Savings = Freedom

I have often heard the phrase “debt = slavery”; when we are in debt, our lives are basically owned by our creditors, our employers, the government, and anyone else whose assistance and support we rely upon. If debt is slavery, then what is freedom? If we have no debt, are we truly free?
When I was a student at university, I managed to keep myself out of debt by working part-time jobs and by doing paid internships, which was a great way for me to build up experience. However, even though I didn’t accumulate debt during this period of time, money was still pretty tight. At the end of the month and at the end of the year, I would have more or less the same amount of money I started out with. This is a great situation to be in as a student, but it also meant that sometimes I didn’t have enough money to pay the bills. An unexpected bill such as a parking ticket might have meant something else would need to be cut that week, at least until the next paycheck would arrive. I was living paycheck to paycheck, which while being much better than being in debt, was still not a good situation to be in.
The problem of course is that my expenses were too high. I was making a low salary, but living as if I made a higher salary. I was not leaving a surplus on the side to carry me over the lean days.

What happens if you carry on the same habits, year after year?

I personally know two families; for anonymity’s sake let’s call them the Blake family and the Dodge family. Here are their stories:

The Blakes

The Blake family are a group of first-generation immigrants. They immigrated from a place where living conditions were a little harder, and opportunities a little harder to come by. They are enjoying their new home, and stashing away most of their income. They don’t spend a lot of money on eating out at restaurants or on other things that can cut over time, but they do save up to take the family on the occasional family vacation every now and then. They look for extra opportunities to make money when it makes sense, such as paid overtime.
By the time the little Blakes have grown up and left the home, the Blakes are nearly ready to retire. They still live in the same home, paid off long ago. They still work hard even though they are nearing retirement age. They haven’t gone on as many trips or spent that much during their live, but the trips they did go on were memorable and excellent. They’ve been able to provide for their family and have a nest egg to last them the rest of their lives. Some would say that the Blakes are fortunate, and indeed they are, but they also positioned themselves to be in a good place to take advantage of this good fortune!

The Dodges

The Dodges also have an immigrant heritage, but unlike the Blakes they are actually a second-generation family. They have experienced the benefits of growing up in a wealthy country, and their parents did everything they could to ensure they didn’t experience any hardship. The Dodges want to experience more freedom than their parents had, and they see money as a tool to be used to experience life in the moment; they often go on trips to the Caribbean, purchase a lot of jewellery, and they don’t hesitate to live it up when the occasion calls.
Before I go on, let me be clear that there’s nothing wrong with the Dodges choosing to live their life a bit differently. They also love their family, and they are not better or worse people. There is a difference though: the Dodges simply have a different weighting of the present versus the future.
Things go on like this for a while, but the Dodges become overleveraged over time. Instead of paying off their home, they add a second mortgage. Paycheck to paycheck living eventually turns into debt-based living. When the economy grows lean one year, they are no longer able to afford the payments and lose the home. The Dodges are forced to move to an apartment, and the kids stay at home to help out with the rent payments.
They are no longer in debt, but without savings, they are forced to live an austere life. The Dodges are entering a time in their lives when they should be able to sit back and breathe a bit, but unfortunately they now have to work extra-duty to make up for all of the spending in the previous years. Some would say that the Dodges are unlucky, and in a way they are, but they also did not position themselves to be in a better position to ride out the lean years.

Savings = freedom

Being out of debt is good, but the only way we really improve our lot in life is by saving and investing for the future! This is true both individually, and of us as a whole. The Dodges have it rough, but they are doing great compared to people a hundred years ago. They are able to indirectly benefit from the accumulated savings and investment of other people which has led to all of the things in society which we enjoy today.
When we save & invest, it’s selfish in the sense that we want to improve our own lives, but we actually help out everyone just a little bit at the same time, and when a lot of people are saving & investing, these effects lead to everyone being better off down the road.
The Dodges fell into the trap of lifestyle inflation, and their expenses grew faster than their income. They enjoyed life while the times were good, but everything moves in cycles and you need to be prepared for the leaner parts of those cycles. At least without debt, there is a chance for the Dodges; they lost everything, but they also have a shot at a fresh start.

Saving / investing in oneself

Being part of the blogosphere, I am constantly reminded by the need to save & invest, especially in oneself. Budgeting in the Fun Stuff is one of the most hard-working bloggers I know, and her success is an inspiration and a motivation to me. She has been investing in herself and her brand, and the results are starting to show!

Living to 100 and Beyond: How Will It Affect Your Retirement Plans?

Ever since time immemorial, humans have been born, they age, and one day, they die. Each of us is blessed with only a few short decades of youth; it’s all downhill from there. Indeed, retirement at the age of 65 seems almost cruel when you think about it: Most of your youth is already gone, and many of your retirement years will be spent visiting your new best friend, the doctor, and watching life pass you by as friends and family slowly pass on. Of course, there is joy, too, such as the freedom of finally being free from work, while being able to enjoy the company of children and grandchildren.
What if we didn’t have to suffer the consequences of aging; what if things didn’t have to be this way? What if one day, each passing year meant an increase in your personal expected lifespan? What if we were even able to reverse the processes of aging, so that you could be restored to youthful vigor and vitality? Sounds like wishful thinking? Ever since the beginning of time, people have been searching for the Fountain of Youth. It hasn’t yet been discovered, but in the future, maybe a miraculous fountain won’t be needed.

New Orleans Mardi Gras 1907. Illustration showing title float for Momus parade. "The Quest for the Fountain of Youth". Source: http://nutrias.org/~nopl/monthly/february2007/february2007.htm

By now, you are probably asking yourself, “what is this guy on?” Well, I am simply talking about the singularity. To explain what the singularity is, one first has to look at the general technological trends. Take a look at the time elapsed since major events in our history:
Agricultural revolution: ~10 000 years
Bronze age: ~4 000 years
Iron age: ~3 000 years
Widespread use of gunpowder; widespread sailing across the oceans: ~500 years
Industrial revolution: ~200 years
Flight; automobiles: ~100 years
TV: ~70 years
Transatlantic flight: ~50 years
Lunar landing: ~40 years
Beginning of widespread Internet use (information revolution?): ~15 years

Arriving at the singularity

As you can see, the pace of technological advance has been accelerating. The amount of change in the last 100 years alone is simply incredible, compared to all of the centuries before. It’s hard to comprehend the vast amount of change for those of us who have only been around a couple of decades, but if you had been born 100 years ago, then there would be no TV, no Internet, no international flights, no nuclear power plants… we have changed the world tremendously in the past 100 years.
As a species, we have greatly reduced the incidence of disease, we have greatly increased the dissemination of information; heck, in spite of all the bad news that you read about, the human race has built an amazing wealth of capital and technology. We stand on the shoulders of giants, of all those who have come before us and contributed to the accumulation of knowledge and progress. We’ve stumbled along the way, too, especially in the first half of this century with two world wars and with clashes of irreconcilable ideologies, but this doesn’t mean that we haven’t made a great deal of progress, in spite of the challenges that we have faced.
Given the improvements to our living conditions and to lifespans, why is it that we still imagine our later years as being more or less similar to how they’ve always been? Surely with all the change in the past 100 years, the change coming up is going to be even more incredible. It’s just hard to see, since we are actually living through these times and experiencing the progression of history first hand.

