than ready...............in fact it is never too young nor too old to start but you just have to be ready to avoid any unnecessary disruption.
Remember, Warren Buffet said in his interview with CNBC news that

"He bought his first share at the age of 11 and he now regrets that he started too late!!"

With this statement in mind you should be more than comfortable to start your journey to creating wealth................

Exponential Growth ..... the Wonder of Compounding

The Power of Exponential Growth

1 + 1 is 2



2 + 2 is 4



4 + 4 is 8



8 + 8 is 16

This is how the dictionary explain the phrase "Exponential growth"

• (microbiology) The period of bacterial growth during which cells divide at a constant rate
• extremely fast growth. On a chart, the line curves up rather than being straight
• growth of a system in which the amount being added is proportional to already present; the bigger the system, the greater the increase
• in everyday speech, exponential growth means runaway expansion

The surprising characteristics of exponential growth have fascinated people through the ages. Lets see what the story of the chessboard, borrowed from a dictionary, can teach us.............

Rice on a chessboard

A courtier presented the Persian king with a beautiful, hand-made chessboard. The king asked what he would like in return for his gift and the courtier surprised the king by asking for one grain of rice on the first square, two grains on the second, four grains on the third etc. The king readily agreed and asked for the rice to be brought. All went well at first, but the requirement for 2^{n - 1} grains on the nth square demanded over a million grains on the 21st square, more than a million million on the 41st and there simply was not enough rice in the whole world for the final squares. (From Meadows et al. 1972, p.29 via Porritt 2005)

Second Half of the Chessboard is a phrase, coined by Ray Kurzweil, in reference to the point where an exponentially growing factor begins to have a significant economic impact on an organization's overall business strategy.

The total number of grains of rice on the first half of the chessboard is 1 + 2 + 4 + 8 + 16 + 32 + 64 + 128 + 256 + 512 + 1024 ... + 2,147,483,648, for a total of exactly 2³² − 1 = 4,294,967,295 grains of rice, or about 100,000 kg of rice, with the mass of one grain of rice being roughly 25 mg.

The total number of grains of rice on the second half of the chessboard is 2³² + 2³³ + 2³⁴ ... + 2⁶³, for a total of 2⁶⁴ − 2³² grains of rice. This is about 460 billion tonnes, or 6 times the entire weight of the Earth biomass.

On the 64th square of the chessboard there would be exactly 2⁶³ = 9,223,372,036,854,775,808 grains of rice. In total, on the entire chessboard there would be exactly 2⁶⁴ − 1 = 18,446,744,073,709,551,615 grains of rice.

The Chessboard story, which is mind boggling, is to simply illustrate the power of compounding...... no wonder it is dubbed as "The 8th Wonder of the World". Now that we understand how powerful compounding is, lets us look for ways to make use of this principle to multiply whatever money we have..............if you are saying you don't have, relook at your expenses, read again Point No. 2 of my initial post...... get out of debts and start saving now, no matter how small, to start with. Put your plan into ACTION.

Linear Growth

lĭn'ē-ər
adj.
of, or relating to, or resembling a straight line
having only one dimension

Linear Growth was what I was talking about when I posted on "Income Creation" where you work for money; either in your own business or as a professional or working at a job for others. In linear income growth you get out what you put in, nothing more, nothing less. If you work for others, you wait for the year long increment and bonus which sometimes can be a disappointment. If you provide services for others, you wait for the project to come and worked hard for the fees paid to you. In these 2 scenarios, your life would probably be....

• you get one day a week to spend with your family
• you might not get more than $40,000 a year (more for professional) no matter how hard you work
• you get your hard earned annual leave of 14 or 21 days but you are too broke to take the family for a rewarding holiday and for professional if you take off, your income stopped
  
• you seldom get time off and when you do you are either exhausted or broke to enjoy it
• you get your paycheck end of every month, and you have to be back on the time-for-money treadmill again the next month

Of course there is a way out. We can break this time-for-money trap with leveraging. In my last post, I used the Coca-cola story to illustrate the power of leveraging. Now there are lots of way to leverage..... big corporation leverage by using their employees. By copying the right kind of leverage in the right situation you can literally grow bigger and faster........ which takes me to the next subject..........EXPONENTIAL GROWTH

The Power of Leveraging

The concept of exchanging "Time for Money" is really limiting. There is that much we can do with our 24-hour, so we will have to look for other ways and means to add to our income, to achieve the goal we have set for ourselves to create wealth.