So, is this really what is still in store for us? Maybe not anymore. One guy who has put a great deal of thought into these ideas is Ray Kurzweil; you can read more about his thoughts on the singularity at his site, KurzweilAI.net.

The retirement plan

So, what does this mean for our retirement plan? First, let’s take a look at how retirement plans are often done today. The usual retirement plan takes a regular savings plan and places a few assumptions on it, such as a compound annual return of 8%, a retirement age of 65 or before, and a life expectancy of another 15-20 years beyond that. The savings built up over time are drawn down during retirement, and it looks something like this:

Traditional retirement plan. Prepared with MSN MoneyCentral.

There are a few issues with this sort of a plan:

• What happens if you live “too long”? You no longer have any retirement savings.
• What if your income changes over time? There is no longer a full-time work guarantee for many of us.
• Do you really want to settle for a “so-so” retirement, watching your nest egg dwindle with each passing day?

In order to fully capitalize on the potential advantages of longer lifespans, the above approach clearly won’t work too well. Our graph should look more like the following:

Retirement seed. Prepared with MSN MoneyCentral.

How can we get here? In order to achieve this, we can’t stick with a traditional plan, but we have to take the call to action and go above and beyond that. There are a few key points that will help form the foundation of this new retirement plan:

• Reducing expenses (Yakezie blog).
• Growing a money tree of savings.
• Building passive income (Yakezie blog).

In my next post, I will talk more about the lifestyle and expectation changes, as well as how a longer lifespan changes investing strategies. What do you think about the coming changes, and how will it impact your retirement strategy?

Getting Started on the Path to Wealth

n this world, some of us are rich, some of us not so rich. Some of us are lucky enough to be born into wealth, but most of us have to work for it. However, even if you are not currently wealthy, it is always possible for you to get started on the road to wealth.
Last week, I talked about planting a seed of savings, and the numerous benefits that your savings can provide for you, such as a safety cushion, income, and compound growth.

One good book that can help get you in the right mindset and started on the path to wealth is “The Richest Man in Babylon”. This book provides the basic lessons; in fact, many of today’s most famous personal finance books derive at least some inspiration or ideas from the lessons outlined in “The Richest Man in Babylon”. The chapter summaries can even be read for free on Wikipedia.
In this series, I will do a short book review of each relevant point from the book and show how it applies to our world today.
So, why Babylon? As the author, George Samuel Clason describes it, Babylon was one of the first wealthy cities known in history. Through the power of the human mind and spirit alone, men and women came to this patch of desolate land between the Tigris and Euphrates rivers, and through hard work they were able to transform it into a rich city, surrounded by bountiful agriculture and filled with the spice of life.

Chapter One: The Man Who Desired Gold

In this rich backdrop of history, we are introduced to Bansir, a chariot builder, and his friend Kobbi, a lyre musician. The story starts out with Kobbi asking his friend if he could borrow a small amount of money, two shekels. We soon find out that there is no way Bansir could lend that amount, because that is all he has as his entire fortune. Kobbi is shocked at this because Bansir is such a hard worker, and he is skilled at the job he performs.
Bansir and Kobbi go over the times they have shared together, and ponder with amazement and disappointed that even after so many years of working hard, they still have barely anything saved away. There is nothing for them to give to their children or to ease their own burdens in life. As they watched the column of slaves heading to the hanging gardens, bearing goatskins of water, they acknowledged that at least they were lucky to be free.
After pondering the disparity in wealth between the rich and the poor and wondering just what it was that the rich did differently, Bansir resolved to talk to his rich friend, Arkad, the richest man in Babylon.
As I read this chapter, I was reminded of my own self, a few years ago, and of friends that I knew then and now. I remembered what it was like to feel like I was spinning my wheel in place, like a hamster trapped in a cage. I would work hard for a pittance; money would come in, and it would go out the door just as quickly. Whenever I found myself with more money, I somehow found myself spending more as well. New expenses would enter my life, eager to eat up my new cash flow: cars, cell phones, and extra purchases.
I remember feeling that it wasn’t fair that I should have to work so hard just to have all the money go out the door, and I also wondered if there was a better way. I can definitely relate to the situation that Bansir and Kobbi find themselves in.

Chapter Two: The Richest Man in Babylon

Arkad had a lot to tell Bansir and Kobbi. He talked about how he once was also a poor man before he started out on the road to riches. He, too, found himself toiling day after day, with nothing to show for it, until one day he met a rich merchant who helped set him out on the road to riches. It was only after a long period of time that Arkad had built up enough riches to be able to give away to charity, splurge freely, and still not have to worry about having an empty purse. In his opinion, there are laws that have to be observed if one wants to become rich; failure to observe these laws will not only keep poor men poor, but will also impoverish men who happen to become wealthy by luck alone.
According to Arkad, the real turning point was when he decided he would start paying himself first. He recounted how all of his money would leave his purse, and go to pay the merchants, tailors, etc…. and at the end he would have nothing left for himself. Therefore, the first thing he did was to set a portion of his income aside, and he forced himself to reduce his expenses in order to make do with what he had left.
The second important lesson that Arkad learned was that one must know whom to entrust with one’s money. His first investment was with a brickmaker, and it ended up going south when the brickmaker took all of his hard-earned money and bought worthless jewels with them. In Arkad’s opinion, one must seek out the expertise of one competent to give his/her opinion on the matter.
The third lesson that Arkad learned was that you should make your savings work for you. Consider each dollar in your possession as a worker, devoted solely to your cause. When you invest your workers wisely, they have “children”, additional workers that can work for you. If you spend your workers and in the process of spending give them to other people, they are no longer working for you. In turn, if you spend the interest that your workers generate, i.e. their “children”, then their children are no longer working for you as well.
I think this chapter presents basic, timeless financial basics that can be applied in just about any situation. It doesn’t matter how rich or poor you are; to get started on the path to wealth, you need to be putting away at least 10% of your income. To make this really work for you, you need to ensure that you pay yourself first, not last; one way of doing this is by going to your bank and ensuring that 10% of your paycheque is withdrawn and transferred to a savings account before you ever see it in your chequings and are tempted to spend it.
Once you have your savings plan setup, you also need to ensure that it is going to a good cause. If you are taking the extra money and partying hard every weekend, you might be having a bit of extra fun now, but you are missing the point of saving that money in the first place: to plant your tree of savings and to nourish it and grow it! It would be more prudent to place that money in a low-fee indexed mutual fund or another diversified investment which can provide you with high long-term compounded returns. As urban legend holds, Einstein once said that compound interest “is the most powerful force in the universe.” The earlier you get started, the longer that powerful force can work for you with exponential growth and rewards.

Source: http://en.wikipedia.org/wiki/File:Ihstar_Gate_RB.JPG

In the intro of “The Richest Man in Babylon”, the author makes the point that the financial course of a nation is be related to the progression of the individuals within that nation; I also believe that the fiscal policies of a nation can influence the attitude of individuals, so there is feedback in both directions.
When someone gets started on the road to wealth, that person’s wealth doesn’t just benefit themselves, but it also benefits everyone else as there is more money available for investments and for loans (though you need to be prudent and think hard before taking out a payday loan). This wealth compounds and society as a whole becomes wealthier, with more wealth to go around. Conversely, when a nation and its people head down the path of debt, the nation and the people become impoverished and enslaved by their creditors. Look at the world around you and see if you can draw any parallels.
The gate is wide open for all who desire to enter and get started on the path to wealth; all you need is the willpower and the desire! Will you enter the gates, and also learn from the richest man in Babylon?

Planting a Seed of Savings

I still remember when I was a student and I didn’t have any savings; what came in my chequing account left again rather quickly. In this series, I want to talk about how you can shift from a habit of spending everything that you earn to a habit of setting aside something each paycheck; of planting a seed that will eventually grow into your tree of savings.

First, what are the benefits of having a tree of savings?

• It’s a nest egg to take care of you should you lose your job, decide to buy your first home, or decide to start your own company.
• As it grows, it will begin to spin off dividends for you in the form of compound growth and interest income.
• Eventually, like a real tree, it will get to the point where it can grow on its own without additional input from you.

Well, suffice it to say, the benefits of having savings are pretty obvious. The question is, if you don’t currently have savings and most of your money is going out the door, then how do you start? Whether you are a student only making minimum wage, or a young professional making a good salary but spending most of it, the key in both cases is reducing your expenses. What are the culprits? They include…

• Housing
• Clothing
• Shelter

We don’t have a choice but to pay for these expenses. But for many of us, they also include…

• Eating out
• Expensive vacations
• Expensive cars

It’s definitely important to enjoy life, but if one lives by the motto “you could die tomorrow”, then every day where you are NOT dead, and still alive, is a day where you still have nothing to back you up and you are still a slave to your job (or whomever else is giving you your salary).
Consider what you would do if your rent suddenly went up 10%, or if your car insurance went up 10%.  It would mean less money to go around, right? You’d invariably have to cut back a little bit, finding more efficient ways to spend your money, looking a little harder for deals, perhaps eating a little less often at that nice restaurant.
Instead of waiting for your living expenses to increase, as they invariably do, why not do this little trick: Pay yourself first. What does this mean? It means, go to your bank, set up an automatic payment program, and have them put aside 10% of your money into a savings or investment account before you even see it in your account. You can start out with savings account, Bank CDs or GICs. Once you have a base of savings, you can then move on to ETFs and low-cost indexed mutual funds. Just like what would happen if you had a small paycut, or if life suddenly got more expensive, you will soon adjust to the new situation. Even better, you will be putting money aside and it will be growing.
How much can it grow? Let’s say you set aside $150/month to put into your savings. $150/month is less than the price of a movie date every weekend or lunch at McDonald’s every day! Add in 5% of compound growth, and that $150/month can end up to more than $10,000 after 5 years. That’s more than enough to buy a very nice gift for yourself and that special someone… or to just keep growing your tree of wealth!
A good, short read that I recently discovered and that will help you get started is The Richest Man in Babylon; the chapter summaries can be read for free on Wikipedia. The book is essentially a set of parables set in ancient Babylon, and cover the ways to gaining and keeping wealth. They were written by George Samuel Clason in order to teach people about personal finance and get them on the road to savings. I’ll be covering the chapter summaries and the basic lessons they present in future posts. Another good book to help you get started is The Wealthy Barber.

In my personal experience, I only really started to grow my own money tree a few years ago. If you haven’t yet started, then it’s never too late to start; if you already have started, then what made you head down the road of savings? Were you always a saver, or was there a time when you realized that you were fed up of being a slave to your paycheck?
Don’t forget… whether it be $50 a month or $500, something is better than nothing, so go out there and plant your seed of savings!

7 Wealth Building Strategies

Here is an article from my early days of blogging. This was originally published on April 21^st, 2010.
It’s a warm, sunny afternoon, the wind is blowing softly, and the birds are chirping. You are lying on a lawn chair next to the beach, eyes closed, with the warm sun shining on your face and a cold drink within easy reach. You feel relaxed, thinking about how great it is to be able to live on your own schedule, at your own pace… and then you hear your alarm beeping, rudely awakening you from your slumber and beckoning you to rise and get ready for another day in the corporate world.
For those of us who have not yet managed to escape the rat race, this is often how our typical workday starts out. Getting out of the rat race is an important goal, but first we need to learn how to build our wealth. In my last post in this series, I introduced “The Richest Man in Babylon” by George Samuel Clason and talked about how to get started on the path to wealth. Today, I’m going to continue my book review and discuss seven wealth building strategies to help you pad your wallet and build your wealth. As I always mention in each post, the chapter summaries can even be read for free on Wikipedia.

Chapter Three: Seven Cures for a Lean Purse

Our story continues in Babylon, thousands of years ago… after Bansir and Kobbi had their discussion with Arkad on how to get started on the path to wealth, Babylon entered an economic downturn. It turned out that most of the wealth was concentrated in the hands of a few rich men, for everyone else spent their money as fast as they earned it. The King then summoned Arkad to hold a series of lessons for the people in order to teach them how to build their savings, so that they might also accumulate wealth. Today, we can use savings accounts to make it easier, so we don’t have to worry about keeping all of our savings at home and exposing them to additional risk.
Arkad came up with seven wealth building strategies to teach to the people. Let’s evaluate those seven strategies here and see how they apply in modern times.

1. Take less out than what you put in.

This is the first lesson which Arkad teaches us. What would happen if every week, you put 10 $20 bills in your wallet, and only took back out 9 bills? Eventually, your wallet would be overflowing with $20 bills. This is the easiest way to start saving your money, and hopefully the extra money inspires confidence and encourage you to continue saving more! Arkad teaches us to put away at least 10% of our income into savings at a minimum.

2. Control your expenses.

It’s easy to say “put aside 10% of your earnings”, but what if you are currently spending 100% of your earnings? Arkad makes a good point that there is a difference between expenses that are necessary, and expenses that we have due to our desires. In order to build wealth, it is necessary to budget these additional expenses so that at least 10% remains for savings. For example, if you have a cold, then why not look at treating your cold using natural therapies, while saving money at the same time?