If we can find a way to leverage our time and effort our goals will be achieved faster and easier.

The dictionary explains the word "Leverage" as the mechanical advantage of a lever. Lever, an old French word means "to make lighter" and................Leverage in financial dictionary means - "Use of borrowed funds to increase purchasing power and, ideally, to increase the profitability of an investment."

Scenario:

If Investor A wishes to invest in real estate. The property costs $100,000 and produces
Net Operating Income of $10,000 per year. If purchased with all cash, Investor A's annual Rate of Return is 10% ($10,000 ˜ $100,000). If she leverages the investment by borrowing $75,000, her return on equity may be higher. If the debt cost is 8% ($6,000) annually, the leverage results in a return of 16% ($4,000 ˜ $25,000). However, if the debt cost is 12% ($9,000), the leverage is negative because it reduces the return on equity to 4% ($1,000 ˜ $25,000).

Leveraged Growth
Working Smart Not Working Hard

The

story

In 1885, Dr John Pemberton developed the now all famous Coca-cola, a carbonated drink. Both small town and big city dwellers enjoyed carbonated beverages at local soda fountain or ice cream salon. Often housed in drug stores, the soda fountain counter served as a meeting place for people of all ages. But.......this is limiting time, effort and location.

In August 1888, Asa Candler paid $2,300 in cash to buy over the rights of Coca-cola. Two young attorneys from Chattanooga believed they could build a business around bottling Coca-cola. In a meeting with Candler, they obtained the exclusive rights to bottle Coca-cola across most of the United States....... for the sum of $1. By 1909, nearly 400 Coca-cola bottling plants were operating.

By 1920, the ideas and zeal of the 2 young attorneys fueled steady growth. Six-bottle cartons were a huge hit in 1923 and by end of 1920s, bottle sales exceeded fountain sales. Before bottling people had to go to a local soda fountain to order a coke - or there is no coke. Bottling changed all that, consumer need not go to a soda fountain to enjoy a coke because they could buy a six-pack and bring the fountain home with them. It has created a world of convenience...this is leveraging of time, effort and location.

Wealth Creation versus Income Creation

"Go to school, get good grades to get a good paying job" is our way of life and we ended up working for money. This is Income Creation....... trading our time for money by working for others or ourselves. Now... is this the only way we know how?? Lets analyze and see what we can get out of this so ever famous term called WEALTH CREATION.

What is Wealth? To different people it means different things and to me W E A L T H means....

Having enough money and enough time

with great health
to do what you want,
when you want and how you want

An American survey states that you are only considered rich if you have a monthly income of USD 50,000 without having to spend time earning it. That is TRUE WEALTH. Ultimately, I can suppose that all we actually want is FREEDOM. Not having to get up early, go to work, be exhausted and stressed and come home to the end of another day....

J Paul Getty,

millionaire says...

If you want to be rich,
just find someone
making lots of money
and do what he's doing.

Income Creation

Ethan...... he is soooooo cute. A 6-year old acting so adult.

I stumbled upon this little video and I thought "Wow, it will say a lot for my next post". Little Ethan performing in his concerts will make him very very rich but if he does not put a certain percentage of his income into some kind of investment, he might just end up like all of us (the 95% of the population) trading our time for money.

We are all slave to temporary income!!! Its the time-for-money trap. We worked 9 to 5 from Monday to Friday whole year round for the salary paid to us. All money will be used to pay for our dwelling, food, clothing, transport, furniture, utilities, entertainment etc......... At the end of the day, what do we have left? For Malaysian, we retire and claim our EPF money for our retirement, but is it enough? Of late you read a lot of news topics like "Most Malaysians not saving for retirement". ARE YOU READY FOR YOUR GOLDEN YEARS?? Maybe if you live frugally and don't get sick..... your retirement money will take you to the end of your days but........................