3. Put your money to work.

Although it is nice to have an overflowing wallet, that money isn’t doing any work for you. Once you have diverted your income stream, it is important to start investing that money in assets that will be able to generate capital growth and income for you, such as stocks, bonds, and real estate.

4. Be aware of risk, and protect yourself from loss.

As we often find out the hard way, time and time again, if something is too good to be true, it probably is. Just ask anyone who invested with Bernie Madoff. In order to reduce risk, it is important to:

• Be diversified and don’t put all of your eggs in one basket. Invest in a variety of holdings and asset classes, such as indexed funds.
• Speculate and gamble only with money you can truly afford to lose.

5. Own your own home.

Owning your own home, clean and clear, and not having to pay a bank or landowner interest or rent is certainly something to commend.  A ton of cash flow is freed up, helping you on that exit from the rat race, and it is something that I personally want to achieve one day. However, in modern times, the prospect of owning your own home must be mentioned with a few caveats:

• The home must be affordable and should cost less than 33% of your net income in total costs, including the mortgage.
• Owning your own home means owning the home to live in, not owning it to speculate or flip.

With the housing bubble collapse in the U.S., many homeowners who didn’t respect the above rules got severely burned. In Canada, once the interest rates start rising, there will be many more whom will find themselves under water because they did not leave enough room in their budget for an interest rate rise or they overleveraged themselves and bought more home than they could afford.

6. Ensure a future income.

It is important to ensure that you are saving enough to provide a future income, not only for yourself but for your family as well. As you get older and start having dependents, tools such as life insurance become more important.
The best time to start saving is when you are very young, even if you don’t have much to put away, because compound interest works its magic by having a lot of time to play with. Just 10 years more of saving can make a huge difference.

7. Increase your earning potential.

This is a relevant and important lesson even today. What is your greatest tool in order to build your future assets and income streams? It is the income stream you have today, which you secure using your skills.
Work hard at your job and continue to learn new skills in order to make yourself a star employee, keep your eyes open for new opportunities, and never let the world pass you by. Learn a new language, take up a new skill, and challenge yourself in the areas that you are weak in. This will help increase your future earning potential as well as enrich your personal and professional lives in the process.
Even though this book was first written in 1926, the knowledge and wisdom contained therein still apply today. Many basic financial principles and laws are timeless, and are as true today as they were thousands of years ago.
Originally published on April 21^st, 2010.

Becoming a Rich Man ?

Today, it is time to wrap up my review of “The Richest Man in Babylon” (Amazon affiliate link to the revised edition). Previously, I talked about getting started on the path to wealth, and seven wealth building strategies which will help you out on that path. The lessons taught in these posts are expounded in much greater detail in “The Richest Man in Babylon”, as well as other finance books which have come since. Beyond the lessons which I covered in those two posts, there are many additional lessons which the book has to teach, such as the role of luck in building wealth and in life, and it offers a philosophy of living your life in a way that will help you achieve your dreams. As always, the chapter summaries can be read for free on Wikipedia.

Luck

As the author sees it, luck is really about grabbing opportunity whenever you see it. You shouldn’t make the mistake that the “gods” dash some people with a measure of good luck and others with misfortune. This concept of luck comes up a lot for those who play poker. Here is an example: in Texas Hold’em, a pair of aces comes around only once every couple hundred of hands, on average. If you happen to pick up a pair of aces, then you have a very strong hand; the best hand relative to everyone else at the table. However, a common mistake made with aces is to “slowplay” with them; this means that you play them in a way that suggests that you have a weak hand when you really have a strong hand. Sometimes, it is good to be deceptive, but the rest of the time, the right play is the straightforward one.
The danger in being deceptive is that once your opponent sees the three cards on the flop, the money is often going in only when you no longer have a strong advantage. Many players in this situation often get angry and tell others how unlucky they are to have their aces cracked, yet again. The truth is, they didn’t take advantage of the opportunity to make the most value out of their hand while it still had value. If they had pushed their advantage preflop, then one possibility is that everyone would fold and they win a small pot, but another possibility is that someone with a second-best hand, such as two kings or two queens, would follow them into the pot. When that happens, they have a 4 out of 5 chance to win the entire pot, so it is a guaranteed money maker.
The main lesson to take away from this is that in life, as in poker, opportunity needs to be taken advantage of when it’s there. There are always risks (even aces can lose preflop against the worst hand in Texas Hold’Em, 7-2 offsuit), but the rewards can more than compensate for the risk. You can get unlucky a few times in a row, but statistically speaking, if the odds are in your favor, then you will win over the long run.
That said, this is also a lesson to never make a habit of gambling at a casino. For most games, the odds are stacked in favor of the house, and it is impossible to win at them over the long run!

Building wealth

My previous post on seven wealth building strategies goes into this in more detail, but again, here are the most important points:

• Wealth can only be built if you spend less than you earn. It is recommended to invest at least 10% of your earnings. For help in preparing your budget, there are many different tools you can use, such as Gazelle budget.
• Your investments should be well-diversified in order to reduce risk, and they should be in efficient and liquid investments such as a broad market-index fund that tracks the TSX or S&P 500.
• To further elaborate on the point above, invest in what you know. If you are going to buy real-estate or stock in a single company, then do your homework, analyze the reports, and ensure that you know what you are doing.
• If you don’t know, then take advice from those whom are qualified to give it. Don’t take advice from people not qualified or from people who try to sell you promises but don’t deliver results. If something is so good, then why would they need to try so hard to sell it to you?
• To further elaborate on the above point, read Andrew Hallam’s post about a Bernie Madoff style investment which seemed too good to be true, but delivered for the first few years; in the end, however, it imploded just as Bernie Madoff’s funds did.

Helping family and friends

It is tough to watch a family member or friend struggle financially, but often, the best way to help them is through non-financial means. If they are having trouble paying for groceries, then offer to bring them some food. If they are having difficulty finding a job, then help them to find leads and contacts.
If in the end, you do decide to lend them money, then to avoid trouble and loss, ensure that they have the ability to repay the money. Look at their spending habits and what kind of work they have; i.e. do they have a stable income? Are they blowing lots of their money on cigarettes and beer? Take a look at these factors before lending money to family and friends, and again, that should be a last resort should other means of help not be sufficient.

The importance of insurance

If you are already filthy rich, then maybe insurance is not so important, but if you are not… then think of it as protection against the slim, but real chance that something bad can happen. It might not be likely that your house burns down in a fire, but think about what you would lose if it did? You probably aren’t expecting to total your car this year, but think how much it would set you back financially if you did, and you didn’t have proper insurance. You probably don’t go traveling somewhere expecting to get very sick or die, but imagine how much it will cost for you to pay for medical expenses out of pocket if you don’t have travel insurance.
Insurance is our modern form of protection against bad things happening. The chances of these things happening is slim, but if they happen and you don’t have protection, then the results can be devastating.

The value of motivation and perseverance

In the end, a lot of what we achieve out of life is in part a product of what we put into it. As engineers like to say, “garbage in, garbage out”. Well, the same applies to life.
Depression is an emotion that can hold many of us back from getting to where we want to be. It places us into a catatonic state, where we live just to get through the day, without much hope for the future. This is an emotion that may have had an evolutionary advantage back in our hunter & gatherer days, when a conservation of energy until things got better might have been what we needed to survive. However, in today’s world with an abundance of both food and opportunity, depression often just holds us back.
If you are not happy with your job or where your life is going, there are so many ways to make a difference. You can start being more physically active, which is one way to help yourself get more motivated, or you can even take more drastic change and move to a different city or country, or change your career path completely. You can even go help build houses in Cambodia; imagine how small your troubles will seem when you see what real poverty is like and when you know you’ve made a real difference to help improve someone else’s life!
The last part of this point is that part of how we feel is linked to how much we feel other people value us. If you only treat your work as a way to make money and don’t actualize any part of it into your own life, then chances are you aren’t making yourself valuable to your colleagues and to the company. There are also other ways to self-actualize, such as starting your own company, whether on the side or full-time, and becoming really good at something. Don’t strive to just be “average” at something, try to become good enough that people actually respect your opinion and count on you for advice. Probably easier said than done, but it will feel really good when you get there.

The Richest Man in Babylon

Again, I recommend reading this book; it is a valuable read and contains a lot of interesting parables which go into much more detail than what I described here; consider it the first step of a financial education.
So, have you read this book yet? If so, what did you think?

A Little Capital Philosophy

Today, me and the girlfriend went for a nice bike ride to take advantage of the gradually improving weather and get some exercise! Ok, I’ll admit that the weather actually wasn’t that great; it was a little chilly, but it still felt good to get out there and move about.
Some of my recent posts have been about learning how to build savings and habits to build that will help you get started. As we were on our bike ride, I was thinking that financial capital isn’t the only capital that we work with and build through our lives. There are other kinds of capital as well, like our relationships and our physical health. Our network of friends, the relationships that we have… this is our social capital. There is the physical shape we are in and the mental sharpness of our minds which represents our health capital.
The same concepts and ideas that help us grow our financial capital can also help to grow our social and physical capital. The ideas of savings and debt… that we can spend a dollar today, or put it away to create more dollars tomorrow, apply as well. Want to see how? Well let’s take a look:
When it comes to social capital and friendships, you have to invest your time wisely in choosing the right people to hang out with; people that can broaden your life. However, you also have to give something back to the people in your relationships, in order for the relationship to be mutually beneficial and not parasitical. If you just take and take… i.e. just spend what your friends are offering you without investing something in return, then the relationship will not work out. Wealth Pilgrim has an interesting post on how learning to network with people can help you achieve success in business, and in life. You never know when the right connection can help you find that job when you are down on your luck!
Physical capital works the same way. People who love to sit on the couch and eat tons of junk are not only mortgaging their future health and quality of life, but they will also end up costing society in terms of increased healthcare costs, lower productivity, and arguably less valuable contributions to society.
When people take the road to wealth, not only in terms of money but also in terms of social and physical capital, they will enrich more than just their own lives; they will also naturally enrich the lives of those around them. A rich man or woman can start a company, employ people, donate to charity, support his/her family, and add value to the world through his/her dollars. An active and mentally healthy person will be able to contribute a lot more than a couch potato, through the power of his mind and muscles.
Having money, good health, and good relationships is like having a positive aura around you; this aura touches everything that you touch. Conversely, being in debt, owing people money, having poor health and poor relationships not only impoverishes your own life, but depresses the people around you; it is a draining force on the world.
Therefore, one should not be jealous when someone has worked hard to achieve their goals and has the results to show for it; although their success undoubtedly benefits them the most, it also benefits the people around them and the world at large. If jealously and envy do tempt your mind, then instead of mentally bringing that person down, try to do your best to raise yourself instead so you can match or surpass that other person.
Well, that’s enough philosophizing for one night. I am hoping that the weather improves so I can take more bike rides… and spend more time philosophizing!

How to Get Out of Student Debt

It is very unusual to find a graduate student in their 20′s these days without a mountain of debt, regardless of whether they worked through university or not. I am one of those graduate students.
Part of the reason for my debt is over-spending, a lot of over-spending. The other part is being negligent with my finances while I was in school.
I am currently in debt approximately $18,000, all of which are student and personal loans. I graduated with $31,000 of debt. My net worth is a different amount. I am from the school of thought where saving is also a priority along with paying off debt.
Why I was given a student loan when I made as much as I did was beyond me, but I clearly did not have my head on straight when I was younger. The last year and a half has consisted of me attempting to bring that down as much as possible without going to the extreme.
My work involves a lot of travelling, and luckily most of my travel expenses are covered by my employer. This helps a lot because I am attempting to limit my expenses. I do have my vices: watches, shoes, and Starbucks, but I have attempted to modify my mentality towards those as well.

Things that I am doing differently to accelerate my debt repayment:

Creating a budget. I know this is not rocket science but I had never created one. I just spent the money that I had access to.
Cutting on optional expenses. This includes my gym membership – I have a treadmill, and free weights at home and I play soccer twice a week. Optional expenses also means reducing the amount of times I eat. This is harder than it sounds since I commute for work and usually have after work meetings with my clients in a different city.
Shopping around for big expenditures. Things like car insurance, banks, work equipment, vacations. I used to spend $200-$300 on jeans alone without thinking twice about it. Oh how I wish I hadn’t done that.
Take on side projects for extra income. I started doing web-design and I do project consulting work for a few friends which has now snowballed into something bigger and I need to take on additional staff to handle the side work. I find that this is the key. You can only cut down on expenses so much, to accelerate the process you need to bring in extra income. There are a lot of resources out there for finding side income.

Things that I have prioritized along with debt repayment:

Creating an Emergency Fund. I know the goal is to pay off debt as soon as possible, but I like the security that an emergency fund provides. Credit lines don’t come close to this. I have been preaching about emergency funds to everyone. You never where life takes you or when you decide to quit your job and venture on the path of self-employment, or even better – travel for a few months. An emergency fund can cover any unexpected fees outside of what you budgeted for.
[Kevin] In spite of a controversial post where I suggested that using a credit card was better than using an emergency fund (or something along those lines), I pretty much agree with Marissa here. A pot of cash on the side is just another bucket of savings that gives you additional flexibility and freedom.
Stick to my budget. Creating a budget is easy; sticking with it is the hard part. We all think we can cut out shopping and eating out but the reality is that it takes a huge lifestyle shift to do that. I attempted to cut eating out all together, went out a few times, became very disappointed and nearly gave up on my budget. I think it is imperative to modify and adjust your budget to your needs and lifestyle. After all, if paying down debt is your priority then you will do what you have to do. I now include a set savings amount for a car fund, insurance fund as well. This avoids surprises latter.
Continue saving for travel. I love travelling. It is one of my passions. I love being lost in a foreign land and discovering things that tourists will never see. I live for those adventures. So when I started my journey towards financial freedom I had a choice to make: did I want to give up something that has always been a priority to eliminate my debt, or could I simply reduce the number of trips and still use them as a treat? I chose the latter and I am very happy with it. Oddly enough, I have become extremely frugal when travelling these days. I hunt for deals, find trips to off beaten paths and usually involve multiple people so we all share the expenses.
Investing. This is something I should have paid attention to a few years ago, but I am monitoring my investments and retirement portfolio closely now. My employer matches 50% of any investments in the company stock. I would have been stupid not to take advantage of this, they always allow paycheck withdrawals for RRSPs. I partake in both, but I am not actively managing the latter since it contains index funds.
I also opened up an e-Series account and an online brokerage and am slowly becoming actively involved in that as well. I don’t always know what the right call is, I like the idea that with enough research and common sense, you generally can make the right decision. A side note to this – women need to pay more attention to where their money is being invested.
There is no clear path to becoming debt free instantly; it is a mental shift. I am a lot more conscious of my decisions and being aware of my financial situation has allowed me a clarity that I value. If becoming debt free is important to you, then making the right personal and professional choices becomes rather simple.

Employ Practical Spending To Avoid Debt

The following is a guest post by Elizabeth Roque, in-house writer for Franklin Debt Relief.

Dollar (Photo credit: s_falkow)

Do not wait for debt to find you and cause harm to your finances. You can secure a good financial life ahead of you if you start to change your unhealthy spending habits now and incorporate practical spending in your daily transactions.
Irresponsible and unmindful spending leads to debt. Nowadays, people prefer to use their credit cards in purchasing instead of cash. Because of this, they tend to overspend and abuse the purchasing power their credit cards hold. Only when this unconscious habit has been translated into accumulated credit card notification letters do they realize their overindulgences.
[Kevin] It does feel less painful and easier to swipe a credit card instead of taking a few $20s out of the wallet. At the same time, that pain will be felt once the bill arrives in the hundreds of dollars!
Fortunately there are ways to avoid a great deal of debt. By employing smart purchasing practices, you will be able to prevent yourself from experiencing impending financial anxieties, as well as cram for debt relief programs that would help you save your finances. As a consumer, it is anticipated that you know your spending limits whether you use cash or credit card. To help you practice smart spending, here are simple suggestions to help you avoid debt and improve your finances.
1. Remind yourself of your income. Times are tough and money is not easy to attain. Reminding yourself of the hard work you went through to earn your money will more likely help you spend it wisely. At the same time, considering your income helps you set a limit on your spending allowance and prevent you from purchasing items that cost more than what you make.
[Kevin] Keep a healthy gap between expenses and income, and you’ll be off to a great start.
2. Take note of the prices. When you shop, it is good to take time to set your options and evaluate items carefully to know which ones are worth every penny. Markets sell items that have similar components, which are priced differently depending on the brand. To save more, a shopper must learn to check and compare price tags of items in mind.
3. Pay with cash more often. It is true that credit cards are useful and efficient when purchasing but using on hand cash helps you recognize and monitor your expenses more. People who prefer to pay with cash rather than credit card are less likely to have credit card debt and avail of debt relief programsin the future.
4. Explore thrift shops. Thrift shops offer a great variety of clothing and home items that may suit your liking for a lesser cost. To add to this, most thrift shops charge you with cash helping you to lessen your credit card debt.
5. Put your necessities first. Practical consumers spend on what they need first before giving into their whims if ever there is still money left from spending on the needs. This smart spending practice ensures that you have all your essential needs before anything else. People acquire debt when they spend more on wants than on needs. As soon as they find out that they do not have what they need, they resort to using credit which accumulates in a while.
Starting with practical steps in spending not only saves you from financial debt but also helps you monitor your expenses and save more. Simple changes do not solve debt problems overnight but small steps accumulate in the long run when done routinely. Keep in mind that great things start from small beginnings, and that includes making gradual changes in your spending practices to ensure a good and healthy financial life in the years to come.

Becoming Financial Indenpendence

his was one of the first blog posts I wrote when I started this site back in 2007. It is also one of the most popular. I describes what I did in the period from 2001–2006. Maybe some day I’ll write a summary of the period 2007–2011, but for now you’ll have to dig into the blog to see what has changed and what has remained the same. When I set out on this journey in 2001, I didn’t have anyone to follow or look to for ideas. Blogs didn’t really exist and I didn’t have access to a good library, so I had to figure out most things myself. In retrospect and with more guidance I would have done it differently and with less personal hassle. So don’t think you have to follow the details of what I did to reach a similar goal. In fact, you can follow the journals of some of my readers to see how it’s done better than I did. With that in mind, here’s my story …

I posit that most people can attain financial independence in less than 10 years and in less than 5 if they are truly determined. I also submit that many people are not willing to make the necessary changes.

My journey towards financial independence was not always with financial independence in mind per se. Had that been my sole goal all a long I would have done things differently and probably faster e.g. 3-4 years instead of 5. If I had a six figure income, which I never had, I would be able to do it in 2 or 3 years. However, that’s the thing. As we gain in knowledge and wisdom our priorities change as that which was once important becomes less important as things are put in a different and hopefully bigger perspective.
First of all I have to confess that I have never been dumb with money. I believe I once made an accidental overdraft because I forgot about an automatic payment, but otherwise I have never been in the red zone. I also suspect I was born with certain miserly qualities so that I did not need to change my basic personality too much. Spending money on “spontaneous fun” e.g. perishables like candy, ice cream, parties, beer, going out… have never meant much to me. Instead I was more interested in gadgets and electronics. Basically I would discover some new hobby. Then I would save until I had the money, and then I would go out and buy a new computer, then a SLR camera, then a HiFi rack, then another computer, then a telescope, etc. Since I enjoyed gadgets a lot more than sugar, alcohol, cab fares and other things that seems to make everybody else happy, I was already ready to save for big items and thus it was not so hard for me to aim for something bigger.
The first thing I realized was therefore that my expensive hobbies had to go and be replaced with “free” hobbies, which meant no more buying toys. Instead I become interested in system administration, linux, and geopolitics, in particular resource depletion and overpopulation – which of course makes for great ice breakers at any cocktail party. I did not immediately make the connection to think of hobbies that make me money. At the time when I started saving money to keep it rather than spend it on the next big piece of electronics, I was a grad student living in a dorm room. There were 18 other people on the floor and we all shared the kitchen, 3 showers and 3 toilets. Most grad students I have known all had their own apartment, their own car, etc. and thus leave school with a degree and a ton of student debt. I did, however, not live there to save money but to meet other people more easily. In addition it was only a 10 minutes walk (or a 5 minute run) from my office and 5 minutes from the closest supermarket. Thus I did not need a car nor a bike.
The two personal finance books that have influenced and inspired me the most and which I caught hold of at that time was Rich Dad Poor Dad and Your money or your life. If I could have only two personal finance books those would be it!
Your money or your life can easily be summarized. There are two main ideas. The first idea is to calculate your real wage by subtracting taxes, transport, business clothes, cost of living (for instantly, suppose your job requires you to live in New York City), and dividing by time spent on the job, time spent on commuting, and time spent unofficially preparing yourself for your job. If you do this calculation you might find some particularly scary numbers. For instance, the hourly real wage of a commuting grad student (e.g. a highly skilled and competent person who would fetch $40-60k in the private sector) is certainly below the minimum wage. The second idea is to use the real wage to calculate the cost of something in hours. Suppose a Wii is $400 and your real wage comes to around $8/hr. Then you would have to work for 50 hours to get it. Since we only live once and never get this time back, those 50 hours have to be weighed against the game system. 50 hours seems fair to me, however, there was no way I was going to add 10 more hours on top of that by buying it on credit. In particular, I did not want to pay for my house 3 times over by getting a mortgage. Thus my initial motivation was to save for a house to avoid the mortgage interest.
Apparently the personal finance blogging community doesn’t like Rich Dad Poor Dad because it does not contain enough “actionable” items and/or because the author gave some questionable real estate advice in some of his subsequent seminars. For me, though, that book was like striking gold. It completely changed my attitude towards money from being something one spends to buy stuff to being something one invests to make more money. Leave it to me to figure out the details, I am a smart guy, but it takes a genius to create a paradigm shift and I am not a genius.
By Rich Dad Poor Dad standards I was still thinking like a poor person, saving and paying in cash and I was probably on my way to thinking like a middle class person who buys everything on credit. Instead I started thinking like a wealthy person and having my money work for me while cutting down on my liabilities and avoiding having me work for money. My guess is that it is probably easier to go from poor to wealthy than from middle class to wealthy. The middle class is weighed down by a large set of liabilities in the form of house payments, car payments, credit payments, educational payments, … Once you have those liabilities, they are very hard to give up to replace with assets.
Initially I was just putting my money in savings accounts and watching it grow. In retrospect pure savings accounts turned out to be a good idea, since that was the period of 2001-2004 which was mostly a bear market. But an important point is that I did not invest for the first 3 years out of the 5 years it took me to gain financial independence. For extreme savers, financial independence is not achieved through investing. There is simply not enough time for compounding to make much of a difference. Instead compounding becomes somewhat irrelevant as the eventual portfolio becomes more focused on preserving principal, generating income, and not suffering too much in terms of inflation and taxes.

What does it mean to get out of the rat race?

To me, the phrase “getting out of the rat race” represents the desire and drive within most of us to live our passions and achieve our goals. If you are living the life of your dreams at a 9 to 5, then the rat race does not exist for you. If, however, you are simply working at a 9 to 5 (or 8 to 5, or 7 to 3, etc…), out of safety and inertia, not out of love and passion, then you could be looking to get out of the rat race, too.
I currently have it good for my stage in life, and compared to many other people and where I could be, I really have no right to complain. I do, however, still feel that I am leaving something behind. I don’t want to do 9 to 5 for the rest of my life, and I believe that something better is possible.
The keys here are to both increase income and reduce expenses.

What are your financial dreams?

Getting out of the rat race is one of my own financial dreams, and achieving it means having the ability and freedom to just pack up and take off anywhere I want, without wondering how I’m going to pay the mortgage next month. My job is pretty good for a 9 to 5, and I currently make a good living, but nothing is certain in life; I never know what can happen next year. Also, a 9 to 5 career does not intellectually nor emotionally appeal to me.
I don’t just want to sit on my ass in an office all day; I want to get out there, do things, and see the world. I do want to continue working, and hopefully begin generating significant income online.
There are financial barriers to just packing up and heading up today, but there are emotional barriers as well. Without a significant wall of savings, there is less security, and without that security, I don’t feel that I’m ready to leave the 9 to 5 just yet. I need to start working on my infinite portfolio before I can do that.

How do you start building up your financial scaffolding and leap over your emotional barriers?

Pay down debt

I believe that the primary source of insecurity is debt. Mortgage debt, consumer debt, student debt are simply some of the different types of debt that we can have. Debt is lurking around every corner, and waiting to take ahold of us if we are not careful.

Dealing with the largest debt of all: housing debt

In some situations, debt is unavoidable. In Canada, housing prices are on the high side, though not the extreme side. Higher housing prices necessitate taking on more debt, so unless you have a lot of cash sitting on the side or you are willing to rent for the next couple of decades, you will need to take out a mortgage.
You also need to ensure that you have adequate insurance, just in case something bad happens. You need to make sure that all your bills are paid on time, as you don’t want to end up like the man whose house burned down, with the firefighters just looking on because he hadn’t paid his bill! There are services to compare home insurance plans, such as Policy Expert.
I, for one, am not willing to rent for the next couple of decades. The rental stock around here is of inferior quality, and rents are not significantly lower than housing prices when discussing similar locations. I need to consider the quality of life, not only for myself, but also for my partner in life. Therefore, I do currently carry around mortgage debt.
My personal recommendations are that total housing expenses should not exceed 33% of net income, with some planning for future interest rate increases. Some leeway is acceptable, but if you find yourself in 38%-40% territory and beyond, perhaps you should reconsider your decision to purchase.
The important thing to understand is that debt is not evil nor objectively bad. When debt is used with caution, then it can be a wise choice. Ultimately, however, if one wants to speak about getting out of the rat race, then one has to pay down debt, supplant that debt with income, or use that debt to invest.
By doubling our mortgage payment, we could bring down the mortgage to a very small amount in 7 years time, and completely pay it off by 9 years time. We would be in our mid to late thirties by then, but with no mortgage debt.

Diversify income

In addition to paying down debt, the other key to getting out of the rat race is by diversifying your income. If I had enough side income to support a backpacker’s style of traveling, then I could conceivably take off for a year and just travel around the world. One of the ways that I personally want to focus on is building up online income.
What about the condo? Market rents in the area are high enough that it could be rented out at between a small gain and small loss in cash flow. At the worst case, the burden might be $300 to $400 a month.
Instead of renting the condo out and taking off, I could also use that side income to accelerate the down payment of debt and investment, thus allowing me to pay off the mortgage fully in 5 years instead of 9 while taking a nice vacation each year, or I can use that side income to expand and generate more side income!
Diversifying your income so that you are not solely reliant on your 9 to 5 opens up a new world of possibilities.

What is your rat race number?

Your rat race number is simply the amount of money you need to have in your investment portfolio in order to never have to work another day in your life. This is what I call the infinite portfolio. The formula for the rat race number is very simple: (expenses – income) / 3%.
Over the long run, a 75% stock/25% bond portfolio with a maximum of a 3% rate of withdrawal appears to do pretty well, even through depressionary events. Going all-in stocks when the markets crash will simply increase returns. Being all-in stocks the entire time might also increase returns, but opens yourself up to more variance in income and long droughts, such as the last 10 years.
I recommend a maximum of a 3% rate of withdrawal because this allows you to build up capital reserves during the good years, which can then be drawn down during the bad years without having to drastically alter your standard of living.
So, what do different rat race numbers look like? See below:

Costs for a couple (examples)
Item	Monthly Expense	Rat race number @ 3% withdrawals
Internet	$40	$16,000
Food	$350	$140,000
Shelter (no mortgage or rented)	$700	$280,000
Shelter (mortgage)	$2,000	$800,000
Public transportation	$100	$40,000
Transportation via used car	$470	$188,000
New car	$720	$288,000

So, once you have $16,000 invested, you’ll likely never need to work to pay for the Internet ever again.
These numbers look large, but don’t succumb to sticker shock. While you carry a mortgage around and a new car, it will be difficult for you to exit the rat race. What about if you pay off the mortgage and go with a used car? Your base monthly expenses might be around $1600 for a couple. If you never worked a day again in your life, you would need a rat race portfolio of about $640,000 in order to accommodate your base expenses. Since the markets have historically returned more than 3% over the long run, your portfolio and income will continue to grow over time.
Wait a second, I am asking you guys to both pay off your mortgage AND save up $640,000? I agree, that is a tall order, but this is just what I consider the minimum number to be safe, if you never work a day again in your life. What if you do continue to work? Generating $2000 a month for a couple is very doable, and with a rat race portfolio of only $320,000 and an income of $2000, you would spin off plenty of income to travel and enjoy life with. One guy is already doing it and enjoying life with less than that.
The best way to exit the rat race might simply be to generate as much income as you can during the most productive years of your life. I don’t believe you need a massive income either; $60,000 to $100,000 for a couple is very reasonable and doable. Some familes have had success with much less than that.
Before you hit 40, focus on your career and on your side business income and generate as much income as you can. Aim for a savings rate of at least 25%, but 40% or more is even better. Don’t forget to enjoy life and take vacations, but build up your reserves and pay down that debt. Reduce your expenses as much as you can, and take advantage of ways to save money, like a tax free exchange. By the time you are in your mid 30s, you’ll have built up a nice war chest that should spin off dividends and that will continue to grow with time, and help you achieve your dreams of getting out of the rat race. This is what I’m personally hoping to do!

Melabur dalam simpanan tetap atau unit amanah?

S: DARI segi keutamaan, bagaimana saya harus merancang simpanan dan pelaburan saya? Ada yang berkata simpanan tetap adalah perkara pertama yang perlu dipertimbangkan, manakala sesetengah yang lain pula mengesyorkan unit amanah. Saya agak keliru bagaimana menetapkan keutamaan simpanan saya.

JAWAPAN: Simpanan dan pelaburan, walaupun kadangkala digunakan dalam konteks yang sama, adalah aktiviti berbeza dari segi perancangan kewangan.

Simpanan bermakna meletakkan tunai dalam sesuatu yang sangat cair, seperti akaun simpanan atau akaun deposit tetap. Sebaliknya, pelaburan bermakna menggunakan tunai untuk membeli aset, yang anda harap boleh meraih pulangan yang berpatutan dalam tempoh tertentu dengan mengambil risiko yang boleh diterima.

Simpanan dan pelaburan berbeza dari segi risiko. Anda boleh menanggung sedikit kerugian atas pelaburan, tetapi simpanan anda adalah untuk dimanfaatkan dalam tempoh masa terdekat dan tidak seharusnya menimbulkan sebarang risiko.

Berapa banyak harus disimpan dan berapa banyak untuk dilaburkan? Simpanan perlu sentiasa diutamakan. Anggap simpanan sebagai asas pelan kewangan anda.

Sebelum melakukan apa-apa, anda perlu menyimpan untuk membina tabung kecemasan. Sebagai panduan, dana kecemasan anda seharusnya meliputi perbelanjaan peribadi untuk tempoh sekurang-kurangnya enam bulan.

Dengan cara itu, seandainya anda diberhentikan kerja, anda ada wang untuk menampung keperluan hidup selama enam bulan sehingga anda kembali berdikari.

Seterusnya, anda mungkin mahu memperuntukkan sejumlah simpanan untuk memenuhi sebarang matlamat kewangan dalam tempoh tiga hingga lima tahun akan datang.

Ini mungkin termasuk wang pendahuluan untuk membeli rumah atau tabung mendirikan rumah tangga. Sebarang jumlah wang yang anda perlu dalam tempoh lima tahun akan datang seharusnya diambil daripada simpanan anda.

Ini kerana pasaran pelaburan mungkin turun naik dalam jangka pendek. Melabur dalam tempoh masa kurang daripada lima tahun mungkin menimbulkan risiko dan kegusaran kerana turun naik pasaran. Setelah anda mencapai matlamat simpanan asas yang saya terangkan di atas, anda boleh mempertimbangkan soal pelaburan.

Seperti yang saya sebutkan sebelum ini, melabur melibatkan risiko yang lebih tinggi daripada simpanan, tetapi ia juga berpotensi menghasilkan pulangan lebih tinggi. Anda perlu tanya kepada diri sendiri sama ada anda sudah bersedia untuk melabur? Pertama sekali, pelajari tentang pilihan pelaburan yang ada.

Adakah anda fasih tentang selok-belok pelaburan saham atau anda rasa lebih baik menyerahkan tugas itu kepada pengurus profesional. Anda mungkin perlu meluangkan sedikit masa untuk memahami cara kelas aset berbeza bergerak dalam keadaan pasaran berbeza, serta caj jualan dan jumlah pelaburan yang diperlukan untuk bermula.

Kedua, luangkan masa untuk memahami kecenderungan pelaburan anda? Adakah kerugian nilai pelaburan sebanyak 10 peratus akan menyebabkan anda tidak dapat tidur lena? Jika ya, anda mungkin tidak sanggup menerima risiko yang tinggi. Cari produk pelaburan yang sesuai dengan profil risiko anda.

Jangan laburkan sesuatu di luar bidang kefahaman anda. Jika anda kurang selesa, tanya soalan sehingga anda mengenali pelaburan yang anda buat. Jika sesuatu pelaburan kelihatan terlalu hebat, kemungkinan besar ada udang di sebalik batu! Tidak ada pelan pelaburan yang boleh menjadikan anda cepat kaya.